Derivatives: Positive IPD figures buoy up 2011 contract pricing

Figures showing a slight rise in returns and weak but positive capital growth have stimulated 2011 and 2012 contract pricing

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CBRE-GFI market commentary

The 2010 IPD Annual All Property Index, released at the end of February, revealed 15.1% total returns for the year, writes Sam Whitham – 15bps lower than the 2010 contract price had indicated for the previous three weeks.

The release led to increased derivatives buying and pushed contract pricing higher. The first two 2011 IPD monthly releases showed positive figures, keeping the bears at bay. February All Property total returns edged up to 0.71%, with capital returns weak, at 0.15%, but positive and rising. Income return was 0.56% for the third successive month.

The retail and office sectors strengthened in February, but the industrial sector’s capital return retreated to a negative level, just, after two months of positive growth. A 0.08% fall in  capital values moved industrial from January’s highest returning sector to February’s weakest. Impressive 1.72% capital growth for February again made City offices the strongest sub-sector, with unbroken positive capital growth since September 2009. This continued to prop up a generally weak sector.

Retail warehouses enjoyed the 20th consecutive month of capital growth, making retail the month’s strongest performing sector, with a 0.76% total return. Following a small price rise for  2010 contracts at the start of February, the release of the 2010 Annual Index moved the contract slightly lower, to close at 15.1%.  Pricing for 2011 contracts was fairly flat in February, but jumped after the Annual Index release to a 5.35% total return. The 2011 contracts are subsequently trading 1% higher than their 4.4% early February level. Pricing for 2012 contracts also rose 1% from early February, to 4.35%.

Further out, 2013 and 2014 contracts rebounded in the past month to a 5.5% total return, after dipping to 4.75% at the end of January. Both contracts have remained stable at this level for the past three weeks. The property derivatives market was boosted in early March by news that LaSalle planned to trade in the product.  The firm pointed to derivatives’ inherent value as a tool that allows fund managers to adjust their portfolio and handle risk.

With political upheaval in the Middle East and catastrophic events in Japan, uncertainty  has returned to world financial markets. The Japanese Nikkei took an almighty kick in the teeth and the repercussions are likely to be felt worldwide. This almost inevitable weakening of the fragile world economy may slowly filter through into property derivatives pricing; dented economic confidence would almost certainly have a negative effect.

After only two months of the year, non-seasonally adjusted Halifax House Prices have fallen 5%, following a 2.6% drop in average house prices last month. The most recent trade in the 2011 HHPI contract was at 92.25% of the December 2010 Index level,  implying a 3.75% fall during the rest of the year. Halifax justified its forecast of a 2% fall in house prices  for 2011 by referring to the continued reduction in new seller instructions discussed  in the January RICS survey.