Financial innovation in the public real estate market : How to exploit arbitrage opportunities in public real estate pricing due to investment approach differences between the real estate market and the capital market

Bachelor thesis English OPEN
Gejler, Jacob (2013)
  • Publisher: KTH, Industriell ekonomi och organisation (Inst.)
  • Subject: Financial Innovation | Public Real Estate | Securitization | Asset Backed Securities

As the stock market is volatile and often short-term, there is a high demand for safe investments outside the stock market and institutional investors like pension funds, insurance companies and asset managers are increasingly searching for low-risk investments that can deliver safe returns.   Alternative investments, like real estate, are a popular way to invest institutional capital. However, debates whether pension savers should have the right to transfer their pension capital without restrictions and discussions about the suitability of institutional investors to own real estate directly has made liquidity a more important aspect when investing institutional capital.   Forecasts and expectations suggest that a large part of Sweden’s public real estate portfolio, such as schools, hospitals and nursing homes, will be sold or produced privately as new builds in the future. Earlier studies have also shown that this type of real estate, with long leases and reliable tenants, is suitable for securitization, that is to say for issuing tradable securities such as bonds based on the cash flows from such assets.   The high demand for institutional capital to find safe and liquid investments and the large future divestment of public properties create opportunities for financial innovation.   This thesis aims to research if there are arbitrage opportunities to exploit due to differences between the real estate market and the capital market in the pricing of public real estate. The thesis will also examine the possibility of setting up a fund structure to profit in practice from these opportunities and study what the business model of such a firm would look like.
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