Financial Assets and Real Estate Investments. The challenge of risk control

Joan Montllor-Serrats and Anna Panosa-Gubau

ERES from European Real Estate Society (ERES)

Abstract: The aim of this paper is to analyze the types of financial assets and derivatives that are necessary to provide an adequate financing for real estate investments, and, at the same time, to control their risk. We begin with a theoretical analysis, and, next, we compare the conclusions we draw from it with the financial assets available in the United States and the European Union before and after the 2008 crisis. The central features of an adequate financing are summarized in: a) A fair distribution of the investment risk premium among the financing sources according to the risk they assume, b) A temporal matching between the expected investment income and financial payments. Furthermore, in a well functioning market of real estate financing, derivatives should play a crucial role in bringing the opportunity to hedge risk, and, thus, in trading and pricing it. Trading risk is crucial in order to build up an efficient market, i.e. a market the prices of which systematically approach values. To sum up, this paper aims to answer four questions: Which assets are necessary in order to finance properly real estate investments? Which derivatives should be available in order to trade the risk of real estate? Which of these assets can we find in the financial systems of United States and the European Union? Has the financial crisis of 2008 modified the set of financial instruments for real estate?

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2011-01-01
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Persistent link: https://EconPapers.repec.org/RePEc:arz:wpaper:eres2011_225

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