Abstract: Real estate assets are part of a category of assets called heterogeneous assets. Each property is different and as a result it is difficult to derive a consistent pricing model for real estate assets. The specification presents an innovative framework for modelling real estate assets. This framework based on genetics enables the identification and standardization of relevant factors to be used in pricing and hedging real estate assets. The model defines a new concept of randomness called multi-factorial causal random walk to be used for modelling real estate prices. This concept represents for real assets what the random walk based on the Brownian motion is for financial assets.

Abstract: Real estate is known for its overwhelmingly idiosyncratic risk structure stemming from heterogeneous real assets traded on imperfect markets with asymmetric information, high transaction costs, low liquidity. In theory, property derivatives should be based on multifactor models cognisant of real estate's fundamental risk structure. In practice, no existing derivatives template can accommodate multi-factors. As a result, property derivatives usually offer poor hedging effectiveness, especially in the context of individual buildings and small, under-diversified portfolios of assets. The specification presents the design of two derivative instruments and market template that accommodate complex risk structures. These instruments and market enable investors to efficiently hedge risks involved in heterogeneous real assets such as commercial real estate assets.

Abstract: To manage risks involved in option positions, traders have developed variables called the ‘Greek letters’ or ‘Greeks’ which capture different dimensions to the risk in an option. These variables which were developed for options linked to assets traded on liquid cash markets (e.g. equity) are appropriate for property options and property futures options as well. Nonetheless, they markedly ignore one fundamental dimension of real estate markets: illiquidity. Hence, property options (i.e. options based on commercial real estate indices) require additional indicators reflecting the intrinsically illiquid dimension of commercial real estate markets. This document presents the design of three liquidity Greek letters for options based on commercial real estate indices (property options) and options tied to commercial real estate index based futures contracts (property futures options).