This is the new product I mentioned in BK several weeks ago. It will be announced in tomorrow newspaper.
It is the Property index (by HKU), by buying/selling the index, it replicate the trading of physical property but with much lower transaction cost...no stamp duty, commission , legal fee ...etc
The first trade had been done in HK/ Asia Pacific Region. A new era to the property market....
Property derivatives debut in Asia
By Jim Pickard, Property Correspondent
Published: February 27 2007 02:55 | Last updated: February 27 2007 02:55
A vital juncture has been reached in the development of a global property derivatives market with the completion of Asia’s first ever deal.
It is understood that ABN Amro and Sun Hung Kai Financial will on Tuesday announce that they have traded a “property swap” based on Hong Kong’s residential market.
The deal is a landmark because it suggests that the market for such products is opening up around the world.
Property derivatives are attractive to many property investors because they enable people to obtain instant exposure to the sector without the costs and delays of trading physical assets.
The industry first took off in the UK in the past two years where it has seen more than 300 deals worth close to £5bn, according to new figures released on Tuesday by Investment Property Databank, the research firm. Growing liquidity in the market has encouraged more newcomers to place deals.
Now other countries are looking to follow suit. A couple of deals have taken place in mainland Europe in recent months while the US has also seen a handful.
The first Asian transaction is understood to be a swap whereby ABN Amro will gain exposure to the Hong Kong housing market while Sun Hung will, in effect, sell it. GFI Colliers were the inter-dealer brokers on the transaction.
The way the derivative works is that ABN Amro receives the annual change in the HKU-HRPI (an index measuring the price of Hong Kong homes) from Sun Hung. In return it pays the bank a set level of interest based on HIBOR (the local risk-free lending rate).
The HKU-HRPI index has been developed by academics at the University of Hong Kong, which some experts believe is robust enough to support a derivatives market.
One of the reasons why the market has been slow to take off in some countries is that underlying data needs to be of a cast-iron calibre – as is the case in the UK.
The IPD, which has provided the figures used by the fledgling property derivatives industry in Britain, will on Tuesday announce that total trades have reached £4.67bn.
There were £572m of deals in the fourth quarter of 2006, a fall from the record £1.66bn achieved in the third quarter.
However, volumes are still much higher than in the fourth quarter of 2005 when there were £183m of transactions.
Hong Kong pioneers property derivatives in Asia
By Nick Ferguson | 28 February 2007
A landmark property derivative trade between ABN AMRO and Sun Hung Kai could open the door on a market worth billions of dollars.
ABN AMRO Bank and Sun Hung Kai Financial have traded Asia’s first property derivative. The transaction, brokered by GFI Colliers, is based on the University of Hong Kong Real Estate Index Series and is the first deal of its kind anywhere in Asia.
It is a one-year trade in which ABN AMRO receives a coupon based on the returns of the index and, in return, pays Sun Hung Kai Financial a spread over Hibor. The exact details of the transaction have not been made public, except that the value is below HK$100 million.
However, in this instance, the devil is not in the detail. ABN AMRO and Sun Hung Kai have kick-started a market with staggering potential, not just in Hong Kong but throughout the region. advertisement
“Property is a major asset class without a developed derivatives market,” says Philip Ljubic, a property derivatives trader with ABN AMRO in London. “Hopefully this trade will help create some deal flow here in Hong Kong.”
ABN AMRO was also a pioneer in the UK market, where property derivatives barely existed as recently as three years ago. By 2006, the market was trading £3.5 billion and the bank expects that figure to be nearer £8 billion this year.
All the parties involved in the transaction are confident that Hong Kong can produce similar, if not better, growth. “It’s real estate and it’s Hong Kong,” says Stephen Moore of GFI Colliers in Hong Kong.
Indeed, with a real estate market that transacts HK$320 billion a year, Hong Kong has plenty of uses for such a product. Developers can hedge their unsold properties and investors can use them as a low-cost, hassle-free way to invest in property.
Ljubic expects that the value of the derivatives market in Hong Kong could equal the physical market in five years.
One of the key attractions of property derivatives, as opposed to property stocks or real estate investment trusts, is that they provide pure exposure to the real estate market. “They’re completely different,” says Moore. “They’re not subject to the rise and fall of any company’s fortunes; it’s pure property.”
Hong Kong’s index is particularly transparent, thanks to the territory’s highly active market and the quality of publicly available data from the Land Registry.
The series, created by KW Chau, chair of the University of Hong Kong real estate and construction department, comprises four indices: Hong Kong Island, Kowloon, the New Territories and a weighted average of the three: the All Residential Price Index.
Plans are also afoot to launch property derivatives in other markets in Asia. Investment Property Databank, a UK benchmarking provider, has taken over Australia’s Commercial Property Index and, in collaboration with GFI, will have a working index up and ready in three weeks, though the first trade will take a while longer.
GFI’s Moore says that he expects Singapore and Japan to follow shortly.
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