Property derivatives trading at lowest level in four years

August 04, 2010 - 12:19:25 am

LONDON: Global property derivatives trading volumes plunged to their lowest quarterly level for four and a half years last quarter as sovereign default worries engulfed the euro zone, industry data showed yesterday.

Investment Property Databank, the global index compiler which tracks derivatives trading on its products, recorded £300m ($464m) of trades between April and June in a quarter broadly expected to plumb new depths for activity.

Trading volumes in the nascent market fell 38 percent from the £483m seen in the first quarter, and were down 67 percent from the £907m seen in fourth-quarter 2009, the IPD data showed.

“The reduced level ... was widely anticipated given the economic uncertainties faced by financial and property markets but also reflects pricing being closer to many investors’ forecasts, reducing speculative trading,” said Nick Scarles, Investment Property Forum’s derivatives interest group chairman.

Property derivatives are contracts based on expected movements in real estate prices measured by a reputable index.

They enable market participants like banks or property companies to adjust or hedge exposure to the asset class in a cheaper and more efficient way than buying or selling buildings.

Scarles said he expected derivative trading volumes to reflect shaky sentiment in the broader financial market although he was optimistic that activity would bounce next quarter as investors spotted the merits of synthetic property deals in a more competitive market for bricks and mortar.

“In the short term there are clear signs that property derivative pricing is moving to a level likely to be attractive to speculators and investors who find physical product at ‘fair’ prices hard to find,” said Scarles.

IPD’s Derivatives Client Manager Kate Pedersen also cited the prospect of stringent bank stress tests and new financial market regulation for the drop in property derivatives appetite in the second quarter.

“However, looking forward the mood is tangibly more upbeat. The Greece crisis appears in hand, the fear of further sovereign debt default has eased, while broader sentiment is less volatile. All of which points to a more robust third quarter for property derivatives trading,” she told a group of industry professionals who had gathered for the market update.

Panel speaker Phil Ljubic, head of property derivatives trading at Royal Bank of Scotland agreed that the outlook for the third quarter was encouraging.

“We are seeing groundswell of activity ... with more trades in first month of the third quarter than we saw over the entire second quarter - that is, more than 250 million pounds worth of trades,” said Ljubic. “So we are seeing some quite big volumes. They consist mainly of All Property trades, but we are looking to do more sector and sub-sector, particularly with hedge funds,” he said. reuters