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Property derivatives: Market at last begins to fulfil its promise

Real estate derivatives volumes are growing at a staggering pace, and there is still plenty of scope for growth. The UK is leading the way but the European, Asian and US markets are picking up too. Market participants speak optimistically of real estate derivatives being the next credit default swap market.

Euromoney Liquid real estate March 2007 

Derivatives back with a bang

Real estate derivatives volumes have finally taken off and there is still plenty of scope for further growth. The UK is leading the way but the European, Asian and US markets are picking up too. Laurence Neville reports.

20 years behind the mainstream

Making the difficult move into residential

The ingenuity of financial markets should never be underestimated: more than 15 years after the demise of the London Futures and Options Exchange property futures contracts in 1991, the real estate derivatives market is back with a vengeance, in a variety of forms; market participants speak optimistically of real estate derivatives as being "the next credit default swap market".

Although the market is still dwarfed by physical sales – around £15 billion was invested in central London office property in 2006 – derivatives volumes have grown at an incredible pace: Investment Property Data (IPD) recorded £1.1 billion of trades from the beginning of the market to the end of 2005. By the end of 2006, a notional total of £4.675 billion of trades had occurred. Moreover, brokers say interest in the market has exploded with them fielding dozens of calls a day from interested parties.