In many ways a property derivatives market would seem to be more of a necessity than a derivatives market for other asset classes; the sale and purchase of property – particularly portfolios or high value properties – may take a considerable time and the buying costs are significant (typically 5.75%). These are precisely the circumstances where derivatives can assist by facilitating a speedy and cost effective virtual switch out of property or from one property sector to another.
One of the main reasons that property derivatives have not featured is the uncertainty surrounding their tax treatment. Following an Inland Revenue consultation, the Finance Act 2004 brought property derivatives within the existing tax regime for derivative contracts (which previously had specifically excluded property). For property investors gains or losses on derivative contracts will be treated as capital gains or losses whilst, in general, traders will bring any profit or loss in on revenue account.
Whilst inevitably it will take time for a fully-fledged property derivatives market to develop there are already signs that this is under way and there can be no doubt that the interest in property derivatives is growing.
