Online Money Manager

There are also some disadvantages for property derivatives. It is important to distinguish between temporary disadvantages due to the actual illiquidity and permanent disadvantages. The disadvantages of property derivatives are also listed in previous posts. Note that management discretion can be both an advantage or a disadvantage. As long as management is able to create value, i.e. beat the overall property market by skillful ‘cherry picking,’ it is an advantage that management can actively influence the composition and use of the real estate portfolio. On the other hand, the risk of potential mismanagement is a disadvantage, since the investor would have been better off by investing in the diversified overall market.

The numerous advantages suggest that buyers as well as sellers can benefit from the use of derivatives. This observation is a necessary condition for the establishment of any efficient derivatives market. This article lists potential buyers and sellers of property exposure through derivatives. The Property Derivatives Interest Group (PDIG) conducted a survey that suggests that there is considerable demand for property derivatives. In the UK, companies controlling nearly GB£ 45 billion of commercial property had been cleared to trade in this new market by mid 2005 (Use of property derivatives, 2005). Also, there seems to be enough of a divergence in views regarding the performance of a property investment. A survey conducted by the UK Investment Property Forum (IPF) in August 2006 showed that forecasts for overallUKproperty total returns 2008 ranged from 0.0 to 9.8 %.1 The divergence of opinion was centered on the degree to which returns will be positive for the period. Figure 3.1 shows the 35 forecasts of the survey, which on average are 5.31 %.

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