Every trading, investors on the New York Stock Exchange evaluate the market value of many real estate investment trusts (REITs) holding commercial properties. The stock market values of those REITs come from their ownership of commercial real estate properties: shopping mails, retail strip centers, industrial centers and others.
Most of those properties — including many similar ones owned by private real estate companies — aren’t for sale. And they don’t come up for sale very often. Therefore, it’s difficult to evaluate their market values based on recent sales of comparable properties, as is routinely done with residential houses.
The NAREIT PureProperty Index uses data on REIT property holdings and their financial data to estimate returns on the underlying properties. They can organize this data by type and location of properties.
Therefore, if you would need, for example, an estimate of 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 came along, there were three commercial real estate indexes: The National Council of Real Estate Investment Fiduciaries (NCREIF) publishes the NCREIF Property Index (NPI). This shows the data from a pool of commercial real estate properties owned by pension funds, mostly using property appraisals.
MIT has a property index called the Transactions-Based Index (TBI) of Institutional Commercial Property Investment Performance. This uses actual NCREIF data of actual transactions.
The third is Moody’s REAL Commercial Property Price Index (CPPI), which tracks same-property, realized round-trip price changes. That is, tracking the same property being both bought and sold. It’s also based on real transactions.
Real transactions do represent real money changing hands, but the market is very illiquid. Plus, the indexes are behind the time periods they track. Plus, private market transactions often involve complex bundles of fees that obscure the true market value of the property itself.
MIT developed 16 models based from 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.