Protego and Barclays Capital are to launch a £100m property derivative product — the first since October’s confirmation of favourable tax treatment for property derivatives.
“This is an important move in the development of a derivatives market in property,” said Protego chief executive Iain Reid. “I hope this launch will be the catalyst from which the market will grow.”
The issue will be in the form of property index certificates, listed on the London Stock Exchange as a four-year eurobond. The bond will give investors capital and income returns based on movements in the IPD all-property index. The counter-party to the PIC issue is a UK life insurance company.
Since changes to tax rules in October, allowing UK insurance companies to offset losses from derivatives against gains in other parts of their portfolios, a wave of derivatives deals have been expected. PICs are also now legitimate investments for unit-linked funds.
Protego head of business development Charles Weeks said: “Property derivatives have been a difficult market to develop but now that the life insurance companies, which own 40-45% of UK property, are able to participate it should stimulate a lot more activity.”
The new regime will allow life insurers to quickly and cheaply re-adjust exposure to property. There is no stamp duty involved in derivatives transactions, which also avoid the agency fees and legal costs of direct property deals.
Weeks estimates that the costs involved in derivative trading will be less than 40% of the cost of trading in direct or other indirect property alternatives.
Protego was also involved in talks with other possible counter-parties to launch property derivatives based on IPD UK subsector indices, and IPD indices in the Netherlands, Sweden and Ireland, Weeks said.
” Tony Key, a former head of research at the IPD and professor of real estate economics at the Cass Business School, is to join Protego as consultant head of investment strategy.
