Property derivatives grow despite market drop

Property derivatives volumes reached new highs in the fourth quarter of 2007, even as UK commercial property prices fell sharply, according to figures released today.

The Investment Property Databank (IPD) said this morning that Q4 2007 saw a record 214 trades in derivatives based on the IPD UK All-Property Index, up from 96 in Q3 2007. The trades had a total notional value of £1.662 billion, only marginally higher than the £1.660 billion the quarter before. Average deal size was £8 million, down from $17 million in Q3.

However, IPD head of research Ian Cullen said the quarter saw "virtually zero" activity in derivatives based on a single sector, such as London office property. "Whatever people are doing, they are not using them to rebalance their portfolios," he said. Since 2005, when sector trades represented 50% of new trades, the sector market has declined to almost nothing, confounding analysts who argued that the ability to take positions on specific sectors of the property market would attract both speculative investors and natural hedgers.

The all-property index fell 7.6% in the quarter, its sharpest fall since launch, IPD announced earlier this week.

See also: IPD: property derivatives still growing
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