GLOBAL - The head of property derivatives at Royal Bank of Scotland (RBS) - the UK bank which executed Prupim's £100m (€111m) total return swap deal last year - has warned the nascent sector will not survive unless more real estate investors become more engaged.
RBS's Phil Lujbic told delegates at IPD Property Derivatives Conference that unless property professionals supplement their core bricks and mortar business with derivatives activity the sector will never develop.
"A lot of the time it feels like a one-way street; we are showing our segment prices but, in terms of feedback, 95% of the time we get very little," he said.
"The trade with Prudential was great, but it is just one publicly-known sub-sector swap trade, we have done others with hedge funds, but where are the property guys out there? We know some are interested but we need the feedback otherwise no transactions will be done," added Lujbic.
Paul Rostas, head of property derivatives at ICAP, the brokerage firm which advised Prupim, echoed fellow Ljubic's concerns.
He said: "Transactions like the Pru's reinforced the fact that sub-sector swaps are very powerful and are generating huge interest.
"But while we know of interested parties, but we need the [pricing] feedback otherwise no transactions will be done."
Prupim, the real estate division of UK life assurer Prudential, carried out a series of multi-sector total return swaps in the UK in 2009 to rebalance short-term exposures.
Will Robson, property derivatives director at Prupim, told the audience that trading synthetically in this way saved time and money and avoided an additional drag on portfolio performance.
"Segment derivatives trading can help to solve some of the problems faced by fund managers: these trades are not in conflict with existing asset allocation policy and, as such, they are purely property fund management decisions," he said.
"We can find value between the relative pricing of segments all the way through the property cycle, rather than at specific peaks or troughs in the cycle."
He added: "This kind of strategy provides an extra layer of return in addition to the physical holdings; it is an extra layer of alpha - not an alternative to physical investment. It is a strategic switching of exposure of one segment with another, rather than the deployment of new capital into the market. As such, the level of return one would expect from the strategy is different," added Robson.
Representatives from Legal & General and AXA Real Estate, respectively, also told delegates how they had made use of property derivatives in recent years.
L&G director Michael Barrie said: "We have used derivatives for short-term liquidity, long-term hedging for certain funds and it has proved to be liquid, cost efficient, flexible and - above all - quick. Sub-sector trades, I think, will be a big win once we start trading properly in that space.
"The ability to not have to trade physical property but to adjust positions and maintain core holdings offers huge value. If you are running liquid open-ended property funds, not having property derivatives in your armoury is a bit of a risk," he concluded.