(To read more on the debt and equity markets, click here.)

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LONDON-The UK's commercial property derivatives market hasalready seen more than euro 730 million ($1.10 billion) in dealsdone this year but it could top euro 2.95 billion ($3.5 billion) in2006, Iain Reid, chief executive of Protego Real Estate Investorstold a property derivatives conference.

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"The scope is virtually limitless. Next year the market shoulddouble in size and in 2007 we could have a steady shaped curve orit could run up rather faster," he said.

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Property derivatives comprise a swap in which the investor paysor receives a spread over the Libor, in return for the yield on anindex calculated by benchmarker Investment Property Databank (IPD)."Property is hot and the hottest part of property is derivatives,"Andrew Baum, chairman of Oxford Property Consultants and professorof Land Management at the University of Reading, told theconference.

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"Buying property contains high specific risk, more than equitiesand bonds, and it is difficult to build a diversified portfoliowithout enormous amounts of money," he said. "There is zerospecific risk in derivatives." He suggested that investors shouldin the future be able to use derivatives to swap exposure betweensectors, such as offices or shopping centers, or betweengeographical areas like the UK and France.

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All the property derivative deals done so far have been based onIPD's UK "All Property" index, but conference speakers said theyexpected transactions on the benchmarker's real estate sectoralsub-indices to be completed soon.

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Peter Clarke, director at British Land , said the company is anactive user of foreign exchange and interest rate derivatives andhad already done a property derivatives deal to test the market'sprocedures and potential. He said British Land, the UK's biggestreal estate firm by assets, would use property derivatives in thefuture to hedge specific risk in real estate sectors.

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"Liquidity is very embryonic, but there has been a massiveincrease in interest in derivatives relative to six months ago. Inthe next three to six months I think we'll see a significantincrease in liquidity," Brett Townsend, head of UK marketing forfixed income derivatives at TD Securities, said.

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