Three former members of Bank of American’s property derivatives team plan to create the world’s first long-only commercial property derivatives fund.
InProp Capital’s Paul Ogden, Ricardo Pereira and Markus Wolfensberger intend to launch the InProp UK Commercial Property Fund early next year
The fund will be open-ended and ungeared with a target initial equity of £50m. It will give investors returns based on those of the Investment Property Databank UK Annual Index.
The manager of the fund, InProp Capital, will achieve this by trading on the over-the-counter property derivatives market through swap deals. It will buy the returns from the IPD index at the prevailing price in return for paying a fixed rate to the seller of the returns – a rate that is effectively equivalent to all the costs of buying physical property, such as financing costs, stamp duty, legal costs, and agent costs.
Both the buyer and the seller will then ‘cross’ their trade to the Eurex derivatives exchange so that neither has to worry about each other’s credit risk. Eurex provides an automated and integrated ‘Clearing House’, which assumes the counterparty risk for both parties.
“This fund has been designed to specifically address the issues surrounding commercial property vehicles that have been concerning investors for the last couple of years,” said Ogden. “I believe that it can offer investors an efficient and liquid way of accessing the commercial property market’s returns without the liquidity problems and dealing costs that are usually associated with unlisted indirect vehicles or the poor tracking error and volatility seen in REITs.”