RISK MANAGEMENT OF REAL-ESTATE - THE CASE OF REAL-ESTATE SWAPS

Real estate swaps are a recent financial innovation based upon the pri nciple of comparative advantage. A real estate swap is a useful tool f or real estate risk management and for participating in real estate in vestment without the high costs associated with real estate. Potential economic benefits and costs associated with real estate swaps are con sidered and real estate swaps are compared to alternative tools for re al estate risk management. The expected utility and effectiveness of r isk management with a swap in a multiperiod framework are analyzed. Th e analysis finds that the subject property's return and its risk chara cteristics (as reflected in its correlation with interest rate and pro perty index returns) delimit the risk management potential of a given swap position. Optimal swap positions are shown for various regions an d property types based on historical return series, from the period be tween 1983 and 1992, and the parameters of the dynamic model developed .