Hong Kong pioneers property derivatives in Asia

A landmark property derivative trade between ABN AMRO and Sun Hung Kai could open the door on a market worth billions of dollars.
ABN AMRO Bank and Sun Hung Kai Financial have traded AsiaÆs first property derivative. The transaction, brokered by GFI Colliers, is based on the University of Hong Kong Real Estate Index Series and is the first deal of its kind anywhere in Asia.

It is a one-year trade in which ABN AMRO receives a coupon based on the returns of the index and, in return, pays Sun Hung Kai Financial a spread over Hibor. The exact details of the transaction have not been made public, except that the value is below HK$100 million.

However, in this instance, the devil is not in the detail. ABN AMRO and Sun Hung Kai have kick-started a market with staggering potential, not just in Hong Kong but throughout the region.

ôProperty is a major asset class without a developed derivatives market,ö says Philip Ljubic, a property derivatives trader with ABN AMRO in London. ôHopefully this trade will help create some deal flow here in Hong Kong.ö

ABN AMRO was also a pioneer in the UK market, where property derivatives barely existed as recently as three years ago. By 2006, the market was trading ú3.5 billion and the bank expects that figure to be nearer ú8 billion this year.

All the parties involved in the transaction are confident that Hong Kong can produce similar, if not better, growth. ôItÆs real estate and itÆs Hong Kong,ö says Stephen Moore of GFI Colliers in Hong Kong.

Indeed, with a real estate market that transacts HK$320 billion a year, Hong Kong has plenty of uses for such a product. Developers can hedge their unsold properties and investors can use them as a low-cost, hassle-free way to invest in property.

Ljubic expects that the value of the derivatives market in Hong Kong could equal the physical market in five years.

One of the key attractions of property derivatives, as opposed to property stocks or real estate investment trusts, is that they provide pure exposure to the real estate market. ôTheyÆre completely different,ö says Moore. ôTheyÆre not subject to the rise and fall of any companyÆs fortunes; itÆs pure property.ö

Hong KongÆs index is particularly transparent, thanks to the territoryÆs highly active market and the quality of publicly available data from the Land Registry.

The series, created by KW Chau, chair of the University of Hong Kong real estate and construction department, comprises four indices: Hong Kong Island, Kowloon, the New Territories and a weighted average of the three: the All Residential Price Index.

Plans are also afoot to launch property derivatives in other markets in Asia. Investment Property Databank, a UK benchmarking provider, has taken over AustraliaÆs Commercial Property Index and, in collaboration with GFI, will have a working index up and ready in three weeks, though the first trade will take a while longer.

GFIÆs Moore says that he expects Singapore and Japan to follow shortly.
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