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                                                                                                                                               June 2008

           The Newsletter of the Property Derivative Market
  The Canadian Property Derivative Market “Show us Your Axes…” in Barcelona was “Gold
                                          The Marcus Evans Pan Euro PD event
  Has Been Launched                       Sponsored” by locals Banco Santander and French group Calyon, who
  National Bank of Canada (NBC) and Royal Bank of Scotland (RBS)               used the event to make their official debut into the PD market. German
  have executed the market's first Canadian property swap.                     banking group Unicredit were Silver Sponsors to this second event in
  The trade which was of a commercial size was executed using the              the series which kicked off last year in Paris.
  Investment Property Databanks (IPD) All Property Index for Canada –          After a welcome from Santander senior Juan de Dios Sanchez-
  the key commercial property index for Canada.                                Roselly, Georges Sitbon of Calyon set out a concise précis covering
  "Executing the first Canadian IPD property swap is a natural step for        the key uses of PD but also the well known imperfections of the UK
  NBC, confirming our leadership role in the development of the                market-build. By the looks of things some the new crop of banks to the
  Canadian property derivative market", said Simon Côté, Managing              PD market are adopting a “clever solution provider” role and the
  Director, Property Derivates Group, NBC.                                     market should become all the richer and more attractive to investors
                                                                               for this. Georges’ presentation was not unlike the Simon Zeigler
  Charles Harris, Global Head of Property Derivatives at RBS, added            (Deutsche Bank) presentation at the IPD Users event a month earlier.
  “The Canadian market is a highly sophisticated and transparent real
  estate market and there is no reason why we should not see further           Santander’s Dominic Cooper then focussed on using the UK
  property derivative trades here. The UK market which has grown from          experience to develop a Pan-Euro market before Markus Hoechtl
  virtually nothing 3 years ago to GBP15 bln of total trades executed to       (Unicredit) co-presented on the value of the pan-European trading
  date, shows how clients are embracing this new concept”                      simulation currently going on under the aegis of FoPID (reported
                                                                               previously in R&M. See page 11.).
  National Bank of Canada is pioneering property derivatives in its home
  market. NBC, Quebec's leading bank and a major player in Canadian            The recently published Juerg Syz described the Swiss PD experience
  derivatives market, is applying its expertise to the real estate sector,     which has a story beyond the IPD trades that have gone thru since
  bringing new efficient possibilities.                                        September 2007. ZKB have been pioneering Swiss resi for several
                                                                               years and news that we should see a new resi index for Switzerland
  RBS is recognised as a pioneer in the development of property                was announced. Further information on the index and Juerg’s
  derivatives, completing a number of firsts in Europe and Asia while          excellent PD book will follow in future edition’s of R&M.
  remaining at the forefront of the growing UK property derivative market.
                                                                               It is always interesting to hear the end-user’s perspective at these
  Property derivatives allow investors to rapidly buy or sell exposure to      conferences. During 2006 when end-user participation was thinner
  the real estate market. They also offer an inexpensive way of obtaining      than it has grown to now, PD market’s banks and brokers sometimes
  the underlying exposure to property, because participants avoid much         resembled bunch of guys early to a party waiting for the girls and the
  of the transaction costs involved in buying and selling property, such as    beer to turn up. As such, ING’s Jan Meulenbelt’s presentation provided
  agents, legal fees and stamp duty. This tool facilitates greater property    day one with context. Directly and clearly delivered, and with humour.
  risk management for clients; whilst at the same time opening up greater      While it cannot always be straightforward for a major fund, insurance
  real estate opportunities both domestically and internationally.             or pension player to set up to trade PD, there must be a reason firms
  The deal was brokered by Tradition Property.                                 like ING and others jumped thru the hoops. It can only be that they
                                                                               perceive value being in the market.
                              Aberdeen Property Investors, SWIP and Tradition Property closed the day with a Panel entitled “Sharing the First
                              Steps into PD”. It is two years since the excellent Hermes Trading Simulation closed, there have been 29 Tradition
                              hosted “WORKSHOP: Property Derivatives”, and there have been more PD conferences than you can shake a stick
                              at - and yet the consensus of the panel and the delegates is that STILL more education is needed to grow this market.
                              No doubt with many, education is needed but you know, some people may use the word “education” when actually
                              what they need is “increased familiarity” which of course comes with education product, trading simulation, test deals
                              and most of all, time.
                              Day two of the Barcelona event covered the FTSEpx approach (latest update carried at the back page of R&M by kind
                              permission), the legal angles of PD with Allen & Overy and Clifford Chance and PDs relationship to listed REIT prices.
                              But by far the most lively session on Day Two was the expanded closing panel session covering PD funds and the
                              future of property derivatives. Chris Iley of ABFM, Marco Salvi of ZKB, Peter Sceats of Tradition Property, Georges
Sitbon of Calyon and Karsten Junius of DekaBank led the debate. Panel members and delegates all saw differing rates of growth, global PD
turnover for 2008 was estimated between £12billion and £30billion. But the panel were unanimous on one thing—there will be growth.
An excellent conference closed and the echo of one comment made by one of the banking presenters prevailed: “Show us your axes…” (market
jargon for a target trading number). This was not the “plea” it sounds but a reflection of the genuine desire that exists across so many investment
banks to be able to show just how useful they can be at supplying hedging and investment solutions at prices often a country-mile more attractive
than what is available in the “physical” market and additionally without attracting the stamp duty.
The sum of a growingly liquid PD market and clever investment banks makes for a potent resource for the real estate investment community. The
companies who hedged last year had to “show an axe”, so did the chap who bought Dec-08 UK All prop at –14% in Feb-08 and the fellow who
invested in a Dec-10 note last month at a full 3% higher than it is now. So, “Show your axes”... and begin to liberate the value.
 Risk&Manage@Tradition.Com                                                                 See the Risk & Manage Canada Feature Pages 8 thru 10
         The Commercial Property Page                                                     All Property Forward Curves

The R Word
Repossession. But not quite. EGI confirmed Capital & Regional has
issued an update on rescue plans for The Mall Unit Trust. The Mall had
sent a circular to existing investors with an open offer at 101p per unit (a
45% discount to the April unit price) and news of raising £286m to pay
off the Trust’s banking facility. Capital & Regional offer had been backed
by Norwich Union Life and Pensions and CGNU Life Assurance. The
company will receive the cash however the open offer plays out.
In other bank related news Estates Gazette reported that “Banks are
preparing to write off failing property loans and take ownership of the
underlying assets as values continue to fall. Some of the UK’s largest
commercial real estate lenders are considering shifting assets into
special purpose vehicles that will allow them to hold the properties at
cost value – rather than market value – to avoid further write-downs”.
Highlighting the lower prices in the market a PruPIM portfolio of mixed
assets is said to be transacting at a number £20mio lower than a failed
sale Air Capital last month. Mountgrange Capital is now understood to
be buying the portfolio for just over £200mio, according to EGI.
                                                                               Lovely Reita...
The derivative forward curve showed an improvement particularly at the         ...Reita made their Quarterly Property Investment Perspective in
front end where the Dec-08 firmed 1.65% from 12.15% to 10.50% as               conjunction with their expert panel. The results are reproduced by kind
end-users bought Notes and swaps. The Dec-09 firmed but did so in              permission in Jun-08 edition of Risk & Manage. Check below and page
sympathy with the Dec-08 rather than its own right. Price action on the        five.
Dec-10 was interesting. The recovery on the front end from those
reported –14% lows and the ability to trade the Cal-10 (the calendar      Recession or short-term dip?
year) means that, for the first time in recent memory hedgers are in the  54% of the Reita experts believe the UK is facing a short-term dip in
market at the same time as investors. The Cal-10 weakened 0.50% as        economic performance, compared to 27% who believe we will see a
hedgers attempted to lock in Dec-10 returns at 5.50%/5.00% area.          recession (a period of two or more quarters of negative GDP growth).
                                                                          Feedback showed this decision was finely balanced for some, with
Banks and end-users on both sides of the same market at once? factors such as government policy and the US economy being cited as
Goodness, a balanced market appears to have broken out.                   important.
The IPD UK Monthly Property Index (to end April 2008) saw a total Recovery – when will it happen?
return of -0.5% m/m in April 2008, a very slight improvement on the 58% of the experts believe investment conditions in the UK commercial
-0.8% month on month return seen in March and continuing the recovery property market will not start to recover until 2009 – 35% said H1 2009
since the -3.7% return seen in Dec-07. IPD’s monthly index is the best and 23% H2 2009. Only 27% saw recovery beginning this year and 8%
bell-weather for the annual index and based on around 4000 properties felt 2010 was more likely.
held in 75 portfolios, worth around £46billion. The release of the May-08
monthly index will be on 13th June. Go Www.IPD.Com.                       Total return forecasts
Risk&Manage@Tradition.Com                                                 42% of the Reita experts said the level of total returns they expected
                                                                          from the UK commercial property market in 2008 was -5% to 0%. 46%
                                                                          were more bearish, with 31% saying returns would be –10% to -5% and
                                                                          15% of the panel forecasted a return of less than -10%. One expert was
                                                                          very precise, forecasting a total return of -11.25% for the year.
                                                                               Tenant demand and rental income
                                                                               69% of Reita’s experts saw a ‘slight deterioration’ in the tenant-driven
      Reproduced in Risk & Manage newsletter by kind permission
                                                                               aspects (rental income, tenant demand etc.) of the UK property market
                                                                               over the next 12 months. 27% were more negative and saw a
                                                                               ‘significant’ deterioration and only one expert saw a slight improvement.
                                                                               Further to the expert panel research, Patrick Sumner, chairman of Reita
                                                                               (and head of property equities at Henderson Global Investors) led the
                                                                               Reita market review panel discussion, which examined some of the
                                                                               experts’ findings in more detail. Continued on pages five and six.
                                                                               For further information, please contact:
           The Residential Property Page                                                        The Tradition “Future HPI” ™
                                                                                          the economic reference tool representing the
The Wheels on the Bus                                                                        changing forward value of UK housing
BBC’s newly invigorated Panorama programme has focussed
increasingly on house prices of late. Last month UK house price
aficionados may have sucked on a thoughtful tooth at the vision of
Florida based “foreclosure coach tours” which took prospective
investors to properties so freshly vacated by the previous owners you
had the impression the loo seat was still warm. The most recent outing
of the current affairs programme reported that 4000 UK estate agents
had lately lost their jobs as a result of the market slowdown and house
price fall. One has the feeling some may find work driving the a
foreclosure bus closer to home.

The shows that property obsessed Brits tune into such as Property
Ladder, Grand Designs and the Location programme came in for
                                                                             The prices shown in this report are indicative mid-points. Property derivative transaction prices may
criticism for helping create the myth that house prices where as vary from mid values shown and are dependent on deal size, duration and market liquidity. For the full
“upward only” as a beleaguered UK shopkeeper’s rent. At least such                          run of Future HPI values please contact Property@Tradition.Com
programming gave us - everyone’s cup of tea - Kirsty Allsopp and
Sarah Beeny. If not Kevin McCloud.
Watch out for a CNBC feature on
                                                                           The Economic Backdrop
                                                                           Governor Mervyn King said the UK economy is actually doing quite well,
house prices coming up during June.
                                                                           outside the property and financial sectors. That’s a bit like saying a
                                                                           hospital patient is doing well aside from the heart and the brain. We like
Buyers Strike                                                              Mervyn though.
Hometrack calculated house prices fell by 0.5% after a 0.6% fall in
April. The Hometrack head has coined the term “buyer’s The recent CBI survey did show that warm weather in May boosted
strike” (something he may come to rue) which he said was continuing sales of clothing and food. But many in the market see higher energy
with the number of buyers registering with estate agents falling 6.7% in and food prices at the same time as higher mortgage rates and the lack
May. The time taken to sell property rose to almost 10 weeks, it was six of new lending as perilous for UK house price.
at the same time last year.                                                Gordon Brown, whose rise to top office was helped by the difficult
The excellent Nationwide house price index showed that UK house decisions previous Tory administrations made, could find himself on the
prices fell by 2.5% in May-08. UK house prices are 4.4% lower than this other side of the house (probably as a backbencher) in less than two
time last year. The Society suggested in their May press release that years as it looks increasing like the economy wont ride organically in
currently “Borrowers are better placed to weather the storm than in and save him.
the 1990s” being that mortgage rates and fundamentals are in better Judging by his actions in pre-credit crunch and more recently, it appears
shape than back then. They went on to say the tighter credit conditions to have come as a bit of a shock to the PM that economies move in
should ultimately help the longer term sustainability of the market. This cycles. Mr Brown’s role in fuelling the UK borrowing boom via his ever
is probably true. This “organic style” correction of the mortgage increasing stamp duty demands has not been fully recognised. People
madness seen in 2006 and 2007 is the only way it will happen. The were in effect borrowing more money to pay the tax.
globalisation of banks and mortgage securities means that even if the
                                                                           But then this was the same guy who did the “sell gold/buy euro” spread
UK actually legislated on maximum Loan to Value or maximum Income
                                                                           just before the world went all old fashioned for precious metal.
Multiple it may not stop the affect of any future sub-prime mortgage
frenzy seeping into the country’s economy.                                 Two-thirds of British households own their homes, largely the same
                                                                           bunch who pay a good slug of the personal tax take, which makes
The HBOS’ HPI release for Apr-08 was £333 up (yes up) on Mar-08.
                                                                           house prices just about as emotive an issue as it is possible to be.
The average UK house valuing then at £190,952. The May HPI is due
for publication very shortly. Commentators fear the May HPI could be The Bank of England has wisely cut interest rates three times since
sharply down in line with the Nationwide. Bids came into the front end December but that has not helped mortgage rates because of Le
of the HPI swap curve. The forecast for UK house price in the coming Crunch. Further BoE reductions in the rate will be tough as the inflation
12 months is now –13.50%. But swap rates could change sharply when looks to have a foothold. There may be trouble ahead, but while there’s
the HPI is published.                                                      music and moonlight...
And while the UK residential sector feels a bit like it is checking itself
into The Priory right now after a prolonged bender, the band plays on
                                                                                                               HBOS PLC Disclaimer
and the market is still active. The Delph Property Group has put 384          HBOS PLC have no liability to Tradition Group or its customers and are
private rented flats across central London up for sale for £150m. Clearly      not under any obligation to continue to publish HPI data. The data is
                                                                              prepared from information that HBOS PLC believe is collated with care,
it is not a great time for the group to hit the market but tenanted resi       but the company makes no statement as to its accuracy or complete-
property is a little different and could prove an attractive for UK            ness. HBOS PLC reserve the right to vary methodology and to edit or
institutional investors, who are surely underweight in the space discontinue the indices at any time for regulatory or other reasons. Per-
                                                                                               to place reliance on the
compared to European cousins. Delph has a portfolio of 1,000 sons seeking commercial purposes doindicestheirtheir own or third partyso at
                                                                                                                                                   own risk.
apartments in the UK and is reportedly selling off the tenanted portfolio
                                                                                      Tradition Group Disclaimer & Trademark Information
to concentrate on buying new-build and off-plan apartments.                  Tradition Group accepts no liability for loss, damage or claim whatsoever
                                                                                           arising from use of these indices regardless of whether that loss, damage
On the residential derivative market the nearby position improved from                     or claim is caused by inaccuracies or errors in the index from any lack of
forecasting a –14.50% reduction in house prices for the 12 month                             reasonable care on the part of Tradition Group or otherwise. Tradition
period to a –13.50%. Okay so its thin gruel, but a rise is a rise. The rest                       “Future HPI is a registered trade mark of the Tradition Group
of the curve showed an average 2% fall.
The First FOW Residential Property Derivatives Summit
It was refreshing to attend a conference focused on Resi after so many commercial conferences in the last few years. It was FOW’s first foray into
PD events but they managed to bring together around 70 professionals. Sponsoring were Morgan Stanley, Santander and Tradition Property. The
event was co-chaired by Guy Ratcliffe (MS), Peter Sceats (Trads) and Susan Smith (Univ Durham).
The opening presentation from Vladimir Pillonca at MS analysed the housing markets in quantitive fashion. In conclusion the MS researcher saw
general downward house price adjustment a high probability, the US downturn persisting and full blown recession in the US a concrete possibility.
In the Euro area he saw house price growth well below trend until the second half of the year but Spain and UK likely to witness the sharpest slow-
downs. France, Italy and Greece look also susceptible to downside house price moves.
Presentation One
Guy Ratcliffe’s presentation set out hedging with swaps and use of options and generally
what potential users need to hear about derivatives:
• PD being a simple way to gain exposure
• The potential for the market to become global
• No need to understand the complexities of trading the physical assets new markets
• Numerous uses and potential users
Presentation Two
Peter Sceats explained the basics and addressed specifically asked questions. See
Panel One
The panel session on indices was the first time in our memory the Halifax, The Nation-
wide and Hometrack have been on the same panel discussing their indices. The various methodologies were discussed and harmony reigned
unlike a similar session in the US earlier in the year which reportedly almost came to blows.
The Halifax’s dominant position in the PD market was evident but it was widely agreed this is not because their method or data scoop was
measurably better or in other cases different than competitor’s indices. The reason for HBOS index being central to the PD market was a legacy
being that it was first to be used and has laid down roots. Hometrack and Nationwide were seen as highly complimentary to the HPI.
Peter Sceats joined the panel to discuss how basketing the three (and other) panelists’ indices to make one benchmark was previously his “big
idea” but that players in the HPI swap market were resistant. The Tradition Future HPI was discussed on the same panel but as it is a version of
the derivative forward curve rather than the basis of it, no comparison is appropriate. Tradition Future HPI looks forward of course while all other
housing indices, naturally, look back.
Questions from the audience on index disruption featured. Martin Ellis confirmed that HBOS has no plans whatsoever to discontinue publishing the
Presentation Three
Dominic Cooper of Santander presented on selling derivatives into the retail market. This presentation bridged the wholesale and retail derivative
market places. Dominic described packaging various structures for retail consumption and Abbey’s products in this regard. He went on to outline a
rather imperfect spread-bet market which in turn perfectly sequenced into a more detailed description of this market from the audience. Simon
Smith who is an expert spread-better actually occupied a panel seat and explained that the spread-bet market has seen a period of growth and
increased liquidity where the market is now trading 10 times a day, sometimes more than the CME housing futures market which came up in
audience questions.
Presentation Four
Susan Smith is a professor at Durham Uni and instigator of the excellent Housing Wealth debate held at the Uni in Feb-07. Susan’s presentations
around PD are always interesting and different. She sees things from an academic, social and housing policy angle. PDs (in the wider and retail
sense) future role around housing wealth (HPI linked savings accounts etc.) was explored.
Presentation Five
Martin Collins of Santander presented on the issues facing house builders. Martin set out that since Abbey had been in the resi PD market there
had been a steady increase in house prices and a lack of belief that prices could fall. As such many house builders entered the down turn in house
prices with no cover. Martin explained that signals regarding the downturn in the market were in to an extent in evidence. He went on to explain the
basics of how house builders should be hedging. In summary he suggested that while current derivative prices do not look welcoming to the
hedger, it appears advantageous to new investors at these levels. He wisely suggested house-builders and others with housing risk should take
derivative levels in their planning. Santander’s offering includes, swaps, options and funded notes as well as retail offerings described by Dominic
Closing Panel
Chris Illey of Alpha Beta Fund Management, Andy Fenlon head of Santander Property Derivatives and Peter Sceats of Tradition Property joined
the closing panel session moderated by Susan Smith of University of Durham. Chris set-out the role of a resi only property fund using derivatives.
ABFM was the first to launch a residential derivatives fund based on the UK HPI. It is a market tracking product that can be leveraged, or
non-leveraged, according to investor requirements. Andy Fenlon related Santander’s years in offering hedge and investment products. Andy now
heads the most influential PD trading desk in the resi space. Peter Sceats highlighted the fact that institutional investors have long been frustrated
in accessing the UK residential market as they face the potentially high costs of managing multiple small units in physical portfolios. Peter also
called for a house price and resi deriv interest group as PDIG has done has done/is doing a great job for commercial property derivatives.
If the event was there to let potential new users know that HPI swaps, options and funded notes are available it did that. If the event was there to
inform end users that derivatives were a lead indicator and provided great value, it did that.
REITA Quarterly Property Investment Perspective:UK Commercial Property-No Recovery ‘til 09
Update – since last quarterly perspective
UK property stocks have fallen back to their lowest point this year. This is despite the rally in property share prices earlier this year, when it
seemed that the end of the commercial property correction might be in sight - and shares rose by 16% in three weeks. Property share prices have
been a fair indicator of direct market trends, and January's optimism has all but disappeared. Analysts are uniformly bearish, not merely about
where values are headed, but also about how long it will take to get there – which is much longer than previously thought. This is despite the rate
of fall in capital values continuing to appear to slow. The monthly fall in values as measured by the IPD Monthly Index was only 1% in April
compared to 1.3% in March, bringing the total fall to 16.2% in the last year.
What’s happening today…?
The tide may have begun to turn in capital markets, but it has left two crucial property sectors - London offices and UK retail - high and dry.
Estimates of job losses in the financial sector, vary from 20,000 to 40,000, equivalent to 5-10% of the workforce, at the same time as 6m square
feet of new space is coming on-stream in the next 18 months. Although much of the new space is pre-let, it is not clear how strong tenant demand
will be for the un-let space. The state of the retail market varies according to the type of goods and outlet, but even the dominant shopping centres,
such as Bluewater and Lakeside, are unlikely to see much rental growth this year or next. Bulky goods retailers in secondary out-of-town locations,
however, are struggling - or capitulating
The future – Reita viewpoint
Land Securities and British Land, the UK largest REITs, have both reported their full year's results in the last week. Both reported strong results
relative to IPD, outperforming expectations and demonstrating the long-term benefits of owning prime quality assets. However it is the immediate
outlook that will be important; if the analysts are right, Net Asset Values will fall another 15-25% in the current year. Property derivative prices are
also implying that UK capital values have a further 7-9% to fall, although care should always be taken in interpreting the pricing of derivatives.
Whilst much depends on the broader economy, analysts appear to be factoring in a drawn-out recession in the UK. Unfortunately, even if these
forecasts are wrong, property stocks have historically tended to lag other equities in a recovery, as general investors buy cyclical stocks and ignore
the property sector. More positively, there have been three announcements from Pub companies announcing intentions towards conversion to
REIT status. This is undoubtedly very good news for the sector, particularly for the development of specialist REITs but care should be taken not to
overreact. None of these companies has actually announced that they will convert, with only Enterprise Inns providing an outline timetable leading
to autumn 2008. Conditions in both the property and hospitality markets remain difficult and since conversion depends on both significant
restructuring and for M&B at least, dependent on raising finance, investors should remain cautious. Looking further abroad…
Elsewhere in the world, the US has possibly the brightest outlook. US REIT investors tend to concentrate on cash income and dividends, which are
expected to grow this year despite the weak economy. They focus less on NAVs, mainly because US REITs do not publish them, and this means
that they are not distracted by capital market volatility. Asian markets have rebounded strongly after a weak first quarter. Hong Kong property
shares were up 59% in 2007, down 24% in Q1 and up 18% so far in Q2. Japan has been even stronger this quarter, up 24%. This reflects some
fundamental market factors, but for the most part it is based on a more confident view of the US economy. Europe has outperformed the UK, up
5% while the UK is down 9% in Euro terms. Sterling weakness explains around 5% of this difference.
                                                                            The Reita Expert Panel
 AXA Real Estate Investment Managers UK Ltd (REIM), Brixton plc, Credit Suisse, Deloitte, DLA Piper, EPRA, Great Portland Estate, Grosvenor, Henderson Global Investors, Invista
   Real Estate Management Limited, Land Securities Group PLC, Lehman Bros, Liberty International PLC, Linklaters, London Stock Exchange, Morgan Stanley, MSS Real Estate,
                          Nabarro, NAREIT, Primary Health Properties PLC, Rugby Estates Inv. Trust PLC, Strutt and Parker, SWIP, Tradition Property.

                                                                                The REITA Quarterly
                                                                                                                             Historic PD
                                                                                Property Investment
                                                                              Perspective is reproduced
                                                                                  in Risk & Manage
                                                                                 newsletter by kind                           Both UK Resi, and
                                                                                                                            Commercial From 2005
                                                                                                                            Other data available for
                                                                                                                             France, Germany and
                                                                                                                                 Delivered in Excel
                                                                                                                               One off payment, no

                                                                                         Cont. Next Page
REITA Quarterly Property Investment Perspective

                                                            The REITA Quarterly
                                                            Property Investment
                                                          Perspective is reproduced
                                                              in Risk & Manage
                                                             newsletter by kind

                                                   Tradition Property
                                                  Play it Straight, Keep it Simple
                                                       +44 (0) 207 796 1510
A View From Down Under by
Welcome down under, and of course a bit up over in Asia as well. Timing in property they say is everything, and
so it appears to be the case in journalism as well. I was all set to say that despite a few minor cracks appearing in
India, high petrol prices and a new tax on Alco pops in OZ that we seemed to be weathering the real estate storm
quite well around the Asia Pacific region. Centro seems to have managed to get more funding; the Central bank in
Australia has ended raising interest rates for now. All fine until Standard and Poor’s comes out last night
preaching gloom, threatening to cut some major financial institutions ratings, and telling us that the worse of the
sub prime boogeyman is not over.
This sparks off another round of selling on the stock market and that all important consumer confidence goes
down the sewer again. Well let’s try and cheer up a bit. The resources boom remains a key factor around APAC
and it still appears to just keep on rolling along, and while it does there remains sufficient investors who clearly
wish to invest in the regions property markets. Property prices are not skyrocketing but they are still holding firm.
This is especially the case for anything that exudes a little bit of quality. In the Australian Residential market for
example, the average dwelling price is approximately $460k, which represents an increase of over 8% from April
2007.Some areas are down, however demand for quality properties holds up the overall value.
From a property derivatives point of view, this market creates the issue of basis risk. The flight to quality occurs in
all markets once nervousness sets in, and property markets are not exempt from the phenomenon. So the risk
managers need to be on their toes, and trust that their market knowledge and experience will bring them through.
Of course this can also create profit opportunities, however around APAC the market is still trying to gain traction.
Alas we will need to wait for more liquidity before we get too carried away with more complicated PD strategies.
So even though the news from the US was anything but comforting, the property market in the region still remains
impervious to the European and US cracks. Albeit a little nervous. (just like the Australian Alco pop market!!!) The
growth of the PD market has been undeniably slow in Asia Pacific but good news on 20th when
Www.Bobsguide.Com and others reported a property derivative option trade occurred between Goldman Sachs
and Lehman Brothers Global Real Estate Group in Hong Kong during May. Well done to all those involved in the
trade. Risk&Manage@Tradition.Com

Spanish Resi Anyone?
Brits and Germans share many things, the dream of a place in the sun is one. But Spain’s housing market has to
absorb at least 650,000 new unsold homes that stand empty. To those who bought Spanish property recently, the
dream looks like a bit of a ‘mare...
According to Reuters, Spanish consumer and retail sector confidence are at their lowest since the early 1990s,
when Spain last suffered a recession. Spanish house sales fell 24% during February 08 while new housing
permit requests fell 50 percent in February. Spanish house sales fell again during March some 39%.
Spanish mortgage lending fell 42 percent in March to just under 10 billion euros as average mortgage interest
rates rose to their highest rate since 2000. Spain’s economy may slide into recession later this year and
unemployment will enter double figures. Reuters said “Analysts see them [Spanish house prices] declining around
15 percent over the next few years…” Risk&Manage@Tradition.Com

Across the Pond by
US residential market is still exhibiting lower index values and still lower forwards. The RPX 25 City Composite
forwards for Dec 2008 and Dec 2009 are down 15% and 20%, respectively, from spot RPX levels. The Dec 2009
forwards for Los Angeles, Miami and Phoenix are down approximately 30%. Of the 25 MSAs RPX covers, 23 of
them are down year-on-year. Transaction counts are rising, which is a seasonal expectation.

Of note is one Southern California builder who, in May this year, was making a TV style sales pitch for their new
homes – “buy one, get one free.”
bogof_flyer1.jpg. This marketing technique is indicative of the balance that does not exist in many US housing

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The Risk & Manage Canada Feature

                                   Reproduced in Risk & Manage by kind permission of
                                          The Institutional Real Estate Letter
                                                                               IPD Canada:          Total            Income          Capital
     The Risk & Manage Canada Feature                                          2007                 return           return          growth
                                                                               All property         16.1             6.5             9.0
So What Have the Canadians Ever Done                                           Retail               13.6             6.3             6.9
for us?                                                                        Office               18.9             6.6             11.6
If the only Canadian contributions to mankind were Pamela Anderson,
Mike Myers and the electric light bulb, that would probably be enough,         Industrial           14.3             6.9             7.0
and more than many other countries could hope to contribute, ever.             Residential          17.9             6.3             11.0
Actually there is much more to Canada than many people know. It is the
                                                                               Mixed                19.8             6.9             12.1
second largest country in the world, the fifth largest energy producer, the
world's eighth biggest trader and is the ninth biggest economy on the          Other                9.6              7.0             2.5
Vancouver tied with Zurich for the highest quality of life of any city,
anywhere and according to the United Nations Human Development
Index which probably explains the Ca $566,000 average Vancouver
house price.
Canada, they say, has the highest quality of life in the world. Additionally
Canadians are annoyingly good at any game that involves ice.

They invented zips and baseball, have a commercial property sector
worth around Ca$180 (give or take a shopping centre) and during May
2008 Canada joined the property derivative revolution.

Like the UK, Canada is blessed with a great commercial property index
series from the company who set the Gold Standard in property
benchmarking, IPD. ICREIM / IPD have produced results for the
Canadian market from 2000 to 2007, with Frank Russell producing the
index series from 1985 to 1999.                                                Article: Canadian PD Market Opens For
IPD returns for to December 2007 show an index measuring un-geared             Business
total returns to direct property investments delivered 16.1% down from         National Bank of Canada and Royal Bank of Scotland have executed
the 18.4% seen in 2006.                                                        the market's first Canadian IPD property swap. The trade which was
                                                                               of a commercial size was setup by Tradition Property and was based
Of the major sectors, offices were the top performer with a total return of    on the Canadian IPD All Property index.
18.9% followed by residential at 17.9%. As at December 2007, the
ICREIM / IPD Canadian property universe was 2,266 properties worth Ca          RBS is widely recognised as a pioneer in the development of
$87.6 billion.                                                                 property derivatives, completing a number of firsts in Europe and
                                                                               Asia while remaining at the forefront of the growing UK property
The 12 months to end-March 2008 saw all property total returns fall            derivative market.
slightly to 15.50%.
                                                                               National Bank of Canada is pioneering property derivatives in its
The transaction price and the duration of the first Canadian PD is of          home market. NBC is the leading bank in Quebec and a major player
course private and confidential, the size of the deal is also not for          in other selected markets in Canada and around the world.
publication, however a follow-on market in Canadian PD exists and
prices and volumes are available from Tradition Property at +44 207 796        Before setting up the first Canadian PD, Tradition Property previously
1510 and Property@Tradition.Com.                                               brokered the first Swiss property derivative, the longest dated
                                                                               brokered PD and has a record of introducing new banks to the PD
There are seventy odd asset owning members of the Real Property                markets.
Association of Canada, twenty institutional members of the Canadian
Pension Management Association. The banking industry includes 20               Peter Sceats of Tradition Property said:
domestic banks, 24 foreign bank subsidiaries and 22 full service foreign       "I would first like to sincerely thank both banks for their role in
bank branches and 7 foreign bank lending branches operating in                 making this transaction happen. This was a great deal for us to
Canada. In total, these banking institutions manage in excess of Ca$2.5        broker but from our perspective it not just a one-off trophy
trillion in assets.                                                            transaction. We have follow-on interest in Canadian All Property
Tradition Property cannot be the only organisation who believe an on-          derivatives. Call us on +44 207 796 1510 for prices. Canada is a
paper representation of real estate risk makes sense in such a market          major real estate market which has the benefit of a trusted
and particularly at a time of financial uncertainty and potential              benchmark index. This trade should demonstrate the potential
opportunity.                                                                   of an on-paper representation to pension, insurance and real
Risk&Manage@Tradition.Com                                                      estate companies with Canadian interests."

The Risk & Manage Canada Feature

Reproduced in Risk & Manage newsletter by kind permission
Reproduced in Risk & Manage newsletter by kind permission