266: Investors use derivatives to cash in on property boom
Navigation trail: / latestnews / archive / 266 - published: 26-03-07
WITH so much interest in brick-and-mortar assets, it should surprise nobody that the ways in which investors can get a piece of the action keep on expanding. The latest is the development of property derivatives, a market with huge potential.
Property derivatives exploit the growing availability of data showing British and European real estate returns. Led by Investment Property Databank (IPD), a research company, these indices make possible a market that lets investors gain or cut exposure to property without having to trade physical assets. Considering the costs of property deals, such as tax or legal fees, this is a major selling point.
The property derivatives market works similarly to other over-the-counter swap contracts. Take the case of an investor with £300m ($576m, E437m) of property who wants to cut his exposure to £100m but not actually sell his assets.
The investor would pay a bank the equivalent of the returns on £200m worth of property, calculated according to an agreed index. In return, the bank pays the investor the interbank rate plus a margin. The payments mimic what would happen had an investor sold the property and deposited the cash in a bank account.
The latest figures suggest that last year total volumes of property derivatives reached £3.6bn in the UK, four times the level in 2005. Not bad for a market barely three or four years old, though these volumes are tiny compared with the $20 trillion credit derivative market.
Contrary to the usual trend, Europe has been ahead of the United States but the world’s biggest economy is catching up.
Last week, Credit Suisse, Merrill Lynch, Goldman Sachs and Bank of America won licences to trade US property derivatives, a move that is bound to add serious volume to the sector.
With little sign – yet – that property prices are headed for a crunch, it is no wonder that this new market holds a lot of promise. As with all high-risk markets, however, this one is only for the most experienced professionals.
Source:
The Business - Top Stories