REAL ESTATE - Dutch investment institutions are being targeted to come to the aid of the emerging property-based derivatives market in London.
Industry sources believe the Dutch institutions could boost the sector because of their greater sophistication as real estate investors when compared to UK pension funds.
Members of the Dutch association for institutional investors in real estate (IVBN) turned out in force for a seminar on London’s property-based derivatives market in Amsterdam recently.
The event was hosted by property derivative pioneer Iain Reid, chief executive of Protego Real Estate Investors (and chairman of the London-based Property Derivatives Interest Group) and Barclays Capital director Paul Coleman.
Dutch health care pension fund PGGM already uses property derivatives and it was represented on a panel session during the seminar by Marc Nuijten, head of treasury and overlay management.
It emerged that one of the major barriers to the expansion of property derivatives is the reluctance of investment banks to expose their balance sheets for property derivative market-making and risk warehousing.
Answering a question from the floor, Coleman said it was naïve to believe the investment banks would ever assume this role. He claimed that the banks would be willing facilitators and catalysts “but the liquidity in the market must come from investors using derivatives to overcome traditional shortcomings in real estate investing”.
The audience heard that property derivative could be used for strategic investments and for hedging. For investors they were said to represent a cheap, accessible way into the market earning returns based on the IPD’s UK all-property index. For sellers they were said to represent a way to reduce property exposure without having to sell buildings.
Two types of property derivatives currently available in London were explained: PICs (property indexed certificates) and TRSs (total return swaps).
It was reported that London was now seeing the first derivatives contracts based on specific sector performance (retail, office or industrial) rather than the all-property index.
Gil Grossman, managing director of Netherlands-based IEF Capital, gave a presentation on his company’s inflation-based derivatives.
There were also presentations on pricing, taxation and legal issues arising from property derivatives.
Among the audience the consensus was that the seminar was extremely interesting but concerns were expressed about whether the liquidity in the marketplace could ever match the size of deals necessary to alter property allocations.