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Minimization of potential debt problems

admin — Wed, 19 May 2010 14:08:12 +0000

Key to the success of a property derivatives market is the existence of a transparent and reliable index that can be used as an underlying value. Creating such an index for properties is by no means an easy task. No two buildings are identical; i.e. properties are heterogeneous constituents of an index. Consequently, recording and averaging only prices or valuations lead to a poor-quality index. All characteristics of a property that determine its value also need to be considered, so that prices can be adjusted for heterogeneity and finally be aggregated. Most existing indices were initially constructed as descriptive measures, typically targeted as a benchmark instrument. Thus, it is not clear that these indices are suitable as underlying instruments for derivatives, i.e. as operative measures. To achieve a high accuracy and to earn wide trustworthiness, the following basic criteria should be fulfilled:

Representativeness. The index must truly reflect risk and performance of the respective real estate market and idiosyncratic risk should be reduced to an acceptable level by including a large enough number of objects. Just as for the stock market, where an index with a limited number of titles represents the overall market well, a large enough sample represents the property market as a whole.

Transparency. The calculation debt problems method of the index has to be publicly available.

Track record. A long track record helps people to understand the index and to judge its representativeness and behavior in past economic circumstances.

Objectivity and minimization of potential fraud. The input data must be free of subjective preferences and valuation practices. A large number of independent data providers further reduces the risk of manipulation, as the data of each provider gets a smaller weight in the overall index.

Derivatives to manage house credit and price risk

admin — Mon, 03 May 2010 16:43:55 +0000

On the side of residential owner-occupied housing, Hinkelmann and Swidler (2006) are sceptic as to whether the market can take off. Mentally, homeowners tend to treat their home just as a consumption good rather than as an investment that involves price risk. Moreover, they would always be subject to a huge tracking error risk when hedging their homes with derivatives based on house price indices. This limits the effectiveness of hedging, and individuals may not use derivatives to manage house price risk. Ultimately, a lack of hedgers in the marketplace may lead to failure of residential housing derivatives such as the Chicago Mercantile Exchange (CME) housing futures contracts. It remains to be seen whether the involved challenges and hurdles can be successfully addressed.

History shows that the buildup period of a new market is very fragile. Property derivatives were launched in the early 1990s and actually failed. The debut on the London Futures and Options Exchange (FOX) crashed in a combination of bad timing and scandal over false trades designed to create the impression of higher activity (see experience in property derivatives).

Today, liquidity in the property derivatives market has a good chance of being increased. In 1981, the first interest rate swap was done. Although people were sceptic at the time, it is now a trillion dollar market. The property market could experience a similar sort of growth in derivative instruments.

Basis for two-year total tax return

admin — Sat, 24 Apr 2010 15:29:49 +0000

Starting in November 2006, Colliers International and interdealer broker GFI formed a joint venture, GFI Colliers, that offers brokerage services for derivative contracts on the Hong Kong University–Hong Kong Residential Price Index (HKU–HRPI). The index, complied by the University of Hong Kong, is based on transaction figures from the Land Registry. Hong Kong has long attracted attention in the global property world due to the volatility of its real estate prices. The HKU–HRPI was offered at 650 basis points over HIBOR or a total of roughly 10.5 %. ABN Amro and Sun Hung Kai Financial announced in February 2007 that they had traded a property swap based on Hong Kong’s residential market. The inaugural transaction in Asia, at less than HK$ 100 million (US$ 13 million), was traded as a one-year price return swap. As buyer of the derivative, ABN Amro gained exposure to the city’s housing market by receiving the annual change in the index. By September 2007, five global banks have received licenses to trade Hong Kong residential property derivatives.

The first Italian property derivative transaction, based on the IPD Italian Property Index, was carried out between Grosvenor and BNP Paribas in October 2007. ICAP acted as a broker for the trade that took the form of a two-year swap.

Further, Grosvenor and Royal Bank of Scotland have traded the first Japanese property derivative in July 2007. The monthly IPD Japan Property Index was used as the basis for the two-year total return swap. It was the first derivatives trade on commercial property in Asia, following the launch of a residential property derivatives market in Hong Kong. IPD uses data provided by Japanese real estate investment trusts (J-REITs) to calculate the index.