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Service firms getting in on derivatives.

Cushman & Wakefield and Newmark Knight Frank have teamed up with Rexx Index LLC to list the total returns of specific real estate markets around the country on a quarterly basis.

According to its founders, the new index will provide information that will fuel the growing trade of commercial real estate derivatives by allowing buyers and sellers to more accurately project the performance of the real estate sector.

The index will be useful for a particular kind of derivative called a swap, which acts like a hedge for building owners if the real estate market declines but allows another investor to profit if an owner's returns exceed predictions.

The market for derivatives in the US has been hindered in the past because indices that measure real estate returns haven't provided sufficient forward looking information that parties entering into a swap contract can use to determine a rate of return above or below which one party will be compelled to pay the other.

Paul Frischer, one of Rexx Index's founders, explained that existing indexes have tended to show the returns that a market has yielded rather than provide investors with the information to determine where it is going. This kind of information hasn't attracted investors to the derivative market, which has thrived in UK but lags in the US.

Rather than provide static information, the Rexx Index provides a projection of the market as well as pertinent market and economic data that allows derivative buyers to stake a better bet how the market will actually perform as compared to the index.

"Other indexes closed the barn door after the horses had left, so to speak," Frischer said. "They were based on appraisals of buildings so you're getting what the market has actually has done rather than a sense of what it's going to do, which is essential to the derivative market. That's what everyone is betting on in a derivative, what the market is going to do."

GFI Group Inc. and CBRE Melody, the mortgage brokerage subsidiary of CB Richard Ellis Group, Inc. also announced last month their collaboration to develop a market for U.S. real estate derivatives.

The collaboration, referred to as CBRE Melody/ GFI, combines CBRE's position in commercial real estate services with GFI's expertise in brokering new derivative products.

GFI and CBRE launched a similar initiative in the U.K. in 2005 and the companies are now leaders in the growing property derivatives market there.

Neither GFI nor CB Richard Ellis will take a principal position in any of the derivative trades arranged by CBRE Melody/GFI.

CBRE Melody/GH's brokering desk will be located in GFI's offices in New York and initially staffed by Phil Barker, GFI's VP, real estate derivatives.

"Real estate is the largest asset class not currently taking full advantage of derivatives," said Don Fewer, senior managing director for GFI, North America.

"We believe an over-the-counter derivative market based on U.S. real estate indices will enable active risk management and trading opportunities in real estate, while reducing the transaction costs and lead times."
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Author:Geiger, Daniel
Publication:Real Estate Weekly
Date:Dec 6, 2006
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