Real Estate Derivatives

Firms 'Lay Wager' on UK property
(BBC Jan 14, 2005)
Speculators looking to invest in the property market may soon be turning to a hassle-free option.

And they will be able to take a wager without seeing an estate agent, applying for a loan, or paying stamp duty and legal fees.

A deal this week between two unnamed UK companies sets in motion the world's first derivatives market for property exposure.

The derivatives contract between a life assurance firm and a property company will work on a similar principle to those in which City traders hedge their bets on shares and currency investments.

The property company was prepared to take a £40m ($74.8m) gamble on the market, while the life assurer wanted to limit its exposure to possible downturns by the same amount.

Tracking the market

The three-year contract between the firms was set up by the London office of Eurohypo, Europe's largest real estate bank.

"This allows property market participants to take a view on physical property without the expensive fees of property transactions," said Kate Morrison, director at Deutsche Bank in London who act for the life assurance firm.

No money will initially change hands, but the firms will settle up at the end of each year.

The assurance company will be paid if the market falls; if it rises the property company will be paid.

The exact amount of the payment will be based on changes to an index collated by Investment Property Databank, which tracks the state of the market.

Any future property derivatives market is most likely to be used by big companies and investment funds.

Some observers, however, question whether it will be possible to find enough buyers and sellers at any given time.

Nonetheless, estimates of the potential total size of contracts reportedly runs into hundreds of billions of pounds. And banks in the US and Sweden are said to be mulling over similar deals.

What are Derivatives?