GLOBAL - Property derivatives trading remains strong compared to direct property but should not be used to estimate property values, according property experts speaking at the launch of the IPD UK 2008 results.
Derivatives trading volumes in 2008 held up well against the financial crisis with £7.73bn (€8.8bn) worth of trades compared to £8.3bn in 2007, according to Ian Cullen, co-founding director of IPD and head of systems and information standards.
"Whilst turnover in the over-the counter (OTC) property derivatives market still remains at just under half of the institutional direct market, absolute levels are holding up better.
"However, with the addition of an exchange-cleared alternative trading platform by EUREX later this month we may see the differential between the two markets narrowing before the end of the year," he added.
In the UK, there was £979m worth of deals completed in the fourth quarter of 2008 and £7.07bn over the year, down only slightly from £7.2bn in 2007.
The French and German derivatives markets recorded a steep decline in trading volumes. In the fourth quarter of last year there were only £40m worth of French trades and £10m worth of German trades, compared with £116m and £110m in Q1 2008. Over the year, the French and German markets recorded £384m and £253m worth of trades respectively.
Analysts are confident, however, that the property derivatives market will continue to be an attractive trading platform.
"There is new interest in the market of various sorts matching counter parties, all wishing to take risk management positions or safer positions. What is also interesting is that the banks are actively supporting this market," said Cullen.
Nick Scares, chairman of the Investment Property Forum's Property Derivatives Interest Group, said: "With limited transactional evidence of property values from the physical market, derivative pricing is increasingly used by investors to provide up to date insights into the values of their portfolios."
However, derivatives trading forecasts may not be very reliable sources, as pricing moves according to market sentiment.
Commenting on this danger, Cullen said: "In months these prices move very, very dramatically and that is because they represent the current sentiment of the market and that current sentiment in these incredibly volatile and uncertain times bounces around from all sorts of signals.
"These are not firm or reliable forecasts, they represent the very, very painful sentiment and the context in which we find ourselves at the moment."
The total value of trades carried out on the IPD indices since recordings began in the fourth quarter 2004 is £21bn.
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