EUROPE - Eurex, the derivatives exchange, is to launch Europe's first property futures in February 2009, despite the economic turmoil.
The futures will be a type of derivative and will be annual contracts based on the total returns of Investment Property Databank's (IPD's) UK Annual All-Property Index.
Investors will be able to make money from 9 February 2009 by buying returns if the market is on the way up or selling the losses if they think the market is likely to fall.
Peter Reitz, a member of the Eurex executive board, claimed "exchange listed, centrally-cleared real estate futures bring added value to the market".
"Risk management is a key issue and futures are an excellent risk management tool enabling hedging and bringing additional liquidity," suggested Reitz.
"They will allow open-ended property fund managers greater flexibility with cash flow management and redemptions, unavailable in other property investment instruments," he added.
Eurex insists the Eurex Clearing, a type of insurance hedge, will mitigate counterparty risk effectively.
Eurex is targeting property fund managers, hedge funds, institutional investors, banks and big property companies like Land Securities and British Land, but has yet to reach a final decision on the trading costs, according to Stuart Heath, from Product Strategy at Eurex.
"They (trading costs) haven't been finalised yet but we are looking at being competitive with fees in the OTC derivative market and a big inclusive in the fee is the reassurance that positions are part of the Clearing facility to mitigate counterparty credit risk," said Heath.
"The regulators are pushing for trades to go through clearing because it gives a much higher degree of risk management and enables banks to have much more security," he added.
Property funds are likely to be cautious at first about investing in property futures, according to Heath, so it will be a "case of educating them" because they are not, in many cases, accustomed to using such products.
"They are also slightly sceptical because it is a derivative and derivatives have been seen as being partly responsible for the crisis we are in now, so there is a certain amount of prejudice. But at the same time they are at a loss to know what to do because they are sitting on falling assets and they can't offload them," claimed Heath.
Eurex signed a licensed agreement with IPD in October 2008 and revealed additional futures based on IPD's UK sector indices and other European indices - initially those in France and Germany and later maybe Switzerland - are expected to launch later next year and boost the property futures market.
"Going forward, we are launching property futures products at the sector level (offices, retail, industrial) and that will be a big enticer for the property funds to get involved because that is how they invest, at the sector level," said Heath.
With an estimated contract size of £50,000 (€53,600) and daily valuation, Eurex aims to encourage more participation, liquidity and transparency into the derivatives market.
Eurex is a futures and options exchange for European derivatives and is jointly operated by Deutsche Börse AG, operators of the Frankfurt Stock Exchange, and SIX Swiss Exchange, operators of the Swiss capital markets.