The commercial property derivatives market is picking up, as buyers try to beat the credit crunch. Property prices have been steadily dropping in the commercial and residential property market and now investing in the derivatives market is becoming a tempting option for those trying to buck the economic downturn.
“Investing in commercial property derivatives could be a good option for investors as this may translate into commercial property becoming more attractive as an investment generally, in view of falling property values,” says Nick Trowell, a property lawyer, Heatons LLP.
A property derivative’s value is determined by underlying real estate asset and contracts are usually based on real estate property index.Derivatives usually involve a total return swap, where the total return on property is exchanged for the total return on cash, or a forward contract.
The cost of a one-year commercial derivates contract has risen from record lows earlier this year and prices have increased by 50 basic points in the past few days.
“Property derivatives can be advantageous to investors as it is a chance to speculate, and potentially accumulate, on the property market without having to exchange physical property. Investors can swap portfolios if they lose interest in a particular sector and can gain more presence in the property market. It’s definitely a buyer’s market at the moment, and commercial derivates are having resurgence,” adds Trowell.