ABN Amro has marked a milestone in the fledgling property derivatives market by creating the first ever sector-specific deal.
Until now, these deals have involved groups betting on the UK’s all-property index, an index collated by the Investment Property Databank. Typically, they have wagered that this will either outperform or underperform a fixed rate, usually a figure of 100-200 basis points above Libor.
But the industry has long been waiting for someone to carry out the first deal enabling investors to get exposure to sub-sectors such as offices, retail or industrial property.
The landmark deal by ABN Amro saw the bank warehouse some of the risk. On one side of the trade, a property player speculated that the UK retail sector would underperform against a Libor-based return over the next 15 months. On the other side, a bank speculated that the UK All Property Index would outperform versus a Libor-based return. CBRE-GFI acted as the broker.
The volume of property derivative deals in the last year is estimated at about £800m. Of this, a large proportion has been in property income certificates, a type of bond with an embedded return based on the IPD index, sold by Barclays Capital and property boutique Protego.
The renewed interest in derivatives has come about after the UK Treasury last year granted tax relief on tax losses from property derivatives. This followed on from a previous FSA decision to allow life and property funds to hold property derivatives.
ABN Amro has set up a dedicated property derivatives trading desk. Niall Cameron, head of global markets at the bank, said it had from the start aimed to strike a sector-specific deal because it believed this was where the strongest demand would come from.
Other groups, such as Eurohypo, Deutsche Bank, Tullett Prebon and ICAP are also seeking such deals.
“There are a lot of players and participants shadow-boxing, and we wanted to get into the ring,” said Mr Cameron, who described the competition in the area as an open field. “It is still early days for the market. You would not have believed five years ago how fast the CDS [credit default swaps] index market has grown and we believe the property derivatives market could see similar growth.”
The ABN Amro swap is shorter than similar deals which typically have a three-year maturity.
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