Property Derivatives Market Seen Growing

Source : The Business Times, December 11, 2008

(LONDON) The global property derivatives market is likely to keep growing despite the financial crisis, as fund managers and property firms seek to better manage their real estate risks, observers said on Tuesday.

The fledgling market, which offers over-the-counter trading mainly in swaps based on property indexes, could grow by about 7 per cent year-on-year to £7.5 billion (S$16.7 billion) by end-2008, said Rawle Parris, head of property derivatives at ING Wholesale Banking.

'It's modest growth, but still quite good considering what's happening in other real estate markets,' he said.

Plans to set up exchanges as clearing houses for property derivatives could help to promote the market as investors hunt for cheaper and more efficient ways to adjust their real estate exposure, he added.

Use of derivatives is holding up even as the volume of direct commercial real estate investment falls, with UK direct investments down 45 per cent year-on-year to £21 billion by end-2008, estimates broker Jones Lang LaSalle.

The property derivatives market is yet to capture significant interest outside Britain however, with France, Germany, the United States, Spain and Japan seeing just a small number of trades, industry executives said.

'It's the wrong time to promote derivatives in the US,' said Aviva Investors's head of client relations for real estate Steve Felix. 'When I talk to pension, endowment funds in the US, these guys don't get compensated for risk and anything new to them is risk.'

But Ian Cullen, co-founding director of Investment Property Databank argued that investors will put themselves at a disadvantage without a derivatives market. 'Real estate investors managing their positions without a deep and liquid derivatives market, when every other asset class investors are managing theirs with derivatives markets, is like fighting with one arm tied behind their backs.' - Reuters