Property derivatives: It’s the new way to buy real estate

Are residential property derivatives about to become the next hot investment?

Buying a slice of Australia’s housing market will soon be achievable without the complications associated with transactions in the ‘physical’ market.

When Australia’s first property derivatives market launches in the second half of next year investors will be able to buy and sell derivative or futures contracts in our major housing markets without owning property.

In September the Australian Securities Exchange signed a landmark deal with RP Data and Rismark International to develop the residential property derivatives market. The ASX selected the RP Data-Rismark hedonic indices as the benchmark indices for the new residential property derivatives market.

Christopher Joye, Rismark International’s Managing Director, said; “A residential property derivatives market has the potential to allow individuals and institutions to cost-effectively access index-linked exposures to the $3.2 trillion residential property asset class. Previously the high transaction costs associated with residential property investment have made accessing this asset class on a diversified basis difficult.”

In June last year a property derivatives study group in Japan defined derivatives as “financial instruments where the prices (present values) are determined by the index and prices of other securities, products, or events (underlying assets)”. The study defined property derivatives as “forms of derivative financial instruments or contracts composed of property-related indices and events as underlying assets”.

Property derivatives markets have begun to boom around the world. In the UK, the world’s largest property derivatives market, there are over GBP 7 billion worth of over–the–counter commercial and residential property derivatives outstanding.

A residential property derivatives market would be of interest to:
• Any investor who wants to buy or sell regional residential property,
• Renters who are currently priced out of the market but want to hedge against future house price increases,
• Developers looking to set benchmarks for pricing and returns.

The buzz is that the property derivatives market could grow dramatically over the next three to five years.