JLL Takes Plunge into Derivatives

LaSalle Investment Management Inc., the property-fund unit of Jones Lang LaSalle Incorporated (JLL - Analyst Report) -- a leading real estate investment trust (REIT), has recently decided to launch a property derivative business in a concerted effort to revitalize the beleaguered sector.

The company will partner with BGC Partners, Inc. (BGCP - Snapshot Report), one of the world's leading inter-dealer brokers, to set up the business for its clients for the first time.

Property derivative business involves a traded swap between two separate parties – typically a property company with physical assets and a bank with indirect exposure to property loans. The transaction is linked to the Investment Property Databank (IPD) index that tracks commercial property returns, and the participating parties agree to a cashflow swap depending on whether the market falls below a fixed point, or rises above it.

Investment in the property derivative business enables investors and property owners to implement strategies to hedge against commercial property returns. These in turn allow property owners to adjust their exposure to sub-sectors such as offices, retail and industrial property, while retaining their existing assets.

Property derivative business had peaked to about €7 billion in the U.K. in 2007 at the height of asset bubble. Thereafter, the industry nosedived as investor confidence plummeted with the financial meltdown led primarily by the subprime crisis. However, the market is gradually limping back to normalcy and the introduction of new players in the market such as LaSalle Investment could help to revive the lackluster sector.

The company is expected to capitalize on its long-term relationship with BGC to enable its fund managers to better execute and monitor trades, thereby actively managing various portfolio sectors, asset allocation and hedging market downside risks.

The new business opportunity would further add another feather in the cap of the fund managers and diversifies the investment portfolio. LaSalle Investment initially intends to focus on the U.K. market, but posesses the flexibility to expand its geographic coverage with time and experience.

The company had recently raised a huge corpus of about € 560 million ($780 million) from investors to acquire commercial properties in Europe. The fund was provided by a group of German mutual-insurance companies that contributed about half of the total amount, while the remaining half was provided by an unnamed major U.K.-based institution. With the inflow of cash, LaSalle Investment had approximately $1.1 billion (including debt) to invest in high revenue-generating commercial buildings.

Managing a portfolio of $43.0 billion (as of December 31, 2010) of private and public property equity investments, LaSalle Investment is one of the world’s leading real estate investment managers. The company operates as an independent subsidiary of Jones Lang.

Jones Lang provides corporate, financial and investment management services to corporations and other real estate owners, users and investors worldwide. The company operates as a single-source provider of real estate solutions with a broad range of real estate product and services, and an extensive knowledge of domestic and international real estate markets.

We maintain our Neutral rating on Jones Lang LaSalle, which presently has a Zacks #1 Rank translating into a short-term Strong Buy recommendation.