Synthetic property group bids to raise banks’ role in market

PDIG chairman says greater derivatives use may aid banks and market

The new chairman of the property industry’s derivatives body hopes to initiate talks with banking regulators about using property derivatives to hedge banks’ real estate exposure. This week the annual De Montfort lending report revealed that banks still have  £207bn of outstanding loans secured on UK property. Another £19bn of loans is now owned by Ireland’s National Asset Management Agency. Will Robson, who took over as chairman of the Property Derivatives Interest Group (PDIG) last month, said banks obviously held a lot of property market risk, while the development of the property derivatives market has been held back by a lack of sellers.

“A lot of entities, such as real estate fund managers, which people thought would use property derivatives, tend to hold real estate for market exposure,” said Robson. “So it is unlikely that this group alone could provide a continuous flow of selling interest to the market.” Robson said he hoped that the PDIG committee would consider how best to approach the Bank of England and the Financial Services Authority, as well as banks’ managements, “to see if and how banks might use the market, to hedge either existing or future exposure.

“There might also be a positive political angle if this allows banks to lend more in a less systematically risky way.” Robson said he was aware that there were “significant technical challenges” to developing a product that would work for the banks, due to the nature of the risk they hold. However, he added: “If the regulators decided such an approach could work and have wider positive impacts, and they were willing to at least consider giving capital relief to banks  for such hedges, that would encourage banks to look further into finding a technical solution.” Robson said PDIG had done “a lot of work with its traditional property membership to promote the derivatives market, which is very valuable and needs to continue. “However, it needs to change focus to higher level engagement to facilitate a step change in the market’s development.”