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LONDON-GFI and Los Angeles-based CB Richard Ellis have teamed up to trade in property derivatives. The joint venture’s board includes two CBRE and two GFI directors. CBRE will introduce clients and contracts while GFI will bring its experience in the development of credit and shipping derivative markets.

Trades will be conducted from a desk at CBRE’s London headquarters, Kingsley House, and both partners will share in the operating profits generated. This is the second cross-pond play for CBRE, which, as GlobeSt.com reported last week, has also expanded its loan-servicing practice to Europe.

Derivatives create a synthetic property market by allowing clients to increase or reduce their exposure without the need to trade underlying assets. Property derivatives usually involve a swap of returns on commercial property against floating interest rates plus a spread for a period of three years or longer.

Commercial property is the largest physical asset class not currently taking full advantage of derivatives, experts tell GlobeSt.com. But the growth of the Investment Property Database UK all-property index and its rolling out across Europe is expected to encourage more derivative trading within the sector.

Prudential Financial estimates the European property market at $4.2 trillion so the potential for property derivatives is seen as huge. At a recent IPD event, it was claimed that property derivatives could make up to 14% of the property allocation held by the UK pension and insurance funds.

“The European commercial property market is huge,” agrees Steve McMillan, senior managing director for GFI in Europe. “But unlike other large physical markets, this market remains unsupported by derivatives. This complicates trading and limits liquidity. Derivatives will unlock the potential of this market by removing physical delivery, thereby enabling faster, cheaper and more effective execution of allocation strategies, short-term hedges, risk transfer and geographical diversification.”

“Property investors will have an opportunity to trade in new ways, and new participants will have easy access to property for the first time,” says Martin Samworth, managing director for CBRE in the UK. “The derivatives market in other asset classes has matured to at least the same size as the underlying market within three to five years. Commercial property has the potential to develop in the same way.”

Other brokers are also looking at commercial-property derivatives market in the hope that it may become as lucrative as the equity derivatives market. Collins Stewart Tullet is in the early stage of developing its own trading platform. And in mid-May, ICAP, the biggest derivative broker in the world, announced it had formed a joint venture with Nigel Kempner’s Grafton Advisors to promote derivatives to pension funds, developers and hedge funds.

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