A new property derivatives market will have a major impact on the investment and lending sectors, said two leading industry figures this week.
Last Friday, tax changes that encourage the use of derivatives – which effectively allow people to bet on the rise or fall of the Investment Property Databank indices, and so hedge their risk – were introduced.
British Land director Nick Ritblat told an audience of bankers in London on Wednesday that “property derivatives will have a very significant effect on the market. It means that a whole new raft of people can play.”
Ian Marcus, managing director of real estate at Credit Suisse First Boston, told the Association of Property Bankers conference that derivatives “will have a greater effect on the market than the introduction of real estate investment trusts”.
Ritblat, who this week was voted vice-president of the British Property Federation, said: “The introduction of derivatives has been underplayed. They will be particularly relevant to the lenders of property. It will help remove a whole level of risk.
“The change will not happen overnight. But when it does it will change the whole dynamic of property lending,” he added.
But Rupert Clark, head of property investment at fund manager Hermes, said he was cautious. “The market will be very attractive once there is liquidity. The question is how much liquidity will there be in it, and how long it will take to get that.
“So it is not something that we are considering at the moment. Although if we could move in and out of sectors without incurring major trading costs, that has got to be attractive.”
But he warned: “By the time that IPD yearly index comes out in February/March, the market will be getting close to knowing what the figures are, therefore limiting opportunity for arbitrage.
“The big question is, are there enough players that are prepared to take a sufficiently contrary view to make the market?”
Bryan Laxton, corporate finance adviser at Cushman & Wakefield Healey & Baker, said derivatives could enhance property’s revival, encouraging greater transparency and liquidity. But investors who lose money for reasons that have nothing “to do with the underlying value of the property”, could undermine this.
References: EGi News 27/09/04
