The prospects for commercial property returns, while not without downside risks, are better than current derivatives pricing implies. The key problem here is that landlords, i.e. “producers” of commercial property, have a clear incentive to use a derivative to hedge against negative total returns on their physical portfolio but tenants (i.e. users of property) do not have a motivation to hedge against positive total returns. This systematic imbalance means that there will always be a tendency for derivatives pricing to paint too pessimistic a picture of the outlook for the property market.
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