Hong Kong sees first property derivatives in Asia

Sun Hung Kai Financial (SHKF) and ABN Amro have completed Asia’s first property derivatives deal, a swap based on Hong Kong residential properties.

ABN Amro bought exposure to the city’s housing market by paying SHKF the Hong Kong interbank offered rate (Hibor) plus an undisclosed spread for exposure to the University of Hong Kong’s Hong Kong Island residential price index (HKU-HRPI). The deal, which was brokered by GFI Colliers, had a one-year tenure and a notional of less than HK$100 million ($12.8 million).

“Real estate as an investment has always been popular in Hong Kong, hence we believe investors will like the new instrument, as there will be good liquidity in the market,” said Joseph Tong, chief executive for wealth management, capital markets and brokerage, SHKF.

The Hong Kong transaction is expected to kick off a series of other deals in the region within the next few months. GFI Colliers is working with the National University of Singapore to create residential indexes for Singapore’s housing market.

Dealers say some of the benefits property derivatives have over physical transactions include not having to incur costs such as legal fees, stamp duty and agent fees. And Tong believes property derivatives could allow global real estate funds to hedge or rebalance their portfolio exposures, while financial investors can treat these instruments as an alternative investment in property stocks or real estate investment trusts.