Euromoney Liquid real estate March 2007
Under the terms of the deal, ABN Amro, the effective buyer of the property, receives from Sun Hung Kai Financial an income stream equivalent to the change in the University of Hong Kong-Hong Kong Island Residential Price Index (HKU-HRPI) while Sun Hung Kai will receive from ABN Amro Hibor plus an undisclosed spread.
HKU-HRPI is a sub-index of a series devised and compiled by Hong Kong University.
“It’s a very robust index,” says Philip Ljubic, a director in property derivatives at ABN Amro. “If it wasn’t I wouldn’t commit ABN Amro’s balance sheet to it.”
The deal size is very small at around $13 million and the swap has a one-year maturity, referenced from December 2006 to December 2007. ABN acted as principal through its proprietary trading book, while Sun Hung Kai Financial is believed to have been acting as an intermediary for clients.
The effect of the property derivative between the two financial institutions is that ABN purchases high-end Hong Kong residential property and Sun Hung Kai Financial’s clients are sellers, although the transaction is a synthetic one.
“The biggest advantage of trading property derivatives is there’s no stamp duty and it’s much quicker to trade,” says Ljubic. “This is the first derivative for Hong Kong but as the liquidity builds up, these can be traded in a matter of seconds.”
Ljubic points to the UK as an example of how property derivatives in Hong Kong and Asia might develop. ABN Amro already has a well-established position in property derivatives in the UK, where transactions grew from $1.4 billion equivalent in 2005 to $6.7 billion in 2006. Ljubic expects trade in UK property derivatives to hit nearly $16 billion this year.
Typical investors in property derivatives include hedge funds, pension and insurance institutions as well as property companies. Asian Reits are clearly a prime target.
“I’m already discussing opportunities in the UK market with some Australian Reits,” says Ljubic, “so Asian Reits are likely to be interested in this product. This is just the start and the start of something big.”
