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US real estate derivatives take off at last

An opening of the market to more market makers should boost derivatives use.

The US real estate derivatives market has finally come to life after two years of missed opportunities that allowed the UK market to surge ahead. Now the National Council of Real Estate Investment Fiduciaries (NCREIF), which provides benchmark property indices in the US, is rapidly signing up new banks and expectations are high that deal flow will increase.

The US has some way to go before it can begin to challenge the UK, which kicked off the real estate derivatives market in 2004 and had transacted £7.6 billion ($15.15 billion) of notionals in 494 trades by the end of the first quarter of 2007, according to real estate information provider Investment Property Databank (IPD), which publishes the indices on which the UK market trades.

As Liquid Real Estate was going to press, as many as eight trades are thought to have taken place in the US since March – the exact number is uncertain because data is not yet published on deal volume. But while that total may sound small – and with average deal size likely to be lower than $25 million it is a drop in the ocean of the US real estate market – it is a fourfold increase on activity in the two years to March 2007, when just two trades totalling $35 million are thought to have been completed.

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