Another emerging class of real estate derivatives involves swaps, a derivative tool that already had some traction among public real estate investors in the form of total return swaps on REIT indexes. In a total return swap, one party pays another the total return of a specified underlying asset. In return, the payer receives a stream of LIBOR-based cash flows—LIBOR plus a spread, such as 50 basis points—over a fixed period of time.

The basis underlying a swap may be any asset, group of assets or index. The benchmark indexes that have emerged in recent years for total return swaps are the FTSE NAREIT All REIT Index, the Dow Jones Wilshire REIT and Real Estate Securities Index, and the MSCI U.S. REIT Index.

In the private equity real estate market, swaps are based on NCREIF return indexes and have come in two forms. One allowed investors to either buy (going long) or sell (going short) the NCREIF return. The other product allowed investors to swap total returns on two different NCREIF sectors, such as swapping retail for office or apartments for industrial, notes Jim Clayton, director of research for the Pension Real Estate Association in "Property Swap Basics and an Overview of Tradable Indices."

For about a year and a half, Credit Suisse First Boston had an exclusive license with NCREIF to offer derivative contracts based on its indexes, but the bank abandoned the position late last year, Clayton notes. In March of this year, NCREIF began licensing its indexes for the purposes of U.S. property derivatives trading. NCREIF currently has agreements with seven investment banks to trade financial derivative contracts on NCREIF indexes.

Other indexes besides NCREIF will also probably evolve into players in this segment of the real estate derivatives market, but it isn't clear whether they'll be as important as NCREIF. The contenders, Clayton posits, include Global Real Analytics indexes, developed in partnership with Standard & Poor's and based on average sale prices per square foot; Real Capital Analytics indexes based on repeat sales of properties in its database; and REXX Real Estate Property indexes

based on rents.