The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.

Property derivatives gather pace

Property derivatives continue to grow in popularity, with new funds launching and increasing numbers of banks gaining licences to trade.

Bank of America and Calyon are the latest banks to get their licences, bringing the total number to 20, according to Investment Property Databank.

This follows the launch of the UK’s first derivatives fund based on residential property prices in London. It is run by Robert Page of Alpha Beta Fund Management.

The fund will track the Halifax House Price Index and aim to give institutional investors exposure to the market return.

Page says the product is essentially conservative but can be leveraged up to three times the return of the index.

"We are the first to launch a residential derivatives fund based on the HHPI, which is a conservative market tracking product that can be leveraged, or non-leveraged, according to investor requirements," he says.

In other developments, Orn Capital is aiming to raise $100 million for its Global Property Derivatives Fund. It plans to bring together global real estate and hedge fund sectors. It is open ended and will not invest in any physical property.

It will look for inefficiencies in global property markets, seeking to identify relative value opportunities between different property markets, sectors and instruments.

Elsewhere Grosvenor Group transacted its first Japanese property derivatives trade in July, a two-year total-return swap on the IPD index for Japan (see Deal Architect section). This follows its earlier trades in the UK, US and Australia.

Also Paribas has priced the first property derivatives trade based on a basked of indices (see Deal Architect section).

The property market is still relatively small compared with other derivatives markets but it is growing fast and prompting further growth of markets in the US and Asia Europe. Indeed, the markets in France and Germany have been expanding recently while UK trading fell by two-thirds in the second quarter to £970 million.

There have been some concerns that rising interest rates in the UK will kill off the country’s housing boom. However, house price rises in June were the fastest in two years, countering the previous month’s suggestion of a slowdown.

But the Halifax says the five interest rate rises in a year are starting to bite.

The property derivatives market offers over-the-counter trading in total-return swaps based on the IPD benchmark commercial property indices for fixed periods, in exchange for Libor plus a spread.

"Residential derivatives have been around for about five years but have only been actively traded in the last couple of years," Page says.

UK institutional investors have historically avoided residential property in favour of higher-yielding commercial property.

"We believe the time is now right for a medium to low cost index fund which gives investors pure access to residential property in a tax-efficient way for the medium and long term," says Page.

The Halifax index is the UK’s longest-running house price series, with a 25-year history. Since inception, it has averaged annual returns of 8.1%.

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree