Business | Investment
Property hedging is over the horizon
Crises often throw up innovative ideas and solutions. The bad patch that the US real estate is going through now has prompted two business professors to suggest something new to minimise real estate investment risk.
- BY Gaurav Ghose, Staff Writer
- Published: 00:00 April 21, 2007
Crises often throw up innovative ideas and solutions. The bad patch that the US real estate is going through now has prompted two business professors to suggest something new to minimise real estate investment risk.
"Hedging is a potential market and we will get there some day," said Robert Edelstein, a real estate professor at the Haas School of Business at the University of California at a recent seminar.
He pointed out that in the last year, real estate investors have moved from core and stable investments to the more opportunistic and value-added investments. That increase in risk is one reason why real estate derivative markets, the lynchpins for hedging, are almost here. He cited a number of indices being planned such as by the National Council of Real Estate Investment and Fiduciaries, Standard & Poor's, and the IPD Index for London or Hong Kong real estate index.
Conditions seem to be ripe for hedging in the US.
"This [hedging] is definitely a cutting-edge real estate solution," says Barmak Beshararty, CEO of Dubai-based Almas Capital. "You don't tend to think about it when the market goes up as the US market has since 1994. Even now, there's a slowdown, not a crash. Also, it's not going to be an easy process. It's not an instrument that can be easily structured - real estate is a fixed asset as opposed to a commodity or currency."
Still, he thinks it is necessary to minimise the fluctuations in risk by such means.
So what about Dubai and UAE real estate markets in general, still riding on the back of a strong real estate boom of the last few years? They are expected to slow down, albeit marginally, with the supply of new units in the next two years. Investors who are still seeing very good returns on their investments are not remotely thinking of US-like eventualities. Hedging is perhaps out of the question for now.
Outlook
In the years to come, however, as the market matures, cycles of boom and slowdown and bust may be a reality here too.
"I think we are years, if not light years, away from seeing having it implemented in the UAE," says Beshararty.
The reasons are not too hard to find. He points out that the basic fundamentals - ownership, escrows, rights of lenders, educational requirements for agents who sell properties - need to be sorted out first just to create the footing. Also, there are issues in the developing mortgage industry yet to develop - securitisation, uniformity of loans, credit reporting and uniform underwriting standards.
"Having said that, I think if hedging in the US and the West takes off, Dubai would be one of the cities that would be foremost in at least considering introducing it here - because all the problems associated with this will have been worked out in the West. Dubai will quickly adopt it."
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