27 SEPTEMBER 2007 REDEFINING PROPERTY INVESTMENT Intelligent property decisions

AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET ABOUT REDEFINING PROPERTY INVESTMENT, DISTRIBUTED IN THE TIMES 2 AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET ABOUT REDEFINING PROPERTY INVESTMENT, DISTRIBUTED IN THE TIMES

REDEFINING PROPERTY INVESTMENT Introduction Property developments

Property is all around us, in the form and foreign property markets. Several In the UK we have seen the intro- of the buildings in which we live, factors have combined to make global duction of tax-efficient UK REITs and work, shop and socialise. Property is a property investment more common, should shortly see the open-ended major factor of production for almost including the widespread pension cri- equivalent introduced in 2008 – as all sectors of the economy. sis and the fact that real estate is in- well as many other positive develop- But developments over recent years creasingly seen as an important ments that are improving access to have also confirmed property’s emer- solution to the ever-growing retire- property investment and the effi- gence as a mainstream global asset ment/savings needs of an ageing ciency and transparency of the mar- class from an investment perspective. global population. ket. Despite the (unconnected) gloom CONTENTS In 2006 capital flows totaled an esti- From my perspective, the most in- overshadowing the wider markets mated $860bn globally, resulting in a teresting aspect of recent years has that we have seen in recent months, it ̆ Gareth Lewis, Director of Finance and global property of $9.6 trillion. been the significant developments in should not be forgotten that these Investment, British Property Federation Fifty years of Rome In recent years, there has been a the structural framework of the invest- structural developments will bring Treaties 4 huge growth in the number of inter- ment markets. This has been driven by long lasting benefits. range of different routes available for Who has converted national property funds, global prop- both the level of demand for property One thing is certain; we are in the investing in property. This Redefining erty funds of funds, and diverse and also an element of healthy com- middle of very interesting times for Property Investment supplement pro- to REITs? 4 opportunities in the private and pub- petition between different govern- the property industry. But for individ- vides an excellent starting point for Why REITs? 5 lic capital markets for domestic in- ments eager to secure a place on this ual investors, these developments can getting to grips with some of these re- vestors to participate in both local increasingly important global stage. result in added confusion given the cent developments. Public awareness 5 Property derivatives 7 take out a mortgage, nor be burdened Case study 9 with legal fees and other transaction Beijing Olympics 10 costs associated with direct purchase Welcome – not to mention the responsibilities Investing abroad 12 of being a landlord. And many of the On the face of it, investing in property at the mo- The arrival of REITs 14 alternatives offer private investors ac- ment seems like a really bad idea. Headlines cess to both residential and commer- screaming “credit crunch continues” and “mort- cial property. There are also attractive opportunities in emerging overseas gage woes widespread” certainly do not inspire property markets, which, while spec- confidence and lead investors to suppose that real ulative, could reward savvy investors. estate is not the attractive asset class it once was, A glance at the companies listed on the Stock Exchange reveals a REDEFINING PROPERTY writes Sally Giles. cornucopia of property funds and INVESTMENT A TITLE FROM MEDIAPLANET trusts in which you can purchase Until recently, UK property values they lend money to, and are charging Yet, historically, bricks and mortar shares and, at a stroke, invest in the Project manager: Shola Adeniran were increasing year-on-year, credit more interest, leading to a reduction have proven to be a sound long-term range of properties in their portfolios. Editors: Sally Giles, Kelly Crummie Production Editor: was cheap and mortgages easy to in affordable credit for companies and investment, and that’s likely to re- Alternatively, if you’re a private in- Katherine Woodley come by. The subsequent property individuals. Sharp interest rate rises main the case. Many investors view vestor or institution with significant Design: Sophie Westerberg boom saw many Britons take on mul- have caused home repossessions in direct property ownership as a viable real estate assets it’s increasingly pos- Prepress: Jez MacBean tiple mortgages and build a portfolio the UK to surge, as mortgage pay- alternative to pension schemes, since sible to your exposure in spe- Print: News International of properties designed to bring capital ments become less affordable. capital gains and rental income pro- cific sectors using derivatives, thereby Mediaplanet is the leading European publisher in providing high quality gains and rental income. A survey by the Royal Institution vide a healthy nest egg for retirement. hedging your risk. Making gains from and in-depth analysis on topical However, the outlook for property of Chartered Surveyors has even in- At the moment, mainstream borrow- property investment will always de- industry and market issues, in print, investment has shifted as a result of a dicated that falling demand has ers with good credit ratings are even pend on where you put your money online and broadcast. combination of market factors. The seen British house prices drop last finding some new fixed rate mortgage and how well you manage it. That’s For more information about current credit crisis began with record month for the first time in nearly deals a bit cheaper, and a short-lived why wise investors consider the supplements in the daily press, please levels of property owners in the US two years. This has whipped up drop in house prices can present a wealth of opportunities available be- contact Carl-Philip Thunström, 020 7563 8877 defaulting on their mortgage pay- fears over the outlook for global good time for those people to buy. fore betting their hard-earned money, [email protected] ments, which affected the wider economic growth, with some ana- However, there are plenty of routes and hard-won financial security, on www.mediaplanet.com global loans market. Banks have be- lysts predicting this is just the tip of to reaping a return from property in- the future profit potential of a prop- come far more cautious about whom the iceberg. vestment that do not require you to erty investment.

The Business of Excellence 2 distributed within The Times (excl Scotland) on 8th November

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REDEFINING PROPERTY INVESTMENT Defining REITs

will mean that individual countries show below-average economic growth over several years. Once the Fifty years of Rome Treaties assimilation processes are complete, these countries will then have aver- The treaty to establish the European Economic Europe with approx. USD 4,037 bn or that there will be further harmoniza- age or even above-average growth approx. 2/3 of the European real es- tion of the cyclical trends in these again. The trend in Germany in the Community (EEC) was signed on 25 March 1957 tate portfolio (inc. Turkey and Russia) markets? In a few of years, will we past few years as well as the current in Rome by Belgium, West Germany, France, Italy, suitable for investment purposes of just be speaking of a European real situation in Portugal are examples of Luxembourg and the Netherlands. institutional investors. The Eurozone estate cycle instead of German, these kinds of assimilation processes therefore represents the second largest French or Spanish real estate cycles? real estate market with a unitary cur- Will the diversification effect of Eu- Diversification BY DR. MARCUS CIELEBACK, HEAD OF RESEARCH EUROHYPO rency after the USA (with USD 5,167 rope wide investment be reduced as a This remaining diversification poten- bn). For participants in real estate result of European integration? De- tial is becoming apparent within the After the last ratification document of real estate investments is essen- markets, in particular institutional in- spite the advancing European inte- Eurozone, for example, in the corre- was filed it came into force on 1 Jan- tially influenced by economic trends vestors, this means that they no gration we cannot speak of a general lation coefficients of the prime office uary 1958. The treaty to establish the and by the development of the real longer have to factor in currency harmonisation of the real estate cy- rent trends (rolling 10-year periods) in European Atomic Energy community estate market concerned, as both fac- fluctuations for their investments in cles in Europe or the Eurozone. A relation to Frankfurt. With the excep- (Euratom) was also signed by the tors determine the value of a property. the Eurozone provided that they come greater synchronisation of the Euro- tion of Munich, the correlation has countries in Rome at the same time, The Rome Treaties have triggered de- from the Eurozone themselves. For pean real estate markets can certainly sharply declined in the last 4 years. which is why both treaties are jointly velopments in both areas, which British and US investors, the need for be expected in the coming years, but The progressive European integration described as the Rome Treaties. To- strongly influence the behaviour of currency safeguards is only focused the cycles of the individual markets will not in future result in real estate gether with the European Coal and market participants in real estate mar- on hedging between USD and euro, or will still be influenced by local condi- markets within the EU, and in partic- Steel Community (ECSC) these treaties kets, and consequently the markets between GBP and euro. These are tions to a considerable extent. The ular within the Eurozone, becoming and the six signing countries form the themselves. One notable cause of the both liquid markets, in which it is economic trend of the past years synchronised as the example of the core of the European Community and economic convergence in Europe, for possible to hedge at significantly within the Eurozone makes it clear office real estate markets shows. The the resulting European Union, now example, are the increasingly syn- lower costs than previously in the in- that differences between the cycles of success of real estate investments will with 27 member countries, and the chronous prime rent trends in Euro- dividual currencies which preceded the national economies continue to continue to be influenced by local Eurozone, now with 13 member pean office markets. During the the euro. This is a major development exist. Some studies even concluded conditions to a significant extent ir- countries. European unification process, the in- that among other things has resulted that the euro and the different levels respective of how the process of Eu- What impact did the process set in troduction of the euro in 1999 had the in the rapid boom in cross-border in- of flexibility of national markets, in ropean integration started by the motion by the undersigning of the greatest impact on European real es- vestments in Europe in recent years. particular labour markets, may be the Rome Treaties continues to proceed. Rome Treaties have on commercial tate markets. With its 13 member Does this intensified integration of cause of recurring long-term eco- real estate markets? The performance states, a currency area has emerged in European real estate markets mean nomic assimilation processes, which UK REITs: Who UK REIT COMPANIES Symbol Quoted price Quoted price Quoted price Conversion date has converted? 3 years ago 1 year ago Recent to UK REIT status Since the introduction of the regime at the com- plc BYG 124 432 ̆ 480 ̆ 15 Jan 2007 mencement of this year sixteen companies have The Company plc BLND 702.5 1360 ̆ 1129 ̄ 1 Jan 2007 Brixton plc BXTN 300 534 ̆ 360 ̄ 1 Jan 2007 launched UK REITs. They are all existing listed plc DLN 890 1687 ̆ 1625 ̄ 1 July 2007 companies, bar one – Local Shopping REIT, which GPOR 284 531 ̆ 585 ̆ 1 Jan 2007 joined the LSE’s () main HMSO 695 1240 ̆ 1128 ̄ 1 Jan 2007 Land Securities Group plc LAND 1140 1955 ̆ 1634 ̄ 1 Jan 2007 market at the beginning of May. It is the first spe- Liberty International LII 795 1135 ̆ 1125 ̄ 1 Jan 2007 cialist REIT, specialising in investing in local shop- Local Shopping REIT plc LSR n/a 175 ̆ 122 ̄ 27 Apr 2007 ping assets in the UK. The other existing REITs McKay Securities MCKS 216 395.5 ̆ 326 ̄ 1 Apr 2007 Mucklow (A&J) Group plc MKLW 322 471 ̆ 335 ̄ 1 July 2007 include some of the leading names in the sector Primary Health Properties PHP 246.5 414 ̆ 359 ̄ 1 Jan 2007 like Land Securities, British Land and Hammerson. – Slough Estates Group SGRO 447 664 ̆ 481 ̄ 1 Jan 2007 Shaftesbury SHB 274.5 559 ̆ 519 ̄ 1 Apr 2007 Warner Estate Holdings WNER 509 690 ̆ 494 ̄ 1 Apr 2007 BY KELLY CRUMMIE WKP 205.55 376.80 ̆ 319 ̄ 1 Jan 2007 The mid-nineties saw the property in- to the momentum. Over recent dustry shares rising steadily, over the months an increase in interest rates, Sources: Digital Look Solutions / Reita website- ‘Company information’ past three to four years especially, this fears of an asset bubble, sub prime *These figures were taken at midpoint of day trading has increased. The property sector as a crisis jitters from the US compounded whole has benefited from a ‘bullish’ ap- with profit taking has begun to put petite from investors, which caused some company’s prices under some market place. However for others it regime is still very much in its in- tive for prospective smaller and pri- share prices to rise steeply. The positive pressure as illustrated in the figures in represents a buying opportunity. fancy. What is for sure is that over the vate investors, and in particular when incline has been intensified by past low the table (right). The pattern of the UK REITs still next few years we will begin to have encouraging ‘the man on the street’ to rates of interest, easy credit and rising correlates with the property market as a clear idea of exactly how REITs invest with REITs, companies will be- asset prices across the board. Stagnation a whole – REITs and non REITs. This have impacted the property industry, come more of a ‘brand’. This is some- This rapid growth accelerated to- This stagnation, and in some decline is due to continue; it is not expected and how much new investment their thing new for a sector which, wards the final quarter of 2006, in is merely a combination of the afore- that REITs will phenomenally change introduction has brought to the mar- historically, has had most of its deal- anticipation of the REITs 2007 New mentioned factors, and could indicate the landscape of the property industry ket. Companies will be competing to ing with institutional investors. Year start, and saw excitement adding bearish sentiment setting into the over night, after all the UK REITs as a market themselves as the most attrac- AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET ABOUT REDEFINING PROPERTY INVESTMENT, DISTRIBUTED IN THE TIMES 5

Why REITs? REDEFINING PROPERTY INVESTMENT

Trading shares also incurs much lower transaction costs compared to St-REIT aware buying property directly. As Chris Luck from law firm Nabarro explains: REITs are often marketed as a way for through collective investment vehicles. “To invest in a property company it the small investor; ‘the man on the More direct involvement requires in- generally costs you half a per cent in street’, to gain access to the commercial creased awareness and understanding of stamp duty and brokerage costs. Pur- property sector, as an alternative to di- the model by investors and their advis- chasing a property, on the other hand, rect investment in property. So, we ers, which will take time to develop. will incur four per cent stamp duty went on the street in a business district A lack of awareness can result in fail- and land tax, not to mention the legal of Newcastle-Upon-Tyne to ask ure, as Invista Residential REIT, and fees and other professional costs.” whether anybody had ever heard of a Vector REIT found out to their detri- So, the capital investment with REIT or Real Estate Investment Trust. ment. Invista scrapped their £500 mil- share purchase is limited to the price Real estate is an American term for lion float of what was billed to be the of the unit and the amount of labour property, and is rarely used in the UK, UK’s first residential REIT and in April invested is constrained to the amount so it was unsurprising that few people Lehman Brothers downgraded the UK of research needed to make the right had ever heard of a Real Estate In- REIT sector from positive to neutral. investment. Best of all, funds offer vestment Trust or REIT. Of the 11 per Vector REIT was to be the largest smaller investors a way into the big cent that had heard of a Real Estate In- REIT initial public offering (and one of money commercial property market vestment Trust, only half knew the ab- the largest floats for the year) in the UK, that traditionally has been the pre- breviated term REIT stood for the same with an initial valuation of £2.64 bil- serve of bigger institutional investors. thing. The individuals that had this lion. The float brought together 70 ho- “The best performing property, cer- knowledge were also the same half that tels across portfolios owned by tainly in the current market, are prime had heard of a REIT via their occupa- Alternative Hotel Group (AHG) and Get a share assets such as City of London offices,” tion – they are working in the property banks HBOS and Royal Bank of Scot- says Luck. “Access to those kind of industry. The others that answered yes land in an intricate structure and was top-class assets is beyond the pockets to the question had seen the term REIT worked upon by several leading law of most private investors, unless but could not recollect exactly what it firms. Fund managers, who were po- of the action you’re mega wealthy, whereas invest- stood for. They said they had seen it ad- tential investors complained about its ing in REITs and property funds gets vertised in a newspaper or magazine, high management fees and potential Purchasing your house or a second home in an exotic you a stake in a diverse portfolio of such as the Financial Times. None of conflict of interests in the manage- quality property assets.” those that knew what a REIT was had ment and ownership structure. Retail location is one thing, but if you want to make money So, for a limited sum, investors have invested in any, yet. investors were also offered the oppor- from a portfolio of residential and commercial proper- access to a range of properties and sec- Whatever the future holds for the tunity to invest in the ipo through ties there are attractive alternatives to directly buying tors, which spreads their exposure and performance and popularity of REITs, it several leading stock brokers, which thereby mitigates the risk of having all will greatly depend on the general pub- led to confidence eroding in the gen- bricks and mortar their eggs in one basket. However, be- lic, and private investors in particular, eral marketplace for property securi- cause funds and REITs are listed on the understanding more about the benefits ties, once the float was pulled. BY SALLY GILES stock market, they are not only subject and opportunities REITs afford. “There’s Much of the criticism of Vector has to fluctuations in the UK property no doubt that there’s still a lack of un- been reserved for the underwriters. Investors have always faced a dilemma when purchasing commercial proper- market but also to turbulence in global derstanding about REITs in some areas Questions have been raised as to over the most appropriate approach to ties – for example, a unit trust must finance in general. The recent crisis in of the financial market and among the whether several key fund managers property ownership. The most direct hold at least 20 per cent of its assets the financial markets and its effect on wider general public,” says REITA’s were sufficiently briefed regarding Vec- route is simply to buy some buildings, in property shares as opposed to ac- mortgages has made some private in- Dave Butler. “We’re doing all we can to tor’s structure. Others have also blamed but that can be costly and time con- tual bricks and mortar to ensure it vestors nervous towards the sector, educate people about this attractive wider turbulence in publicly-listed suming, not just to buy but also to meets liquidity restrictions. REITs are and some have already begun to draw new investment avenue.” property assets that has seen several manage and sell. Two popular alterna- a more flexible alternative in that money from property funds. Research by the Association of In- real estate floats pulled in recently tives, which can bring bountiful re- they freely invest in both residential vestment Trust Companies found that (Spain’s Reyal Urbis and Dutch com- wards in return for a small investment, and commercial properties. Launched Risky business only 40 per cent of sophisticated in- pany Uni-Invest shelved high-profile are investments in quoted property in January 2007, REITs are a more tax “What we’re seeing in the UK now is vestors consider investing in REITs. Fur- share offers citing poor demand.) funds and REITs. They are property efficient version of a listed property fallout from poorly underwritten mort- thermore, a survey by REITA found that Lately, though, some smaller firms companies listed on the stock ex- company. Investment vehicles con- gage lending in the US at a time when less than 20 per cent of financial advis- have managed to list. Lewis Charles change that offer investors the chance verting to REIT status have to meet Britain’s property boom is also fading,” ers understood REITs prior to their Romania Property Fund recently to put money into a range of commer- strict criteria and pay a conversion explains Kemble-Diaz. “However, there launch, yet nearly 50 per cent envisaged began dealings on London’s secondary cial and residential real estate instead charge, but in return are no longer are some positives to take away: namely REITs being part of their clients’ invest- AIM exchange, joining a select group of directly purchasing buildings. In- subject to corporation tax on capital the fact that – for all those cranes on the ment portfolios. Many experts believe of European property firms going vestors buy shares in a fund, where gains and rental income, which London skyline – there isn’t a huge ex- this knowledge gap still exists. As Phil against the trend of cancelled stock one share is ‘one unit portion’ of a means they can distribute more profit cess in supply of new buildings. So, a Nicklin puts it: “Until the message gets floats. Despite touch market conditions managed pool of property. This pool of to investors. return to the extended property reces- through, REITs are destined for a slow for property securities, the Guernsey- property then generates income sion of the early 1990s is unlikely.” burn, not a massive explosion in popu- domiciled company raised £27.4 mil- through renting, leasing and sales, and More liquidity and flexibility As Robin Priest, lead corporate fi- larity.” Most private investors are likely lion. This shows that there is still a distributes that income directly to the Share ownership is a liquid way of in- nance partner at Deloitte elaborates: to continue participating in REITs demand for quality property stocks. shareholder on a regular basis, much vesting in property, since investors “Limited supply is one characteristic of like dividends from other types of can buy and sell shares much more living on a small island, so property listed company. easily than they can buy and sell prices will stay high as long as demand Investors can buy shares by simply property itself. That’s particularly ad- outstrips what’s available.” contacting a broker and, because of vantageous when investing in over- And although property is subject to their listed status, funds are highly seas real estate, as buying and selling market cycles, “it remains an attrac- regulated and reasonably transparent. on an international scale is im- tive long-term investment,” he main- In the UK there are many property mensely complex for private individ- tains. “The historical evidence backs funds operating as both investment uals. Many funds and REITs invest that up and the risk/reward profile trusts and unit trusts. They are not al- internationally, thereby giving in- from property places it somewhere lowed to invest in residential property vestors access to global property mar- between equities and bonds, so it’s directly and there are restrictions kets via a single share purchase. ideal for a balanced portfolio.” Respondents (55) LEADERS FROM THE START

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Property derivatives REDEFINING PROPERTY INVESTMENT Property derivatives come in from the cold Financial derivatives have been around for many years and established markets already exist for almost every class of asset you could care to mention, be it currency, equity or natural resources. Yet, property derivatives have not taken off, even though real estate readily lends it- self to being traded in this way, so why should investors be interested?

BY SALLY GILES

In basic terms, a is a finan- cial instrument that derives its value from something else. And as Parya Badie, a senior associate in the real estate department of law firm Allen & Overy, puts it: “Derivatives generally offer more flexibility than the under- lying asset and that’s why the deriv- atives market is likely to keep growing. “Property derivatives are exciting because real estate is a very important asset class and derivatives are a very flexible way of dealing with it. I’m not suggesting that the popularity of ̆ Parya Badie, senior associate at Allen & physical property investment will Overy fade away, but there are advantages to using derivatives.” posure in one area and/or increase it elsewhere, all the while retaining Lower costs and a chance ownership of the original asset. And to manage risk that, in theory at least, is immensely The advantages are twofold. Firstly useful when it comes to overcoming and fundamentally, trading in deriva- short-term market trends and long- tives is cheaper and easier than going term investment cycles. out and buying or selling a property. “For one thing you avoid many of the Obstacles to overcome costs,” Badie elaborates. “You pay Despite these unique attractions, prop- neither land tax nor stamp duty and erty derivatives are only just begin- there are no agent, legal or surveyor ning to catch the market’s fees to worry about. Essentially, as imagination, even though they’ve been with property funds and other indi- around, in one form or another, since rect real estate investment vehicles, the early 1990s. There are three main Around the same time a solution to derivatives offer a chance to invest in reasons. Firstly, until very recently, the the second stumbling block also pre- property synthetically.” legal and tax environment for property sented itself. The existence of a robust LIFFE LAUNCHES BASED ON As well as cost savings, perhaps derivatives was prohibitive for major index of property values is essential PROPCO EQUITIES BASKETS the greatest benefit to derivative institutional investors. Secondly, there for a successful trading is that it affords an opportu- were concerns over the presence of a because, as Sceats points out, “a de- Liffe announced on 6th September nity to hedge the risk of property in- suitable index for derivative values to rivative is basically a bet on the fu- that it will launch on the Paris de- vestment. Nick Nabarro from the be measured against. And thirdly, in- ture of a chosen property index.” rivatives market two futures con- Investment Property Databank (IPD), vestors bemoaned a lack of liquidity in Without such an index there would be tracts on indices that track the the organisation responsible for the the market. no gauge against which an asset’s performance of European real es- data that underpins most of the The two most significant develop- performance could be assessed. tate companies. property derivative activity in the ments for the property derivatives Today, the role is largely filled by The two new futures contracts UK, outlines the principle. “If an in- market occured in 2002 and 2004, the aforementioned IPD, which pro- are based on the FTSE EPRA/NAREIT vestor owns £500 million in retail which addressed the legal and tax is- duces a range of indices highlighting Europe Index (EPRA) and the FTSE property, for example, they could use sues. As Peter Sceats of specialist the performance of commercial prop- EPRA/NAREIT Euro Zone Index (EPEU) which are seen as benchmarks in Europe for property derivatives to sell on some broking house Tradition Financial erty assets both as a whole and di- investments in listed real estate companies. of the exposure to the risk of it fluc- Services (TFS) explains: “There were vided into three sub-sectors: retail, The FTSE EPRA/NAREIT Europe Index covers approximately 100 listed real es- tuating in value. On the other hand, two key legislative changes that office and industrial. In many respects tate companies based in 15 European countries with the largest weighting being if an investor thinks that the value cleared the way for a property deriv- the UK leads the way in terms of the UK (45 per cent). of office property will increase they atives market in the UK. To sum- property derivatives trading, a fact The FTSE EPRA/NAREIT Euro Zone Index covers approximately 50 real-estate could take on someone else’s expo- marise, these enabled investment many attribute to market confidence companies based in nine Euro Zone countries, with the largest weighting being sure to that sector.” companies to include derivatives in in the IPD’s data. As Charles Weeks, France (40 per cent). Hedging, therefore, allows an in- their solvency calculations and al- co-founder of real estate investment The futures contracts are the first of their kind in Europe and complement vestor (either an individual or, more lowed them to offset against tax any business Protego, states: “IPD is now Liffe’s existing range of derivatives on national and pan-European equity indices. likely, an institution) to decrease ex- capital losses arising on trades.” Continued on page 8 8 AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET ABOUT REDEFINING PROPERTY INVESTMENT, DISTRIBUTED IN THE TIMES

REDEFINING PROPERTY INVESTMENT Property derivatives

uidity has meant that sizeable fund managers have not yet been able to “hedge exposure effectively using de- rivatives.” There’s a dearth of fellow investors willing to trade with them. But, according to Paul McNamara of Prudential Property Investment Management (PruPIM), the market downturn may actually represent something of an opportunity for in- vestors. “At the moment property de- rivative pricing actually looks very interesting and there could be specu- lative gains to be had,” he ventures. ̆ Paul McNamara of Prudential Property “If investors come forward and are Investment Management (PruPIM) willing to trade at current valuations in the current climate it will be a one of the most credible property in- hugely promising sign for the indus- dices in the world, if not the most.” try. If not, I don’t know what that will While IPD’s research underpins the say about the market.” commercial property market in the UK, the residential sector operates slightly You pays your money… differently. “There are some indices out Whether commercial or residential, there but they don’t have the same property derivative deals can be struc- reputation as those provided by IPD,” tured in a number of different ways. says Allen & Overy’s Parya Badie. In their purest form they consist of “That said, HBOS’ house price index “total return swaps”. An investor sells (HPI) in the UK and the Schiller index exposure to an IPD index in exchange in the US are two residential indices for exposure to Libor (a benchmark with rapidly growing reputations.” for short-term interest rates), plus or The move to a more favourable leg- minus a negotiated number of basis islative framework combined with the points. These basis points are key as emergence of robust central indices they allow an investor to state how has worked to boost liquidity in the they expect the property index to per- property derivatives market. The likes form in comparison to interest rates. of Barclays, Goldman Sachs, Merrill The return on the underlying asset’s Lynch, Prudential and Santander are value is then determined by the per- then have the to either ‘go based on the IPD benchmark,” ex- vide products with denominations as just a few of those now taking a keen formance of these two markers over a long’ or ‘short’. If they ‘go long’ and plains Protego’s Charles Weeks. low as £1,000. interest. The impact on the market has set period of time. the index value rises to 112 their PICs differ from total return swaps “Although there’s not much evi- been staggering, as a glance at IPD’s profit is two. But if it falls to 108 they and CFDs in that they offer a more dence of a retail investor market in statistics reveals. At the moment, loose two. Transactions are cash free structured product. You have to pro- derivatives at the moment there seems During the first half of 2007, IPD at the start and settled at the end.” vide the cash up front to buy a to be a lot of interest,” says Allen & saw trades with a total notional value property“ derivative pric- CFDs have one major intrinsic at- and you can’t bet against the index, Overy’s Parya Badie. “In a way, deriv- of £3.9 billion take place against its ing actually looks very in- traction, although it is also a signifi- but you can trade them in a second- atives could even offer some retail in- indices. This represents a marked in- teresting and there could cant risk, namely that they enable a ary market, which affords some addi- vestors a first foot onto the property crease on the figure of £1.4 billion buyer to bet against – or “short” – the tional security. ladder.” seen in the first half of 2006 and be speculative gains to be market. Thus it is still possible to Assuming the property derivatives dwarfs the £550 million seen in 2005. had make a profit if a market falls, some- The path ahead market successfully weathers the cur- ” thing of an attraction given the cur- On the whole property derivatives re- rent sub-prime storm there could be A note of caution But variations on this theme exist. rent market turbulence. The danger is main the reserve of large corporate some interesting opportunities ahead While the property derivatives market “Some investors believe that property that, in theory at least, the losses are entities and it is easy to see why. As on an international basis, too. is benefiting from increased attention total return swaps are simply not for potentially limitless. Santander’s Andrew Fenlon com- “IPD produces data in Germany and from investment banks, insurers and them,” explains TFS’ Peter Sceats. “As ments: “The problem with CFDs and France,” continues Badie. “In recent fund managers, who all have the po- an instrument, total return swaps are Property derivatives total return swaps is that they haven’t times there have also been property tential to inflate it exponentially, it is somewhat complex, they may not reached a size where private investors derivative trades in Hong Kong, worth remembering that liquidity still specifically hedge enough property are“ exciting because real can trade in them directly.” After all, Japan and Australia. And there’s the remains a concern. Over-arching eco- and have interest rates imbedded in estate is a very important few individuals have multimillion- US market to consider. The hope for nomic trends will play an important them, which can be unattractive.” asset class and derivatives pound property portfolios at their dis- the future is that you’ll be able to buy part in the attractiveness and future For these reasons many transac- posal, or the equivalent cash, and office exposure in Japan in exchange success of property derivatives. tions now take place in the form of are a very flexible way of even fewer have the expertise to ne- for retail exposure in the UK. Once The current sub-prime mortgage contracts for difference (CFDs). dealing with it gotiate appropriate contracts. you start viewing derivatives on an crisis in the US – and subsequent “Effectively a CFD represents an ” But while most private investors international level these things be- global credit crunch – provides a index,” states Andrew Fenlon, head of Given this risk, others favour an al- can’t play directly in the property de- come possible. timely reminder of the power of this property derivatives at Santander together different approach to deriv- rivatives market, there are structured “Banks are now trading property influence. As William Kemble-Diaz, Global Banking & Markets (formerly atives trading. Protego, for instance, products through which they can gain derivatives and there are funds being editor of ReutersRealEstate.com, Abbey), a major player in the resi- works with Barclays to provide expo- access. set up to include them, so I think this points out: “August’s data from IPD dential derivatives market. “When the sure to the UK property market via the Fenlon, for instance, notes that “or- is laying the foundations for the mar- showed UK commercial property fail- swap deal takes place it effectively issue of property index certificates ganisations such as building societies ket to take off,” Badie adds. “And ing to generate a positive monthly re- starts at 100. The seller can state (PICs). “These are essentially Eu- and the post office can buy exposure once you factor international trade turn for the first time since December where they expect the market to be robonds listed on the London Stock wholesale from us and then hedge into the equation, I think the property 1992, in the wake of a global credit after a set period of time, say three Exchange, which are issued by Bar- this by selling it on piecemeal to their derivatives market could experience squeeze that has curtailed property years. If they think the index’s value clays. They pay both capital and in- clients.” Likewise Protego, Goldman the sort of growth that everyone is investment.” Moreover, a lack of liq- will increase to 110, the buyer will come returns, with the former being Sachs and others are starting to pro- hoping to see.” AN INDEPENDENT SUPPLEMENT FROM MEDIAPLANET ABOUT REDEFINING PROPERTY INVESTMENT, DISTRIBUTED IN THE TIMES 9

Case study REDEFINING PROPERTY INVESTMENT

investors to Safeland but the man- agement also have a very strong Safeland ‘flexes’ its muscles reputation as directors of property businesses listed on the London Stock Exchange, a number of which were demerged from the original with £200 million fund Safeland business. As well as Biz- space, Hercules Property Services, a With the majority property fund raisings on hold Larry Lipman (pictured left), Man- residential management business aging Director, sees benefits of this and commercial property auction- due to the credit market turmoil, Safeland, the deal for the growth of Flexspace as eer, was demerged and listed on property management business, has a lot to smile well as delivering significant value AIM eventually being sold Erina- about. Having recently closed a fundraising, which for Safeland shareholders, “it obvi- ceous in 2004 with an enterprise ously brings increased revenue to the value of £110m. Similarly self-stor- gives them £200m of funds at its disposal, Safe- business, through our management age company followed the land is now firmly on the acquisition trail. fee and the potential to earn more Safeland demerger and AIM listing through profit share, but it also route in 1998 growig from three Over the last 21 years Safeland plc management. With an initial £15m firmly establishes our fund manage- centres to 20 and was subject to a has moved from being a business investment from Electra Partners and ment business and gives us far more £44m management buyout. Safe- solely focused on trading property, an investment by Safeland of £1 mil- predictable revenue streams. It is our store returned to AIM in March this mainly in Greater London, to a com- lion, the Safeland Fund aim was to properties was given a firm endorse- aim to repeat the success that we year valued at £450m. pany firmly focused on its growing invest in income producing UK prop- ment with the news that it had raised achieved through Bizspace”. Given the recent expansion of the property fund management arm. This erty investments where value can be further equity with Babcock & Brown, Of course Larry and his colleagues Safeland Fund Larry Lipman is natu- latest development for the company added by active management. To the Australian investment group, are no strangers to the world of man- rally bullish about the prospects for culminated in the recent news that date, £47 million has already been in- agreeing to invest an initial sum of up aged workspace as they established the company he founded in 1986: the Safeland Active Management vested in properties, all of which trade to £50 million. At the same time Elec- flexible managed workspace provider “The team at Safeland has an im- Fund,