LONDON (Reuters) - Some of the world’s biggest property fund firms could eventually be tempted to trade property derivatives in a material way as long as the young market continues growing.
However, listed property firms such as real estate investment trust (REITs) could be a tougher nut to crack, leading industry figures at the Reuters Global Real Estate Summit said this week.
Matthias Danne, who sits on the board of DekaBank, Germany’s biggest operator of open-ended property funds, said he was interested in putting investor money to work quickly using property derivatives.
“I would use them if the market was liquid enough so I could invest my liquidity and I have a lot of that,” Danne said.
The property derivatives market offers over-the-counter trading mainly in swaps based on the total return on property benchmarks such Investment Property Databank’s UK All-Property index in exchange for interest payments.
The instruments enable investors to gain or hedge exposure to bricks and mortar investments synthetically and to bypass some of the transaction costs normally associated with buying and selling property directly, such as stamp duty.
Debut property derivative trades have been recorded in France, Germany, Italy, Japan, the United States, Australia, Canada and Hong Kong. But the market is most established in Britain where dealing volumes hit a record 3.4 billion pounds ($6.71 billion) in the first quarter.
That is puny compared with other markets, such as the $62 trillion credit derivatives market, and for the time being too small for some global property fund managers.
“The trouble with (property) swaps is the depth of that market, which we’re not convinced of,” said Robert Houston, a member of ING Real Estate’s global investment board.
Neither ING Real Estate nor rival property investment giant RREEF, which is owned by Deutsche Bank, ruled out getting more involved with property swaps in the future.
“I think we’ll be a player in that market at some point or the other,” RREEF’s Leitner said, while Houston said ING Real Estate had already invested about 250 million pounds on structured notes linked to IPD index returns, demonstrating a growing appetite among pension fund clients to explore new ways of real estate investing.
DekaBank’s Danne also said he was optimistic that regulations which barred German open-ended funds from investing in property derivatives would be lifted.
RREEF, ING Real Estate, and Dekabank have about 150 billion euros ($235.1 billion) in real estate assets under management between them.
“The issue for us is that there is an asymmetry in public markets,” said Stephen Hester, British Land’s chief executive.
“If we made a lot of money out of derivatives trading our investors would say ‘thank you very much’ but that is very low-quality profits and we are not going to apply any multiple to that,” he said. “If we lost a lot of money in derivatives trading our investors would fire us and call it a scandal.”
Hester was backed by SEGRO chief Ian Coull.
“I have a real problem, and my finance director shares this, that making a bet against the sector that we are in seems to me to be saying to our shareholders that we are not very good at the direct property investment stuff that we do,” Coull said.
However, Mike Hussey of Land Securities (LAND.L) said he was open to the possibility of using property derivatives as liquidity improved, especially if the business demerged into separate retail, London, and outsourcing units.
He also highlighted the growing role of property derivatives as a barometer of property investor expectations.
“We do look at where property derivatives are priced because it gives a view as to where people perceive markets to be heading,” he said. “We find that an interesting backdrop to our own investment decisions.”
(For summit blog: summitnotebook.reuters.com/)
Reporting by William Kemble-Diaz and Sinead Cruise; Editing by Ian Jones