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Risk management: BZW relaunches UK real estate derivatives

Two groups of financial institutions are reviving the idea of trading derivatives linked to UK real-estate prices, five years after the first attempt to do this ended in disaster.

Last November, Barclays de Zoete Wedd (BZW) began selling property index forwards (PIFs). These are over-the-counter instruments based on an annual index of UK institutional property holdings compiled by Independent Property Databank (IPD), a property research company.

PIFs allow investors to bet on the real-estate market without having to buy an intermediate security ­ such as property unit trusts ­ or property itself. BZW is making a market in the contracts, which run until the end of 1997 or 1998, and Barclays Bank is sole counterparty. PIFs have been developed from a property security that BZW developed earlier: property index certificates, cash instruments that pays a stream of income linked to the IPD annual index.

In a separate development, a consortium of investment management companies, real estate companies and banks are developing a screen-based property derivatives trading system. Called the real estate index market (Reim) and appearing on Reuters, the market will open in summer 1997. It will be a matched-bargain system offering forward contracts similar to BZW's PIFs, but based on the smaller IPD monthly and sector-based indices.

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