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Loïc Guilloux: «The IPD is the only vehicle to take a short position on the housing market»»

Swaps and dérivatives on real estate, what are the prospects of this new market ? The Merryl Lynch Managing Director Loic Guilloux, head of Fixed Income, Currencies & Commodities in France, provides answers...

Article also available in : English EN | français FR

Axa Reim and Merryl Lynch announced that they had done two months ago the first IPD (Investment Property Databank) swap, the benchmark of French real estate offices. What is the benefit of such products compared to a typical investment in a fund of real estate ?

The IPD is an index representing the real estate portfolio of institutional, it is transparent and calculated by an independent company. Derivatives on this index provide real liquidity against the physical property cost of friction (transaction costs, tax...) and also relative to funds invested in real estate. In addition it is the only vehicle to take a "short" position on real estate or "hedge" an existing portfolio or simply make the geographical or sector diversification...

More than three billion pounds have already been dealt in this segment since the start of this activity in 2005, but can we talk about liquid market ?

Actually, according to the latest figures from the IPD, there were more than four billion five hundred million pound treated with three billion for 2006 alone. And if liquidity is measured through the bid / ask, then "yes" the market can be described as liquid with a spread of forty basis point (40 bps) on the most active segments (the ALL PROPERTY UK from DEC 07 to DEC 10)

The central bank vision of inflation is highly dependent on the level of real estate price index, is there not ultimately a strong correlation between the housing derivatives market and the inflation market ? Are they not likely to be competitors in the long term ?

If a correlation exists between the housing market and inflation, it remains to be demonstrated. This IPD index is not only the rental income but also the price changes: it is an index "Total Return" and its correlation with inflation, fortunately for it, was very low in recent years. Also, in terms of level, the ALL PROPERTY France offered an annualized return of more than 10% over the last 8 years when inflation was far from approaching 2% over the same period...

What range of products do you offer on the property derivatives market ?

The total return swaps are the first vector in this market but we have already address the Euro Medium Term Notes (EMTN) and we are also able to display prices on options.

What are the main "end-users" interested in these products ?

We mainly dealt with institutions and hedge funds but the market develops and all the participants will gain exposure on housing risk or hedge. Ant that sooner rather than later

Yann Olivier , March 2008

Article also available in : English EN | français FR

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