Property derivatives poised for US launch
By David Oakley, Capital Markets Correspondent
Published: March 5 2007 02:00 | Last updated: March 5 2007 02:00
The first US commercial property derivatives market is to launch as early as this week, as four of the world’s biggest banks join forces to create a trading platform that has the potential to grow into a multi-billion dollar business.
Credit Suisse is one of the four banks; the others are believed to be Goldman Sachs, Merrill Lynch and Bank of America.
The four banks have signed up to work with the National Council of Real Estate Investment Fiduciaries, which will provide the data from its US property indices, to create the market.
The banks and the NCREIF will create a similar platform to the one used in the UK, the only market in the world where a commercial property derivatives market has taken hold. The UK market has grown from virtually nothing to just under $10bn in the past two years, or just more than 1 per cent of the underlying commercial property market, which now stands at $800bn.
The move is another sign of the banks’ hunt for profits in the expanding world of derivatives. The instruments make up the bulk of global trading activity at $450,000bn in outstanding contracts, dwarfing the $60,000bn in the total value of share trading on the 10 biggest exchanges, according to figures from the World Federation of Exchanges.
It is yet further evidence of the banks’ desire to challenge the traditional exchanges as they attempt to make money on over-the-counter alternatives. Property is one of the few main asset classes without a developed derivatives market in the US, in spite of its size, estimated at $26,000bn.
While the recent bout of market volatility could overshadow a launch, it could encourage people to use property derivatives as it would give them an opportunity to hedge or protect their investments in uncertain times.
The banks will be given their licences to use the NCREIF data. Another three banks are also close to signing up for licences, according to Blake Eagle, NCREIF chief executive.
These banks are believed to include Lehman Brothers and Morgan Stanley.
Mr Eagle said: “The banks are very excited as this is a market with tremendous potential. And it won’t just be the big banks that trade this. Hedge funds and insurance companies are showing real interest in developing this market.”
The reason why the UK has been successful in developing a market is down to the quality of data, which are far superior than in any other country, provided by the standard benchmark that measures the size and growth of the commercial sector, the Investment Property Databank.
The NCREIF and the banks will use a similar format to that used in the UK, where derivative contracts are in effect swaps, which enable investors to exchange returns on property, based on IPD data, for an interest rate set against the London Interbank Offered Rate.
Copyright The Financial Times Limited 2007