Derivatives open opportunities for landlords

According to the latest reports from the FT there are opportunities for buy-to-let investors to increase their exposure to the housing market without having to pay high taxes and fees or go through the process of investing in a property. It is even possible to make money in a falling housing market.

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According to the article a number of private banks are offering clients the chance to trade property derivatives – investments that allow them to speculate on rising or falling house prices without having to purchase a house. In another development, CityOdds, a financial betting service, has started providing bets on UK house prices for retail customers from as little as £5.

Richard White, head of derivatives at Knight Frank, said demand for residential property derivatives is growing fast.

“Demand has increased exponentially as the market has grown in size, from around £300m in 2005 to £2bn in 2008,”.

While the residential property derivatives market is less developed than the commercial equivalent, it is set to play an increasingly important role in portfolios.

White said that derivatives offer property exposure without the burden of stamp duty and management and maintenance fees, and for smaller sums. These investments are also quite liquid – investors can buy and sell them easily – and they can offer protection against falling house prices.

The derivatives market is based on the Halifax House Price Index, which showed a 1.1 per cent increase in average house prices in July, the second rise in three months.

White said that, at the beginning of 2009, the futures market was anticipating a further 32.5 per cent fall in prices. However, the 2010 price is now trading at an average house price of £161,606, a 2 per cent increase from the December 2008 level.

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