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| Nick Scarles, Grosvenor: looking to Italy |
In September, ABN Amro entered into the inaugural Swiss IPD trade with Zürcher Kantonalbank. "This Swiss trade was another step in the development of the market from the point of view of having new products," says Rawle Parris, head of property derivatives at ABN Amro in London. "We’re seeing the European picture emerge in property derivatives. We now have an established market in the UK and we’ve had trading in the French and German indices as well."
The Swiss trade was followed in October by the first property derivatives trade in Italy. This time Grosvenor Group, which has been a leader in new property derivatives, and BNP Paribas were counterparties on the trade. Grosvenor has also executed trades in the US, UK, Japan and Australia.
"We’re looking at increasing our exposure in Italy as we think it’s got a lot of potential, especially on the retail side," says Nick Scarles, group finance director at Grosvenor in London. "As well as investing in the physical assets, it’s important to understand what we can do on the derivatives side. We have five investments there now and as we want to change our exposure to that market, derivatives give us a way to do that pending real investment that should only be made at a sensible speed."
These new trades come as IPD announced that volumes in UK IPD index property derivatives trades had reached £10.6 billion as of November 1 2007. Total volumes on all IPD indices including Japan, Australia, Switzerland and Italy, stand at £11.5 billion. IPD estimates that there have been at least 700 trades since the market’s inception.
And despite widespread volatility in financial markets, property derivatives, although still a nascent market, are holding up well and attracting interest from a broader range of end-users.
"We’re still seeing an increase in the number of players," notes Alex Dewey, co-head of property derivatives at Cushman & Wakefield BGC. "Real estate players, investment companies, pension funds as well as hedge funds and private banks are increasingly having conversations with us about using property derivatives as a risk management tool or looking to take advantage of current marketplace conditions." Clients are also using property derivatives as more than a tool to simply take on property risk.
"In the UK we are seeing clients both selling and buying the commercial and residential indices," says Guy Ratcliffe, head of property derivatives at Morgan Stanley in London. "Some clients are seeing absolute value in the market because of the discount priced in. In some cases clients are buying property and selling inflation as a relative value macro play."
As a result of the unsteady market conditions created by the US sub-prime mortgage debacle, end-users are looking at property derivatives in a new way.
"The shock we’ve had recently will mean that lesson will have been fully learned where the derivative is seen from both the buy and the sell side instead of just the buy side," says ABN’s Parris. "This will help the equilibrium of the market now that we’ve had some experience and seen a shock. I think it’s a lesson that’s been learned by people who own physical property but are not used to shorting in a synthetic market."
Market players have been encouraged by how bid-offer spreads have held up under the pressure of the credit crunch in the sense and prices have led the sentiment in the physical market.
"We saw the derivatives market at the all-property level pointing the way for the physical and being a lead indicator," says ABN’s Parris.