UNITED STATES - The use of property derivatives by institutional investors, including pension funds, has increased in the United States, following their losses resulting from the financial crisis, according to data analysts.
Liquidity in the Residential Price Index (RPX), a daily index by Radar Logic Incorporated based on the price per square foot in metropolitan areas in the US, experienced 40% of its annual volume from September to November 2008.
Michael Feder, president and CEO of Radar Logic said: "There is evidence that there are more pension funds investing in RPX based on the flows that we are seeing as a result of customer volumes."
"Certainly the inquiry level from pension funds has become much higher," he added.
RPX has been active as a trading environment since September 2007 and has had a total trading volume of nearly $3bn (€2.2bn).
Feder remains optimistic about the prospects for property derivatives as trading tools this year.
"Our outlook for property derivatives is extremely positive. Our last quarter was our biggest quarter in volume. Our rates based on the last three or four months of returning activity suggests we should trade between $5-10bn in 2009," Feder told IPE Real Estate.
The risks for pension funds trading in property derivatives are the same as in every asset class, says Feder. These include asset value and counterparty risk.
"The real risk is that it is still a relatively nascent market and the issue of investment liquidity is one that you have to consider, but it's certainly more liquid than trying to buy $100m worth of homes and hoping to sell those," he added.
Pension funds and other institutional investors have also been reportedly trading more on the National Council of Real Estate Investment Fiduciaries Index (NCREIF), which has agreements with seven investment banks to license its NCREIF Property Index for financial derivative transactions in US commercial real estate.