What do you guys in Wilmott land think of the newly emerging market in total return swaps on UK commercial property indices? I've heard a variety of opinions ranging from them being the future of real estate to a niche market which will never generate any serious liquidity.

I did one some years ago. A customer wanted a property option embedded in a contract to be valued by Black-Scholes.Customer wanted it, we did it. With some adjustments to parameters and formula. I wasn't too comfortable with it, but since they only neded it for accounting reasons...The problem is, that, in my opinion, you can't assume any Brownian Walk in Property-Prices. They are far mor dominated by macro-economic effects and trends than something like equity. As far as I'm concerned, I wouldn't touch any new derivatives in markets where everybody agrees on the fact that you have got a bubble in place.Exept of course if I am absolutely sure of what I'm doing.

*edit: double posting* sorry for that.

Quotewho's the target market ?One use I can see is maybe some sort of institutional investor using them to get around investment restrictions and indirectly hold real estate although precluded from doing so.I don't think so. I just read the german regulations on Financial Derivatives, and they say, that a company, restricted to hold positions in an underlying, are not allowed to hold positions in a related derivative. I don't think, that regulators anywhere else would allow that.

I've seen derivatives on EPRA.

Two points emerge, one is that nobody is suggesting options at this stage, it will be a pure and simple swap market . Secondly the driving force must be that it costs 750bp round trip and maybe six months to deal in physical property. You would be mad to get a beta exposure to property by that route surely you would use the derivatives.

There's massive interest in using CFDs and sectoral swaps in property. With 5 or so deals done in the last 6 months, this is make or break time for the market. I'm putting together the World's only devoted property derivatives conference for October in London, and am looking for those interested to give views at the event. Please pass on my details or get in touch if you are interested: Ed Lawson, Property Derivatives World, ed.lawson@terrapinn.com