NAREIT PureProperty Index to track commercial real estate values

Each trade, investors on the New York Stock Exchange assess the market value of many real estate investment trusts (REITs) that own commercial properties. The market values ​​of these REITs come from their ownership of commercial real estate: shopping malls, retail strip centers, industrial centers and others.

Most of those properties, including many similar ones owned by private real estate companies, are not for sale. And they don’t go on sale very often. Therefore, it is difficult to assess their market values ​​based on recent sales of comparable properties, as is commonly done with residential homes.

The NAREIT PureProperty Index uses data on REIT property holdings and their financial data to estimate returns on underlying properties. They can organize this data by type and location of properties.

So, if you need, say, an estimate for an office building in the Midwest, the PureProperty Index could add up the estimated values ​​of all office buildings in the Midwest owned by all listed real estate investment trusts.

Until this index appeared, there were three commercial real estate indices: The National Council of Real Estate Investment Trustees (NCREIF) publishes the NCREIF Property Index (NPI). This shows data for a set of commercial real estate owned by pension funds, mostly using property appraisals.

MIT has a proprietary index called the Institutional Business Property Investment Return Transaction Based Index (TBI). This uses actual NCREIF data from actual transactions.

The third is Moody’s REAL Commercial Property Price Index (CPPI), which tracks round-trip price changes made to the same property. That is, track the same property that is bought and sold. It is also based on real transactions.

Real transactions represent real money changing hands, but the market is highly illiquid. Also, the indices lag behind the time periods they track. Additionally, private market transactions often involve complex fee packages that obscure the true market value of the property itself.

MIT developed 16 models based on the entire PureProperty Index. These can be used to create derivative investment products. This could encourage investors to use these derivatives to invest in commercial properties. More importantly, financial institutions could create hedging instruments.