New Security Lets Institutions Take a View on Commercial Real Estate

Global Index Group has introduced a synthetic real estate index-based security called duETS that allows institutional investors to take a view on the commercial real estate sector. Investors can take either a long or short view, making it easier for them to hedge or adjust their real estate exposure up or down.

The value of Down/Up Equity Trust Securities, or duETS, is tied to movements in the NCREIF NPI Index for US commercial real estate. After two years, GIG, a Tacoma, Wash.-based developer of index-based synthetic financial products, will value the securities based on the performance of the NCREIF NPI, with a two-times multiplier effect tied to the movement of the index. Between the valuation dates, the securities will trade based on investor sentiment as to their likely level at the next valuation.

Commercial real estate has a relatively low correlation with other asset classes, which makes it attractive to institutional investors, Kelly Haughton, chief executive officer of GIG, pointed out. “Until now, however, investment options have been limited to direct investment, open-end diversified core equity and other private funds, and public and private REITs,” he said. “Often, the ability to get in and out of these private investments is constrained by the illiquidity of the underlying properties, resulting in situations where investors are unable to deploy their capital fully. duETS will provide new tools for investors, including the ability to easily hedge their positions.”

Institutions could also benefit from exposure to commercial real estate nationally, rather than being constrained by region or property type.

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GIG has tied up with CBRE Capital Advisors to broker duETS. How big is the potential market? More than $1.7 trillion is available globally for investment in the commercial real estate sector this year, according to CBRE.

Said Philip Barker, senior managing director at CBRE, “duETS can provide an efficient allocation tool for institutional investors that want to adjust or rebalance their real estate portfolio without making a major commitment or changes to new or existing investments. In addition, we expect duETS to be the foundation for further product innovation in the real estate space.”

Tags: CBRE Capital Advisors, commercial real estate, Derivatives, Down/Up Equity Trust Securities (duETS), Global Index Group, Kelly Haughton, long view, NCREIF NPI, REITs, short view, synthetic

US equities are fairly valued or even overvalued, said an overwhelming 97% of institutional investors surveyed for Corbin Advisors’ first-quarter earnings primer report. More than four out of 10 investors (44%) of expect first-quarter earnings to surpass expectations – the highest percentage since December 2013 and substantially higher than the 35% figure Corbin reported for the fourth quarter.

The Corbin survey is based on input from 83 institutional investors and sell-side analysts globally.

“Valuation is one of the toughest issues today,” said Fla Lewis, chief investment officer at Weybosset Research & Management. “If interest rates stay low, everything is cheap. On the other hand, from the historical point of view, things are on the high side of reasonable. The truth probably lies somewhere between the two, but where?”

Institutional investors are also more optimistic about organic growth in earnings, with 62% anticipating it will materialize compared to 45% for the fourth quarter, Corbin, a Hartford, Conn.-based investor relations advisory firm, reported. However, twice the number of investors as in the last quarter also expect that margins would drop.

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Even though investors expect President Trump’s policies relating to infrastructure spending, tax cuts, and repatriation to come to fruition, they are less upbeat about the US economy than they were in the fourth quarter. One Trump policy they don’t expect to be implemented is his proposed “border adjustment tax.”

However, “our research indicates clear and widespread investor acceptance that Trump-based animal spirits and pro-business policy reforms will stimulate growth and extend what is already an exceptionally long recovery cycle,” noted Rebecca Corbin, Corbin’s founder and CEO.

Investors who responded to the survey also see valuations as less inflated overseas, which is why they are also interested in opportunities in non-US markets. Their sentiment on the Eurozone has picked up most substantially, with sentiment on India and Brazil following.

Institutional investors’ appetite for risk has also improved as they jettison more defensive plays in favor of higher-beta stocks. The technology and industrial sectors are also seeing more investor interest, according to Corbin, while the prospect of rising interest rates and deregulation is boosting the financial sector. Investors are most bearish on sectors where plays dominate and that could be hit by interest-rate hikes, including real estate investment trusts and utilities.

“Valuations are lofty, especially when considering the reality that much, if not all, of the upside is priced in, even as the Fed appears poised for a series of rapid rate hikes,” Corbin said. “Thus, any stumble in policy execution will likely have significant, negative consequences. Investors are increasingly aware of these risks as indicated by our survey; however, we have yet to see this awareness manifested in their actions. Stay tuned.”

Tags: Corbin Advisors, Donald Trump, Fla Lewis, institutional investors, Rebecca Corbin, valuation, Weybosset Research & Management