On their last day of orders, CIBC capital markets outlines their intention behind two real estate structured products
Earlier this month CIBC launched two structured notes tied to a house price index. One was a long note for investors betting on continued growth in the Canadian housing market. The second was a short note, for investors who think the price of Canadian housing is set to fall.
The notes come at a time of considerable flux and uncertainty in the Canadian housing market, as we wait to see what two years of rising interest rates will do to mortgages and borrowing costs.
Elliot Scherer, Managing Director and Head, Wealth Solutions Group at CIBC Capital Markets outlined why CIBC launched the two notes, what they expect these strategies to deliver, and how advisors can use them to open a wider conversation with their clients about the state of the Canadian housing market.
“These solutions allow investment advisors to speak with their clients about residential real estate, in addition to the other more traditional asset classes they already provide advice on (i.e., stocks, bonds, ETFs, REITs, prefs, etc.),” Scherer says. “We are always looking for innovative ways to meet needs that aren’t met. For example, we launched Canadian Depositary Receipts as a way for investors to get exposure to global companies while mitigating any currency risk. Similarly, we developed HPIs as a way to make investing in real estate asset class accessible to all investors.”
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Scherer offered a pair of scenarios to illustrate the utility of these notes. In one case, an investor may want to buy units of the short note to protect against a potential fall in the value of their home or any other residential real estate they might own. In the other case, an investor may seek broader real estate exposure and greater diversification, buying units of the long note to increase their access to Canadian real estate.
Both notes are linked to the returns of the RPS Real Property Solutions Inc. national index published, which is a house price index tracking price trends for all property types across Canadian towns and cities. Each note is issued at $100.
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The long note provides a one-for-one return linked to the index, which Sherer describes as similar to an index-linked ETF, with an additional 3% issuance credit. If the index is up 5% at the end of the yearlong term, an investor gains 5% plus 3% issuance credit.
The short note provides a one-for-one inverse return linked to the index with an additional 1% issuance fee. Sherer cites the same example of a 5% rise in the market, where the investor would lose 5% as well as the 1% fee, totalling 6%, or $6 on the initial $100 cost of the note. Any index return greater than -1% would mean an investor gets a negative return on these notes.
Scherer says that CIBC launched both notes at the same time to meet interest from clients for both types of offerings. They elected to use structured notes as a cost-efficient way to issue investments with a defined term. He notes that CIBC was able to leverage their existing infrastructure to provide these to investors. Moreover, as CIBC is not buying or selling any actual houses in these strategies, using notes rather than traditional funds was “more streamlined” says Sherer.
The offering on these notes closes on November 29th, making today the last opportunity for advisors to access these products. As they are still in the early stage of the launch of these products, Scherer could not say which note has received more fund flows at this time.
