The deal is a two-year total return swap, based on the London-based Investment Property Databank’s IPD Italy all-property index from December 2006 to December 2008, and brokered by London interdealer broker Icap. The size has not been revealed but was described by Grosvenor's group finance director, Nick Scarles, as "insignificant".
"This was a test trade," he added. "The purpose was to show that we can do derivatives in a sensible way."
Earlier this year, Grosvenor completed similar small trades in Japan and Australia – both market firsts – and in the UK and US.
"I don't think we need to do more test trades to get comfortable," Scarles said. "I'm now comfortable we can use derivatives for whatever purpose we like." The company will probably use property derivatives for portfolio balancing – a derivatives trade is faster and easier than a trade in the underlying property market – and to hedge the risk associated with property development projects, he said.
The IPD Italy all-property index represents 24% of the Italian property market, worth about €13.8 billion. The Italian index is one of the least representative in Europe – others, such as the flagship UK index, include 55% of the market or more.Scarles acknowledged there was a higher possibility of basis risk in Italy, but commented: "The question is: what is the alternative? The index may not track as well as the UK index, but it is a choice between taking that exposure and the basis risk, or not having any exposure."
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