It is possible to make a credit funded investment
Alternatively to an unfunded swap or CFD, it is also possible to make a funded investment. Rather than paying LIBOR plus a spread quarterly and receiving property returns, the investor pays the notional amount of cash upfront and receives property returns net of the spread. For example, on a two-year swap an investor could choose, rather than paying LIBOR plus 1% on the swap, to pay 100% of the notional amount and receive the property return minus 1% each year and 100% redemption after two years.
The basis for property derivatives documentation is the International Swaps and Derivatives Association (ISDA) documentation. Just as for other derivatives, ISDA has prepared standardized documents for property swaps, in order to facilitate trading. The Property Index Derivatives Definitions were published in May 2007. Standardization aims to reduce transaction costs, legal risk and transaction time, to increase transparency and confidence in the market, and to improve efficiency and liquidity. In addition to the definitions, ISDA provides confirmation templates for forwards and swaps in the US (Form X) and in Europe (Form Y), as well as an annex that describes the indices on which the trades are based. By September 2007, the Association has included the Standard&Poor’s/Case–Shiller Index, the Office of Federal Housing Enterprise Oversight (OFHEO) Index, the National Council of Real Estate Investment Fiduciaries (NCREIF) Index, the worldwide Investment Property Databank (IPD) Indices, the UK Halifax House Price Index, the FTSE UK Commercial Property Index and Radar Logic’s Residential Property Index (RPX). The definitions booklet covers issues such as disruption events on these indices. More indices, as well as confirmation templates for options and basket trades, are likely to follow.
Payday loans as a new solution to invest
GFI and Colliers claim they are working with the National University of Singapore to create residential indices for Singapore’s housing market. The main issue is that there are fewcountries that have an adequate amount of transparency to develop credible and robust indices on which to trade.
The first property derivatives in Switzerland were launched by the Zuercher Kantonalbank (ZKB) in February 2006. The bank issued two structured products that were offered to institutional as well as retail investors as a new solution to invest into the asset class of real estate.
One of the products was capital-protected while the other was structured as a discount certificate. The products could be subscribed in small denominations and the bank guaranteed a daily secondary market. The two products were based on the “ZuercherWohneigentumsindex (ZWEX),” which tracks owner-occupied house prices in the Zurich greater area. The index is calculated and published quarterly and is based on transaction prices. The bank says that demand exceeded expectations, especially for the product with capital protection.
In September 2007, the first swap on commercial property was transacted. ZKB and ABN Amro traded the IPD Switzerland All Property TR Index against Swiss LIBOR plus an undisclosed spread.
Derivatives trading and payday loans
Derivatives trading in the RPX started on 17 September 2007 on an over-the-counter (OTC) basis with maturities expected to be from one to five years. Initially, licensed banks to offer products in the RPX market included Morgan Stanley, Lehman Brothers, Merrill Lynch, Deutsche Bank, Goldman Sachs and Bear Stearns. Trades are quoted in terms of price appreciation in percent for a given maturity date and executed as quarterly price return swaps exchanging a fixed payment against the quarterly index appreciation. For example, if one counterparty buys the index with a maturity of one year at 4 %, he or she pays 1% every quarter in exchange for the actual quarterly index returns.
The interdealer broker ICAP announced the creation of a joint venture with Radar Logic to develop the RPX market in August 2007. In September 2007, ICAP intermediated the first derivative transaction, a total return swap, based on the RPX. The counterparties were two of the licensed banks. Further, Radar Logic has plans to roll out similar indices that allow trading in commercial real estate.
