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CHICAGO-The Chicago Mercantile Exchange is expanding to begin trading commercial real estate futures and options in the first quarter of 2007. It has signed a licensing agreement with San Francisco-based Global Real Analytics, which gives it exclusive use of the GRA Commercial Real Estate Indexes, GRA CREX, for that purpose. The terms of the agreement are confidential, according to both parties.
Felix Carabello, director of alternative investment products with CME, tells GlobeSt.com the move represents an extension of the exchange's continuing expansion of financial instruments. "Commodities are being redefined," he says. "We began with physically delivered commodities, such as butter and cattle, then to events and natural phenomenon, such as weather, that impact the economy. Now we're commoditizing and monetizing the second largest asset class in the US." The initiative will allow investors and speculators to protect or gain exposure to what he quantifies as "the $5.3-trillion US commercial real estate market."
This is the first time investors in the US commercial real estate market will have this opportunity, according to Larry Souza, chief economist and managing director of GRA's index services. Some over-the-counter trading of commercial real estate futures and options has taken place in Europe, according to Souza, and he tells GlobeSt.com, "we've heard rumors of a couple of others out there that are considering this for the US. However, GRA has been doing this research for over 20 years, and we have a huge database to draw from. Furthermore, it has taken us a year to put together these indexes and develop this agreement."
The GRA CREX indexes capture underlying real estate and capital market dynamics by tracking transaction-based price changes in diverse property sectors and geographic regions. Initially there are 10 indexes, including a national composite. The others cover national office, warehouse, apartment and retail property types and five regions: Northeast, Midwest, Mid-Atlantic South, Pacific West and Desert Mountain West. According to GRA, depending on demand, property types indexes by the five geographic regions could also be made available.
"These products will create a liquid and transparent market that can be used by these market participants to help reduce risks associated with holding real estate assets," says Rick Redding, CME managing director of products and services, in a statement. "The development of [these] indexes, along with our existing US housing indexes, fits into our ongoing business strategy to over innovative products and attract new users to the market."
The ability to execute trades on the CME allows portfolio managers and others with commercial real estate assets to hedge, or manage risk better without having to sell the underlying assets. It also allows others, which may not have the financial capability of acquiring these assets, to gain exposure to the commercial real estate market. Trading will occur on CME Globex, the exchange's electronic trading platform.
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