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Property investment: Real estate derivatives go high-rise

But can their value surpass the underlying market?

Weeks: £1 billion by the year-end

The primary real estate derivatives market in the UK might soon exceed an annual £1 billion ($1.75 billion) in value for the first time, possibly indicating the beginning of an explosion in property derivative trading, according to real estate analysts. Charles Weeks, head of new business development at Protego, a fund management company specializing in property derivatives, estimates that there has been about £600 million-worth of primary real estate derivative transactions so far this year in the UK. In his view, as well as that of some other market participants, that could exceed £1 billion by the end of the year.

That number could be a small fraction of the potential property derivatives market, however. In the eyes of Nick Tyrrell, head of research and strategy at JPMorgan Real Estate Europe, the property derivatives market could be much bigger than the direct real estate market in Europe within two decades.

He points out that direct investment in property involves extremely high costs in the form of property management, tax payments, and the low liquidity generally associated with real estate.

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