A report by Deutsche Bank Research forecasts that markets for property derivatives – financial instruments with a return based on the value of real estate as an underlying asset – are likely to develop fast in several European countries over the next few years, following the UK’s example.
The researchers, Thomas Just and Jürgen Feil, noticed that a significant market for property derivatives has developed in the UK in the past couple of years, with a trade volume of 7.6 billion pounds sterling at the beginning of 2007, six times higher than at the end of 2005. The growth in trade can be explained by the wide range of property derivatives, their functions that differ from other real estate-investment instruments and the advantages for private investors that they generate.
The researchers believe that this market development is likely to be followed in continental Europe, mainly in the Netherlands, France, Ireland, Spain, Sweden and, to a lesser extent, Germany. Just and Feil believe this is the result of availability of a suitable property index with sufficient data history and experience with capital market vehicles in connection with property deals in these countries. Furthermore, high transaction costs and downwards price corrections are favourable conditions for market development, according to the Deutsche Bank researchers.
They conclude there are very strong indications that property derivatives will establish themselves as a new capital-market-oriented property instruments. The market can be expected to expand vigorously over the next few years.