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Synthetic real estate – going nowhere fast

Structured note sellers had high hopes that property-linked pay-offs would be a big revenue generator in the UK. However, recent real estate upheavals have cast a dark cloud over the market.

The property swaps market

WEST BROMWICH BUILDING Society did very well out of the UK house price boom. But not just from supplying mortgages. The company also had a nice little earner in supplying retail investors with synthetic exposure to the residential property market through capital-guaranteed structured notes. The emergence of a derivatives market on property over the past few years, led by the dealing desks of investment banks, meant that West Bromwich could buy exposure to house prices via swap agreements with banks before selling it on in note format to end investors. Recent house price upheavals, however, have had a nasty effect on the market.

"We don’t plan to look at either commercial or residential indices for some time," says Andy Heseltine, West Bromwich’s savings and investment product manager. The building society was still marketing property price-linked notes at the start of the year. Specifically, it was selling a five-year, capital-guaranteed product that offered investors exposure equally to the performance of the FTSE100 and the Halifax House Price Index (HPI). Heseltine says sales have been disappointing. "The general appeal went towards the end of the offer period. Over the last three or four months the media coverage, and the actual performance figures, have not been that exciting," he says.

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