Who could benefit from using duETS?
Current commercial real estate or mortgage investors can use Downs for hedging their portfolio without selling existing assets. When it is difficult or impossible to sell a particular existing asset, but there is still desire to hedge against a market decline, Downs will help.
Anyone looking to increase their exposure to commercial real estate, or particularly to invest in private commercial real estate without owning real property, could use Ups to meet their needs. Foreign investors can access the US real estate market with greater ease by purchasing Ups. Foreign investors required to pay FIRPTA taxes will find Ups attractive since Ups are not subject to FIRPTA taxes.
Our clients are constantly coming up with new uses for duETS. With the addition of future duETS that are sector-specific, the opportunities become even greater.
How could duETS augment an existing commercial real estate portfolio?
duETS might provide a more liquid way for current commercial real estate investors to add to their portfolio, or create access to private real estate in a new way. duETS also provide a way to hedge a real estate portfolio if investors anticipate a market downturn.
Are duETS a REIT?
duETS are not a REIT.
A REIT owns a pool commercial real estate and is legally obligated to pay out income from that real estate as dividends to shareholders. duETS are a synthetic investing tool, meaning they do not involve owning any real property. Instead, the value of duETS is tied to the change in the underlying index (e.g. NCREIF).
How are indexes based on private real estate different from stock indexes?
Private real estate is a very illiquid asset class with infrequent transactions. Stocks, in contrast, are highly liquid and trade throughout the day—as a result stock indexes are calculated once every 15 seconds. Indexes based on private real estate are only generated once a month (residential) or once a quarter (commercial).
What counterparty risk is involved in duETS?
There is no counterparty risk when investing in duETS. Each pair of duETS is backed by money held in cash or U.S. Treasuries. Any increase in the value of Ups is mirrored by decreases in the value of Downs and vice versa.
The value of Ups is capped at the value of the Treasuries held in the GIG Trust. The value of Ups can only go down to zero. Downs have the same cap and floor.
Due to the differences between stocks and real estate, can financial instruments designed for stocks work for real estate?
No. Stock index funds invest in the underlying shares that they measure. This is not possible with private real estate indexes – it would require buying units of the underlying properties. To design a successful financial instrument for real estate it must take into account the characteristics of real estate, especially the illiquidity of the asset class, and the inability to invest directly in privately held properties.
How is the design of duETS affected by being tied to a real estate index?
duETS are specifically designed to work for the real estate asset class and indexes of private real estate. Instead of buying a share of the underlying real estate, investors have an economic interest in a pool of Treasuries. The size of the duETS holder’s economic interest is driven by the performance of the underlying index (e.g. NCREIF) over the measurement period. Each duET has both Down and Up securities. For every dollar of increased value of the Down security, there is a dollar reduction of the Up security.
How are the values of duETS tied to the underlying index?
duETS are tied to the change in the NCREIF Index at the Valuation date, the end of a multi-year Measurement Period. If the index goes up, then Ups increase in value and Downs decrease in value, and vice versa. The multi-year period reflects the fact that real estate is illiquid and trades infrequently. As a result, the value of real estate’s key indexes are relatively static and predictable on a daily, monthly and even quarterly basis.
Between Valuation Dates, the value of the securities in the secondary market is driven by market supply and demand. This can fluctuate based on market sentiment, economic and political events affecting future real estate prices, and the need for liquidity of market participants.
How liquid are duETS?
duETS have liquidity between publicly traded REITS and private real estate funds. The only legal restriction on the trading of duETS is that each side must be a Qualified Institutional Buyer (QIB). The practical restriction on the trading of duETS is finding who will be on the other side. Currently, Global Index Group is discussions with two different market making firms to make duETS markets to facilitate trading.
What is an Authorized duETS Creator (AdC)?
An Authorized duETS Creator (AdC) is similar to an Authorized Participant for an ETF. AdCs create new pairs of duETS by depositing money into the Trust and receiving pairs of Down/Up securities in exchange. These Downs and Ups are then available for trading in the secondary market via AdCs, Market Makers and brokers.
Are duETS an ETF or ETP?
No, duETS aren’t an ETF or an ETP.
duETS do have structural similarities to an ETF/ETP, but in an ETF/ETP the investor owns a share of the underlying assets. Since duETS are designed for private real estate, it would be impossible to own the real property underlying the product. Instead, duETS are tied to the fluctuations in a real estate index and the underlying assets are Treasuries and cash.
Doesn’t the NCREIF suffer from "appraisal lag"?
While the NCREIF has historically suffered from appraisal lag, it no longer does. With a long series of improvements the NCREIF property index now provides an accurate market snapshot within the limits of the asset class. Read more in this NCRIEF whitepaper written with input from key NCREIF staff.