Investors here in Singapore may soon be able to invest in property derivatives, which are based on a property index of real estate assets. According to investment bank Goldman Sachs, a residential index is being compiled – paving the way for the first property derivatives to be launched in Singapore.
Singapore has a fast-growing property market and those investing in the sector currently do so through buying properties.
Property derivatives are a new form of financial instruments, which makes it easier to invest in real estate.
Goldman Sachs said having a derivatives function for the market can help facilitate faster entry, as well as an exit strategy for short-term investors.
And the investment bank said the timing is right to introduce property derivatives here.
Carsten N. Kengeter, Co-Head of Securities & Structuring, Asia-Pac Goldman Sachs Asia, said: "It took REITS quite a few years to move over from the United States to the rest of the world. And this particular asset class property derivatives originated in Europe.
"I think the boom in real estate as an asset class and the fashionable status it has right now, will provide for a speedier process, in terms of adaptation of property derivatives, into one's normal toolkit and universe of playing a role in the property market."
Currently, the property derivatives market in Europe is estimated to be worth US$40 billion.
Goldman Sachs recognised that it would take time for investors to warm up to property derivatives as well as to build up trading volumes.
Mr Kengeter said: "I would say Asia will initially be a fraction of that because the European market, especially the UK market, has been around for much longer and there are large capital aggregation users in that market."
According to Goldman Sachs, experts at the National University of Singapore are currently working on formulating a residential index, on which a property derivative contract can be based.
Property derivatives are an alternative to REITS, giving investors opportunities to hedge or rebalance their portfolio exposures.
Analysts said they would need more information before they can assess how property derivatives would work here.
They said there is a need for investor education just like when REITS were first introduced in Singapore. - CNA/so
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