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What is a property derivative?

Property derivatives are similar to any other types of futures contract. They require one party willing to sell their exposure to an asset without actually selling the underlying investment, and they need a buyer willing to acquire exposure without buying the underlying asset.

Buyers can avoid legal and surveying fees and taxes such as stamp duty, while sellers get to diversify their holdings and take out cash without selling their buildings. The downside for the seller is that regardless of whether their property portfolio meets the return of the index, they have to pay out that level to the buyer. The buyer, meanwhile, will receive back the performance of the index minus any fees.

Last year the Investment Property Databank's UK commercial property index (which tracks the price of property) said that commercial property returned 17%, meaning a buyer would have received 17% minus the 3% to 3.5% premium they would pay to the seller.

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