More investors and fund managers are looking to use property derivatives to improve investment returns and are starting to compare its pricing regularly with their other options. The argument that derivatives can give fund managers a competitive advantage is gaining acceptance. Asset allocator converts, like UBS’s David Buckle, would even say the whole industry’s image would benefit if more fund managers used derivatives as a proxy for direct investment.
He believes that for all real estate’s attractions as a diversifier in multi-asset portfolios, the asset class still faces losing ground because of its illiquidity. A big frustration for users of the market has been the lack of sellers of property exposure. The last time volumes were high was in 2005/2006 when regulators gave the green light for insurers to trade. Then large groups such as Standard Life, Aviva and Prudential made big tactical switches out of property of hundreds of millions of pounds each, ahead of the downturn.
Spikes in trading since then have pointed to latent demand on the buy side if the price is right. But in more normal market conditions there are few sellers. Will Robson, new chairman of the Property Derivatives Interest Group, believes PDIG should target potential new users of property derivatives, in particular sellers. Banks seem an obvious group that might want to hedge property exposure and he wants PDIG to open this discussion and try to find out whether there really could be potential for them to use the market.