Market Structures and Transaction Costs in Commercial Real Estate Investment: A Multi-Method Approach

"In the short time since their introduction, property derivative contracts have become an important tool for property fund managers. The use of the derivative contracts allows market participants to quickly modify their exposure to the commercial property sector and provides for an effective risk hedging choice that, until recently, was not available to investors. Generally the contracts are structured as a swap arrangement with one party to the swap receiving a return that follows the IPD index in exchange for another return. Normally, this other return has been specified as LIBOR plus a fixed margin but, at the beginning of 2008, the basis of pricing property SWAPS in the UK was changed to a simple fixed margin. A report by the IPF summarises the factors that influence pricing on swap contracts (IPF Pricing Property Derivatives: An Initial Review 2006). However, property derivatives traders have also asserted that direct property investment cannot be hedged and on this basis property SWAPS should be priced according to the performance expectations of the underlying asset class and its index. The goal of this research proposal is to extract information on the capital growth estimates implied by the prices on the swap contracts. Using historical capital growth outcomes and historical swap price data, the implied growth estimates can be calculated and their forecast accuracy evaluated. This could also be compared to the capital growth estimated implied by the IPF consensus forecasts.""