Market Growth
The market for real estate derivatives was long overdue. Real Estate is the only major asset class that only recently developed a derivatives market. According to the Pension Real Estate Association’s Plan Sponsor Research Report, pension funds allocate approximately 6.0% of their assets to real estate, making it one of the largest investable asset classes, after equities and fixed income. Because of the significant transactions costs involved with investing in real estate, derivatives can improve the efficiency of the market.
The market for US real estate derivatives, while in a nascent stage, made significant progress in 2007. There are now a diverse set of indices and methodologies being used to create and structure real estate derivatives, for both residential and commercial real estate.
In the UK, the market for property derivatives did not begin until 2004. However, since the market’s inception, the growth has been significant. Through the third quarter of 2007, trades with an outstanding notional value of 7.9 billion pounds have been executed. The U.S. market is still emerging, and has been limited somewhat over the last year by the global credit crunch and uncertain values of mortgage-backed securities. However, the market in the U.S. is now emerging quickly, with over $500 million worth of transactions to date in 2007.
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