Property derivatives

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Property derivatives
  • What are property derivatives?
  • Why are property derivatives used?
  • Using property indices
  • Which indices are used?
  • Common types of property derivatives
  • Forward contracts and total return swaps
  • Structured notes
  • Exchange traded property derivative contracts
  • ISDA 2007 Property Index Derivatives Definitions
  • More...

Property derivatives

What are property derivatives?

Property derivatives are derivative contracts which use the price of property as a reference rate to determine the amount the parties to the contract are required to pay one another. They can be found in over-the-counter (OTC) form or exchange traded form. The market for property derivatives is a niche market for specialist investors and their use in the UK has remained limited.

Why are property derivatives used?

As with all kinds of financial derivatives, there is no single reason for using property derivatives. The contracts allow market participants to obtain exposure to the movements of property values and can be entered into for speculative purposes, hedging exposures on existing property investments or transferring risk on property portfolios. Derivative contracts are a cost effective method of taking a position on property prices without the need for expensive direct investment in that asset class. They are not generally subject to taxes such as stamp duty which would otherwise be payable on direct property investments.

As with other forms of derivatives, a property derivative may allow an investor to ‘short’ the property market or a particular sector if they have a negative view on future performance.

Insurance companies, investment and pension funds are all investors in property. Property derivatives will allow management of existing risk exposures to specific property sectors such as residential property,

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