Bankers are using derivatives to exploit the contrasting outlook for commercial property in the US and UK. Financial Times
As the property market cools in the US and UK, opportunities are opening for what are called relative value trades – bets on the performance of different markets – as opinions diverge on the economic outlook.
UK commercial property prices started falling this year after a long period of growth, while the US market slowed sharply in the third quarter.
Commercial derivatives are pricing a 4% fall in the UK market over the coming months and a rise of 6% in the US. Some bankers believe a smart trade is to bet against such a wide divergence because the US has only outperformed the UK by 10% once in 28 years.
This kind of relative value trade was not possible until a few months ago. The US market for property derivatives only began to take off when four banks signed up for licences to trade the securities in March.