Asia property derivatives take root, yet to bloom

By Dominic Whiting

SINGAPORE (Reuters) - Property derivatives are taking root in Hong Kong and Australia and will soon debut in Singapore and Japan, according to broker GFI, but markets will not prosper until banks create products to draw retail investors.

Some global investors and developers would relish having the new products to hedge their positions in Asia's notoriously volatile markets, Steve Moore, head of Asia property derivatives at GFI, said on Wednesday.

But others might find the markets just too risky.

"In Asia, where a market can drop 50 percent in a year, or double as it has in Singapore, some people might stay away from derivatives and others will be tempted in," Moore said in an interview during the Reuters Real Estate Summit in Singapore.

"But the market won't take off until we unlock the retail side, and then we'll see it grow infinitely."

Following the British market's lead, Asia's fledgling property derivatives are essentially a two-way bet based on a property index.

One party agrees to pay a benchmark interest rate plus a spread after a certain period, while the counterparty will pay the property returns indicated by the index.

Asia's first property derivatives trade was unveiled in February -- a Hong Kong deal between Dutch bank ABN AMRO and Sun Hung Kai Financial based on a new residential index run by Hong Kong University.

Moore said six investment banks had received licenses to be counterparties in property derivatives trades in Hong Kong, and "a few are waiting in the wings".

The next stage in the market's development would be for retail banks to use property derivatives to package investment products for "the man in the street".

"We get calls from people asking whether they can hedge their 17th storey apartment in Happy Valley," Moore said of a Hong Kong district. "I have to say come back in three years."

Advertised as the easiest way to obtain pure property exposure to a market, property derivatives have been pioneered in Britain, where the market quadrupled in size to nearly 3.6 billion pounds ($7.07 billion) last year.

FIRST AUSTRALIA DEALS

Moore said a couple of over-the-counter deals had been done in Australia, and GFI was working on three -- one on Sydney office exposure, one on residential returns, and one based on a general Australian property index.

GFI is working with the National University of Singapore to set up a residential index, and Moore expected the first derivative deal to be made by the end of 2007.  Continued...