--Jeanine Prezioso
Canadian pension funds who scooped up commercial real estate when the market was booming two years ago are now having trouble hedging their exposure. The funds want to sell swaps on the Canadian Property Index of the Institute of Canadian Real Estate Investment Managers to offset valuations risk, but are having trouble finding counterparties.
"We suspect [pension funds] have become overweight in real estate because the value of their other assets has dropped. They need to lower their exposure," said Simon Cote, managing director of property derivatives at National Bank of Canada in Montreal.
The current mid-market price for a three-year swap going out to Dec. 2011 is cheaper than the current swap price. A buyer of the swap would collect the differential in price between the index level at the inception of the trade and the level at maturity, but swap counterparties are hard to find because the market consensus is that property prices will tail off in the next several years.
Smaller plan sponsors who missed out on purchasing commercial real estate and want to own it for their employees’ portfolios might take the other side of such trades, Cote said, but interest remains thin.