Real estate as an asset class
The real estate market as a whole is an aggregate of many submarkets such as owneroccupied housing, offices or land. Usually the performance of a submarket and not the overall market is the focus of an investor. It is important to take indices as underlying instruments that have a large community of potential users. Primary users are generally institutional investors, but private investors should also be able to understand and benefit from property derivatives.
While investors see real estate as an asset class that must generate a return as high as possible, homeowners see their house as a consumption good with some price risk. The submarkets for the two are completely different. The choice of an index as a suitable underlying instrument for derivatives depends mainly on the criteria of the region, property type and data base (rents, transaction prices or appraisal values). Types with a potential volume that is sufficiently large for a reasonable derivatives market include offices, residential properties, retail space and industrial space. It is doubtful whether more special property types such as hotels or even land would find a big enough market.
Owner-occupied housing is treated very differently around the globe. While homeowners borrow relatively moderately and stay for decades in their home in central Europe, households in the UK and in the US are much more sensitive to property price movements. Often, they are ready to realize gains by selling their home or they increase the mortgage once prices have appreciated.
Only the latter mind-set may lead to a broadly supported desire for protection against falling house prices. The market for owner-occupied housing is huge, and the sufficiently large number of transactions make indices more reliable.
Minimization of potential debt problems
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.
Payday loans to build exposures to different markets
Throughout the 1990s, several other initiatives were launched to get derivatives started. Iain Reid, a property consultant, realized that property funds could benefit hugely from the ability not just to build synthetic exposures to different segments of the market but also to hedge existing long positions by creating off-setting short positions. Reid moved to Barclays and found that its bankers were similarly enthusiastic about his plans to develop a product that could hedge property exposures. The UK real estate market had just been through a crash, and Barclays had property exposure as a result of bad loans made to property developers. To them, the idea that they could hedge that exposure was a revelation and they were very keen to launch something.
Together with Aberdeen Property Investors, Barclays Capital structured a tradable bond that pays out IPD index returns. They called these bonds Property Index Certificates (PICs). PICs link their coupon payments to the IPD All Property Income Return Index and the capital redemption value to the IPD All Property Capital Growth Index. Investors who wanted to gain exposure to the property market paid upfront to buy the bond and received income based on property valuations in the form of quarterly coupon and redemption payments. By issuing PICs, Barclays basically exchanged its long property exposure for a fixed income. The PICs were seen as bond instruments that pay a return based on an IPD index rather than pure derivatives.
The instruments enable investors to bet on the market, but not against it. Since its release, the certificate has mainly created interest from high-net-worth, private bank and institutional investors. In addition, Barclays launched exchange-traded Property Index Forwards (PIFs). These forward contracts on the IPD Capital Growth or Total Return Index included some standardized elements, to make the products tradable. However, in contrast to exchange-traded future contracts, not the market itself but the bank took the role of the market maker. Since the bank never really succeeded in developing a liquid secondary market, the concept was still based on matching buyers and sellers. Barclays continuously quoted prices for the contracts.
Improve your business and profits with CSS based website
Learn how a CSS and standards compliant website will improve your business and profits.
CSS layouts and web standards have been present on the web for many years, but only recently did they become a commonly applied financial solution for online businesses. Such situation was caused by the fact, that most browsers didn’t support CSS correctly (especially Netscape 4). Today CSS 2.0 is fully supported by almost every browser available.
Is there any reason to convert a thriving financial website that deals with payday loans, real estate etc. from a table-based layout to a CSS layout? The reason is simple, it will give you more money and improve financial stability of your business. Here’s how it works.
Reduced bandwidth costs
Files on business websites that adopted CSS layout are much smaller in size that those used on sites with traditional layout. You can reduce the size of your files as much as 50% if you decide to switch layouts. With smaller files you will be able to reduce your bandwidth costs, which for a high traffic financial site usually indicates huge savings.
The file size is reduced so dramatically because all presentation information is located in an external document, which is downloaded along with the page and then stored in your computer’s cache. With tables all layout data are located inside each web page document, so it has to be downloaded repeatedly with every page.
What is more, you can rely on CSS as an replacement for advertising JavaScript image rollovers, which gives you even more reduction in size.
A higher search engine ranking
A CSS-based financial website will be displayed higher in the search engine rankings when a particular phrase (such as payday loans, real estate, mortgage, etc.) is searched. This is because the code on your site is cleaner and search engines can access it more easily. You are also able to place the most important content at the top of your document and the whole content is more dense in comparison to code.
Obviously, a higher search engine ranking will provide your business with more customers interested in a credit, mortgage or other money service.
Welcome to Expand the Web Blog!
My name is Vaclav Vranicky and I would like present you with my offer of both quality and reliable translations and software localizations from English to Czech (web applications, web pages, etc.). I also deal with technical, electronics and automotive translations.
I’m a native Czech speaker and I’ve been working as a freelance English – Czech translator since 2004. My expecience involves cooperation with various customers and companies. I have a university degree (Master of Arts) in computer science and a Cambridge English CPE Certificate.
