Developing a reliable real estate index- a step towards real estate derivatives

Abstract

An asset class is a group of financial investments that exhibit similar characteristics and are subject to the same law and regulations. In India, we have five main asset classes a. Equities b. Fixed income Bonds c. Commodities d. Cash e. Real Estate Property Equities: Shares of stock let investors participate in a company’s success via increases in the stock’s price and through dividends. Shareholders have a claim on the company’s assets in the event of liquidation (that is, the company going bankrupt) but do not own the assets. Bond: A bond is a debt instrument representing a loan made by an investor to a borrower. A typical bond will involve either a corporation or a government agency, where the borrower will issue a fixed interest rate to the lender in exchange for using their capital. Commodities: Commodities refer to tangible resources such as gold, silver, and crude oil, as well as agricultural products. There are multiple ways of accessing commodity investments. Cash: A cash deposit is the safest asset. The investors have precise knowledge of the interest they will earn but also guarantee they will get their capital back. The ticket can be a small to a big investment. Real estate Property: Investors can acquire real estate by directly buying commercial or residential properties. Alternatively, they can purchase real estate investment trusts (REITs). However, in India, the market is still nascent and permitted commercial real estate. Among the top 5 asset classes, the first four assets, equities, bonds, commodities, and cash, are tracked and monitored daily the regulating department. Investors trade-in equity, bond, commodity, and money exchange markets and balance their risks. For the above class, a standard index picks a basket of goods, such as a currency basket, commodity basket etc., to track the direction of asset class movement. The 4 index performance depends on the performance of assets at a global level. The index will have a portfolio of similar assets to avoid temporary local factors in a particular asset and suggest overall growth. Further, exchanges introduced financial instruments such as derivatives based on values of underlying assets to reduce investor risks. In a derivative contract, one party to the deal typically wants to free itself of a specific risk, linked to commercial activities, such as currency risk. However, in the real estate class, markets are nascent. Real estate is considered the least liquid asset among all the assets because it can take a long time to buy or sell a property at market price. It may be partly due to the difficulty in getting the transaction information about the asset class and partly due to the heterogeneity of this asset class. However, a proper real estate index brings visibility to the direction of asset class movement for the investors and Government. (Ganti, 2022)