AN EXPLORATORY STUDY OF PROPERTY FUTURES

Abstract

Financial theories have always been adapted for use in the real estate industry. However, the real estate industry is slow in utilizing them due mainly to fundamental differences between the real estate and other asset classes. The lead-lag relationship between financial assets and the real estate appears to be one of the key issues that are extensively researched into in real estate research literature. In the last decade, globalization, innovation and flexibility in the financial markets have brought about an immense growth in derivatives. Henceforth, it is just a matter of time before these hedging instruments will make the inroad and be adopted by the real estate industry. The idea of using property index options and futures for developers to hedge their property portfolio is not new and has evolved as early as in the last decade. However, to date, there is still no active trading of property futures and options over the exchanges in the world. This dissertation explores the feasibility in the development of property derivatives in Singapore, and attempts to illustrate how these instruments can be applied for the risk management purposes. The application of derivatives must be clearly understood before its potential can be fully exploited by relevant market players. It is, therefore, hoped that through this study, developers will obtain a better understanding of the operation and mechanism in a proposed property derivatives markets. For a derivative market to be successful and self-sustaining, not only must there be a demand for it, but it has also had to be one with a large trading volume to make it economically viable.