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LONDON-The UK’s commercial property derivatives market has already seen more than euro 730 million ($1.10 billion) in deals done this year but it could top euro 2.95 billion ($3.5 billion) in 2006, Iain Reid, chief executive of Protego Real Estate Investors told a property derivatives conference.

“The scope is virtually limitless. Next year the market should double in size and in 2007 we could have a steady shaped curve or it could run up rather faster,” he said.

Property derivatives comprise a swap in which the investor pays or receives a spread over the Libor, in return for the yield on an index 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 professor of Land Management at the University of Reading, told the conference.

“Buying property contains high specific risk, more than equities and bonds, and it is difficult to build a diversified portfolio without enormous amounts of money,” he said. “There is zero specific risk in derivatives.” He suggested that investors should in the future be able to use derivatives to swap exposure between sectors, such as offices or shopping centers, or between geographical areas like the UK and France.

All the property derivative deals done so far have been based on IPD’s UK “All Property” index, but conference speakers said they expected transactions on the benchmarker’s real estate sectoral sub-indices to be completed soon.

Peter Clarke, director at British Land , said the company is an active user of foreign exchange and interest rate derivatives and had already done a property derivatives deal to test the market’s procedures and potential. He said British Land, the UK’s biggest real estate firm by assets, would use property derivatives in the future to hedge specific risk in real estate sectors.

“Liquidity is very embryonic, but there has been a massive increase in interest in derivatives relative to six months ago. In the next three to six months I think we’ll see a significant increase in liquidity,” Brett Townsend, head of UK marketing for fixed income derivatives at TD Securities, said.

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