Historically, real estate has had a low correlation to stock and bond investments, but buying and selling physical property is not nearly as simple.
Enter real estate derivatives. These instruments allow investors to gain exposure to the real estate asset class without having to buy or sell properties by replacing the real property with the performance of a real estate return index. These derivatives are based on swaps, where one party swaps one exposure for another. In this way, investors can get exposures to either real estate equity or debt without ever buying a real estate asset or lending capital with real estate as the collateral.
The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI) is the accepted index created to provide an instrument to gauge the investment performance of the commercial real estate market. Originally developed in 1982, the unleveraged index is made up of more than 5,000 properties worth a total of about $309 billion (as of 2008) from all the U.S. regions and real estate land uses.
Although this index has been in existence for more than 20 years, it is only recently that data has become transparent enough to allow it to accurately and appropriately track the performance of equity real estate. With real estate data becoming more transparent and transaction information becoming easier and less costly to obtain, real estate indexes have become more relevant, leading to the creation of an increasingly efficient derivatives market
Source: http://www.forbes.com/investoreducation/2008/08/13/derivatives-realestate-swaps-pf-education-in_rs_0813investopedia_inl.html
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