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The cost of buying and selling physical property (so-called round-trip costs) are generally estimated to be between 5 and 8%of the value of the property investment. The use of derivatives allows investors to avoid a large part of these costs. This appears to have been the trigger for property derivatives in the UK and mainland Europe.
However, the rationale for property derivatives is not just about saving transaction costs. Besides avoiding costs, the most obvious benefit is that they make real estate investable in a flexible way. Property derivatives can be traded quickly and easily, contrary to physical property transactions.
In addition to saving time and money, there are more advantages to property derivatives. For example, by investing in an index, the investor gets not only exposure to a few single objects but to a diversified property investment. Such a synthetic investment in the broad market avoids the idiosyncratic risks of single objects. Moreover, tax authorities of many jurisdictions treat property derivatives favorably compared to direct investments.
Aresult of a liquid, established derivatives market is the improvement of market information. By observing transaction prices, it is possible to assume implications on the base market. For example, derivatives can reveal the volatility that is expected by market participants. Improved market information in turn results in better transparency and finally contributes to more efficiency in the real estate market.
Welcome! My name is Eve Santori. I professionally deal with money management for almost 15 years now and this blog was created to share some of my knowledge with your. After graduation from Stanford University I learned a lot about thing that ordinary people find confusing and frightening, such as loans, mortgage or debt. I shared that experience in two books that I've published, but I also decided to offer the same information on my blog. So, there it is!