Euromoney Liquid real estate March 2007
Orn Capital, the hedge fund manager backed by Morley Fund Management, has launched the first property derivatives-only hedge fund. Its move reflects the rapidly expanding property derivatives market.
“This fund will focus on relative value in the property derivatives market. We will look at the implied valuations for property returns and when there are anomalies in the swap spreads over the Investment Property Databank (IPD), due to shifts in market sentiment, we will capitalise on these movements,” says Chris Iley, portfolio manager of the Orn Capital fund which is aiming for returns of 15% with 7% volatility. Iley hopes to raise £100 million before the end of 2007.
The fund will initially invest in UK derivatives based on UK property indices established by the IPD with the aim to expand into Europe as the market spreads.
Before last year only a few players had used the property derivatives market as an investment, instead of just using them as a tool to hedge existing long positions by off-setting short positions. But the market has reached a tipping point, and recent months have seen property and liquidity reach new levels, which has sparked interest amongst the brokers and surveyors. These incomers have, in turn, created a market. “The influx of players has validated property as a derivatives product. It is now a credible product that is here to stay,” says Iley. In 2006 the total value of UK trades was more than £3.7 billion, and 2007 is expected to see over £5 billion of trades.
The Orn Property Derivatives Fund opens to external investors in March 2007. “There is enormous demand for investors to have a flexible and liquid stake in property. It is not surprising that someone has stepped up to fill this demand, I think it is the natural progression – with this fund we see one end of the property investment spectrum being exploited,” says Iain Reid, CEO of Protego Real Estate Investors.
However, Reid cautions that market participants should not run ahead of themselves: “There is little real market beyond the UK at the moment. I also think trading across sectors will be difficult due to limited quotes. There isn’t much depth to the market yet. One large trade could move prices.”
Iley is excited about progress in Hong Kong where a new repeat transaction index has been developed that looks at the change in flat prices over time and extrapolates a value from there.
Iley hopes to trade across property sectors, as well as trade against other property related instruments such as Reits and equities. The fund may even go long through the purchase of stakes in other property funds. “I presume that Orn will try and sniff out arbitrage and value across sectors with market inefficiencies delivering value, but as arbitrage across the sectors takes off so the market will tighten and mature,” says Paul McNamara, director and head of research for Prudential Property Investment managers (Prupim).
McNamara sees a lot of potential: “These plain vanilla swaps are only the start of this market – options are in the pipeline. Also, so far bets have been on total return, but clients are likely to start looking for splitting capital growth from rental growth and betting on just one element.”
For more on property derivatives, see Property derivatives: Market at last begins to fulfil its promise.
