Summary: The following is an extract from a report by Luke Hatigan for Jones Lang Lasalle on propoerty Derivitaves. Over the past year or so, news has reached Australia about the exceptional growth seen in the UK’s property derivatives market – the world’s leading market. Property derivatives are becoming a topic of interest in Australia. However, details about the area and what they involve are still relatively scarce. This month’s Economic Insight hopes to provide a brief overview of the topic.

The following is an extract from a report by Luke Hatigan for Jones Lang Lasalle on propoerty Derivitaves.

Over the past year or so, news has reached Australia about the exceptional growth seen in the UK’s property derivatives market – the world’s leading market. Property derivatives are becoming a topic of interest in Australia. However, details about the area and what they involve are still relatively scarce. This month’s Economic Insight hopes to provide a brief overview of the topic.

What is a Property Derivative?

A derivative is a financial instrument whose price is dependent upon, or derived from, one or more underlying assets. The security itself is merely a contract between two or more parties, and its value is determined by fluctuations in the underlying asset. They are primarily designed to be used in risk management.

Property is the last major asset class in Australia without a developed derivatives product, and while this is still a relatively new idea, it is a tool property professionals should not ignore as investors seek ever greater flexibility in relation to property investment.

Property derivatives require a well-constructed, broadly based index to act as a proxy for the performance of the underlying asset for which these derivatives refer. The underlying asset in this case is, unsurprisingly, physical property.

The main form of property derivative in use in the UK and elsewhere is known as a ‘swap.’ Swaps are an over-the-counter (OTC) product, which means they are not traded on an exchange like equities. They allow an investor to exchange property performance against either an interest rate (total return or capital return swap) or the performance of another property sector (sector return swap), where performance is measured by the change in the relevant property index measure.

For the full report on Property Derivatives download the report here. http://www.piaa.asn.au/reports/Property_Derivitaves