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Property derivatives: 20 years behind the mainstream

Ed Stacey, managing director of derivatives at Eurohypo, one of the earliest supporters of a real estate derivatives market, says the market is still at an early stage of development. "It’s like the mainstream derivatives market... 20 years ago," he says.

Property derivatives: Market at last begins to fulfil its promise

Eurohypo began trying to push the market in 2003 but tax and regulatory issues mean that no trades were done until 2005. Only in 2006, when banks entered the market, did it become established. "It required investment banks to take risk on their balance sheets," explains Stacey. "And to their credit, that’s what they have done."

While index providers such as FTSE have waded into the commercial real estate market, the vast bulk of real estate derivatives trades to date have focused on the IPD All Property Index, which tracks commercial property valuations – not completed sales – across the UK annually, although quarterly and monthly updates are available. A number of UK sector indices, such as Central London Office property, are also compiled as well as indices throughout Europe and the world.

The UK index covers about £150 billion of property and is widely regarded as both accurate and fair – giving confidence to those seeking to trade derivatives based on it. In addition, the use of the IPD All Property Index as the main reference for derivatives has meant that the growth of the market can be easily monitored: IPD requires that everyone that uses its index (for a fee) must disclose their trade.

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