Property derivatives and indirect investment in real estate
Property derivatives and indirect investment in real estate

The following Property practice note provides comprehensive and up to date legal information covering:

  • Property derivatives and indirect investment in real estate
  • Property derivatives
  • Example
  • Indirect investment
  • Advantages of indirect ownership
  • Choosing the right fund
  • Common types of fund
  • Company
  • Limited partnership (LP)
  • Limited liability partnership (LLP)
  • More...

Property derivatives

A derivative is a financial contract that gives an investor a return based on the performance of an underlying asset. In essence, the contract involves a bet between two parties as to how a chosen asset will perform over an agreed period.

In the property derivatives market, the underlying asset is not an individual property or portfolio of properties; instead it is a property index (such as one of the many published by the Investment Property Databank in relation to commercial property or, for residential property, the Halifax House Price Index). These indices record the total return of a class of property (ie aggregated income and capital growth or decline) over a period (yearly, quarterly or monthly) compared as a percentage increase or decrease on the previous period.

The use of property derivatives allows investors to buy or sell exposure to the property market quickly and cheaply by buying or selling contracts which are based on the returns from the movements of the chosen index. This is potentially an entirely ‘synthetic’ property portfolio, because neither party to the contract needs to own any property.

The most common type of property derivative is the ‘total return swap’ or ‘contract for difference’. The following example illustrates how such a derivative works.

Example

An investor, who has £50 million to invest, enters into a swap contract with a bank.

The investor agrees

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