One of the leading US derivatives brokers has teamed up with CB Richard Ellis in order to take advantage of the burgeoning market in European real estate derivatives.
GFI Group and property adviser CBRE will work to develop a derivative market based on commercial real estate in Europe.
Real estate derivatives typically involve a swap of returns on commercial property against floating interest rates, plus a spread for a period of three years or longer.
GFI says commercial property is the largest physical asset class not currently taking full advantage of derivatives. However, the market in the UK has taken off in the past year, with investors such as insurance company Prudential and asset manager Protego leading the way. Around £600m (e873.7m) of deals have been carried out so far this year, using Investment Property Database (IPD) UK all-property index should spur more derivative trading within commercial property.
Steve McMillan, senior managing director for GFI in Europe said: “The European commercial property market is huge – estimated at more than $4.2trn (e3.5trn). But unlike other large physical markets, this market remains unsupported by
derivatives. This complicates trading and limits
“Derivatives will unlock the potential of this market by removing physical delivery thereby enabling faster, cheaper and more effective execution of allocation strategies, short-term hedges, risk transfer and geographical diversification.”
Martin Samworth, managing director for CB Richard Ellis in the UK, claimed the European derivatives market would grow to a multi-trillion euro market. “The derivatives market in other asset classes has matured to at least the same size as the underlying market within three to five years. Commercial property has the potential to develop in the same way,” he says.
Other commentators reckon an annual derivatives market of around e20bn is more likely. The development of real estate derivatives outside the UK is limited by the lack of long-established IPD indices in other markets. Only France and the Netherlands have indices approaching the maturity of the UK index.