Two property investors have switched their exposure from one market sector to another by buying and selling property futures contracts in a single trade for the first time, the company mediating the deal has said.
In the trade on Eurex Exchange, one party to the deal sold £25m (€34.2m) of the Calendar 2015 IPD Shopping Centre Index at 9.5% whilst buying £25m of the Calendar 2015 All Industrial Index at 15.5%, said Arca Property Risk Management.
The company said it matched both sides of this deal with a counterparty that was keen to do the opposite pair of trades.
It said it was the first sector switch trade carried out using property futures.
The cashflow for the switch will not be determined until the end of this year because that is the time when the two IPD indices settle, as they are based on the total returns for the year.
Charles Ostroumoff, director at Arca PRM, said: “For the first time, a property fund has sold exposure in an IPD segment whilst simultaneously buying exposure to an IPD sector in real time and without the costs associated with buying and selling in the direct investment market.”
He described the deal as a ground-breaking trade.
“This innovative way of trading real estate ushers in a new era of risk management for the industry and will have a big impact on the way property fund managers manage their beta – market risk – and their sector and segment exposures going forwards,” Ostroumoff said.
He told IPE it had taken Arca two weeks to find a counterparty and agree terms for the deal, once the order had been given.
Besides the hurdle of finding a counterparty, such deals also require preparation in other ways.
“It takes time educating new clients and then making sure they get set up formally so that, as an organisation, they are comfortable being ‘price givers’ and ensuring the right checklists are in place,” he said.
He emphasised that this type of transaction involving futures rather than bricks and mortar was a much cheaper way to change real estate sector exposure, costing less than 0.5% rather than the 8% that buying and selling a building would come to.
Arca PRM said it was working with other clients to carry out similar trades.
Stuart Heath, head of Eurex’s representative office in London, said the exchange hoped the transaction would spark further trades.
“Our IPD futures are annual contracts with guaranteed cash settlement on maturity and no counterparty risk,” he said, adding that no other property product easily offered these conditions.
Malcom Hunt, executive director at MSCI, which provides the indices the contracts are based on, said being able to switch out of one IPD segment and into another synthetically using futures contracts was a valuable tool for the industry and a complement to direct investment.