Weaker property prices fuel derivatives


Weaker property prices fuel derivatives
By David Oakley in London
Published: November 4 2007 22:31 | Last updated: November 4 2007 22:31
The volumes of derivatives based on property have more than doubled in the past year as more banks, investors and companies seek to bet on the asset class and to hedge against a fall in valuations.
Bankers say weakness in commercial property prices in some of the key economies, such as the UK and the US, have boosted trading flows.
Property derivatives enable investors to bet on property price movements without having to buy the actual bricks and mortar. The contracts tend to be instruments such as swaps where one party bets that property returns will exceed a set benchmark, such as the London Interbank Offered Rate in short-term money markets, while the other bets that it will not.
In the UK, which has the biggest market in the world, property derivatives volumes rose above £10bn ($20.8bn) in the third quarter, double the level seen in the same period last year. The sector was only worth £200m at the start of 2004, according to the Investment Property Databank.
Significantly, the third quarter saw the first trades in Italy, Switzerland, Hong Kong and Japan. The US market has grown tenfold since March from $50m to $500m.
Guy Ratcliffe, head of property derivatives at Morgan Stanley, said: “Property is the biggest asset class in the world, so it makes sense for it to have a big derivatives market.
“If you look at credit derivatives 10 years ago, there was no market. There is no reason why property derivatives cannot also grow to become a very large global market.”
Copyright The Financial Times Limited 2007



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