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Virtual real estate hits Asia

For a region that has had a long-term love affair with property, Asia’s first property derivative could mean the start of a beautiful new relationship. In February, ABN Amro and Hong Kong broker, Sun Hung Kai Financial executed Asia’s maiden property derivative based on Hong Kong residential properties.

Euromoney Liquid real estate March 2007 

Under the terms of the deal, ABN Amro, the effective buyer of the property, receives from Sun Hung Kai Financial an income stream equivalent to the change in the University of Hong Kong-Hong Kong Island Residential Price Index (HKU-HRPI) while Sun Hung Kai will receive from ABN Amro Hibor plus an undisclosed spread.

HKU-HRPI is a sub-index of a series devised and compiled by Hong Kong University.

"It’s a very robust index," says Philip Ljubic, a director in property derivatives at ABN Amro. "If it wasn’t I wouldn’t commit ABN Amro’s balance sheet to it."

The deal size is very small at around $13 million and the swap has a one-year maturity, referenced from December 2006 to December 2007. ABN acted as principal through its proprietary trading book, while Sun Hung Kai Financial is believed to have been acting as an intermediary for clients.

The effect of the property derivative between the two financial institutions is that ABN purchases high-end Hong Kong residential property and Sun Hung Kai Financial’s clients are sellers, although the transaction is a synthetic one.

"The biggest advantage of trading property derivatives is there’s no stamp duty and it’s much quicker to trade," says Ljubic.

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