A new derivative will enable international investors to participate in capital growth of UK property. Alex Catalano reports.
BZW is launching Property Index Forwards, a derivative that will allow investors to take a view on movements in the capital value of UK commercial real estate.
PIFs will be forward contracts on the IPD annual capital growth index, and traded over the counter. Initially, Barclays Bank will make the market in PIFs, acting as counterparty and quoting bid/offer prices on Reuters.
The contracts involve two parties taking different views on what performance the IPD annual capital index will show, at a specified time in the future. One party agrees to buy, and the counter-party agrees to “sell” the index for a specified price at that date.
Initially, PIFs will involve a one- or two-year time frame. On the expiry date, the contract is settled by a cash payment which reflects the percentage rise or fall in the index.
The new derivative will help increase liquidity, an issue which has been at the forefront of investors’ concerns about property as an asset class. PIFs allow investors to take a capital position on the UK commercial property market, without having to buy property directly. This will aid investors who may want to buy or sell property, but cannot immediately find the right product or purchaser. And those who already have direct property holdings can use PIFs to hedge their exposure.
PIFs are the latest stage in a developing derivatives market in the UK. A club of 11 top UK investors are also devising a property futures contract, the Real Estate Investment Market (Reim). This will also be based on IPD indices, but will use the monthly rather than annual index, and cover a range of sectors.
BZW’s PIFs follow the bank’s successful launch of Property Index Certificates (PICs), which are now listed on the London Stock Exchange. These instruments offer investors a return that is linked to the income from UK commercial property, as measured by IPD’s annual index.
PICs have raised around £275m since they were set up in 1994, attracting about 100 UK and overseas investors.
