This document discusses property derivatives and their potential applications and growth opportunities. It provides an overview of the size and transaction volume of real estate markets globally. It then discusses the benefits of real estate investment and different types of property derivative instruments. It reviews the history and current state of property derivatives markets in various regions. It also discusses the importance of real estate indices to the functioning of property derivatives and describes several major commercial and residential property indices. The document outlines new opportunities for property derivatives in Asia and reviews the overall positive outlook, while also noting concerns relating to market conditions and barriers to further growth. It concludes by discussing implications for exchanges in developing exchange-traded property derivative products.

1. Property Derivatives
for the Social Good
Andrew Koh

2. Outline
1. Introduction and Project Background
2. Real Estate Market – Size and Transaction Volume
3. Benefits of Real Estate Investment
4. Property Derivative Instruments
5. Applications of Property Derivatives
6. Market Activity by Region
7. Property Indices – Methodology and Description
8. New Opportunities in Asia
9. Outlook and Concerns
10. Implications for Exchanges
11. Q&A
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3. Real Estate Market Overview
Size of Investable Universe
3
Source: ING Real Estate Research & Strategy, S&P / Citigroup Global Property Index
Total = $23.6 trillion Total = $15.4 trillion
Total = $1,465 billion

4. Real Estate Market Overview
Transaction Volume
4
Transaction Volume Averge Deal Size
12 months ending Sept. 2008 USD Billions % of Total No. of Properties (USD Millions)
Asia 206.4 27% 2,661 77.56
Australia 19 3% 355 53.52
Europe 261.1 35% 10,076 25.91
Middle East 5.4 1% 65 83.08
Africa 1.9 0% 52 36.54
North America 256 34% 9,442 27.11
South America 7 1% 296 23.65
Total $756.8 100% 22,947 $32.98
Source: Real Capital Analytics, Sep-Oct 2008

5. Benefits of Real Estate Investment
5
Long-term Positive
Return Achievement
Inflation Hedge
Diversification
of Equity Risk

6. Property Derivatives Instruments
• Majority of transactions, OTC market
Swaps
• Main derivatives for exchange trading
Futures/Forwards
• Becoming more common, primarily puts for
downside protection
Options
• Notes or bonds with performance linked to a
property index
Funded Notes
• A “quasi-derivative” that is gaining momentum,
performance tied to a property index
Tracker Stock
6

7. History of Property Derivatives Markets
7
1990 2002 2005 2007
2006
……
Further expansion
UK : Early years
Asia:
US:
Formative stage

8. Applications of Property Derivatives
Risk Management
• hedge / reduce
exposure to real
estate market but
retain exposure to
asset
Investment
• increase exposure to
real estate asset class
without physical
ownership; this
generally means lower
cost and faster speed
Portfolio Balancing
• quickly adjust
allocation / weighting
of real estate
exposure to
overweight or
underweight on a
certain geography,
sector exposure
Liquidity
Management
• prevent cash drag in
funds on lumpy / time
consuming transaction
8

9. Market Activity by Region
9
United Kingdom
Residential
- Structured
Products based on
HHPI
Commercial
- Swaps
- PIC’s based on
IPD index
United States
Residential
- CME-listed futures
and options
- OTC derivatives
based on Radar
Logic index
Commercial
- CME-listed futures
and options based
on S&P/GRA index
- Swaps based on
NCREIF index
Continental
Europe
Commercial
- OTC swaps on
IPD indices
- EUREX-listed
futures on IPD
indices (planned)
Asia Pacific
Residential
- Swap trade on
HKU-REIS index
(Feb 2007)
- Long-dated option
trade on HKU-REIS
index (Mar 2008)
Commercial
- Swap trade based
on IPD Japan index

10. Property Indices
10
Market Characteristic
• Real estate is a unique and illiquid asset
traded in a fragmented market
Implication
• Property Derivatives rely on the existence of
a tradable index of market performance

11. Attributes of a Quality Tradable Index
11
•Well regarded underlying data source with established track
record, collection methodology should be transparent
Accuracy
•Established and reputable index publisher with strong
corporate governance
Continuity
•Index methodology should be transparent and widely
accepted, with model open to users where desired
Objectivity
•Must be released at consistent and known frequencies
Consistency
•Index must be perceived as representative of the underlying
market in terms of sampling size, coverage ratio etc
Representation
•Open for licensing (no sole access by single trader),
accessible on established information platforms
Accessibility

12. Index Categories & Methodologies
12
Underlying
Asset Type
-Commercial
- Residential
- Special use e.g. hotel
Performance
Metrics
-Total return (income gain + capital gain)
- Capital return only
- Revenue performance e.g. ADR
Methodology
- Appraisal based e.g. NCREIF,
IPD family of indices
- Transaction based
- Repeat sales e.g. Case-Schiller
Home Price Index, HKU-REIS
- Median
- Hedonic model e.g. S&P/GRA index
- Special hedonic model

13. Index Descriptions
13
Commercial
US:
Four publishers -
NCREIF, S&P/GRA,
MIT/RCA (now
published by
Moody’s/REAL), Rexx
Non-US:
IPD as the dominant
publisher in most
European and Asian
markets
Residential
UK:
Halifax House Price
Index
US:
S&P/Case-Schiller
Home Price Index,
Radar Logic
residential index
HK:
Hong Kong
University Real
Estate Index Series
(aggregate index and
3 sub-indices)
Australia:
Residential index
published by RP
Data and Rismark
International
Others
US:
HQuant hospitality
index

14. New Opportunities in Asia
14
Structured notes in Hong
Kong linked to HKU-REIS
index; potential for HNWI
/ retail distribution
Residential derivatives
trading to begin on
Australia Stock
New residential index in
Singapore (targeted for
Q4 2008 / Q12009)

15. Outlook and Concerns
•Proven track record in UK in extreme market
conditions
•Volatility and downturn provide need / reason for
Property Derivatives trading
•Imperfect indices / basis risk does not necessarily
present barrier to market development
Positive Overall
Outlook
•Recent difficulties in financial sector greatly
reduces market-making, activity depends on
matching of end-user orders
•Other barriers to growth: valuation and pricing,
user education, investment mandate changes
Concerns
15

16. Implications for Exchanges
16
Exchange-traded products offer potential solution to
mitigate counterparty and liquidity risks
Fundamental business model still sound for new exchange
product development
Learn from past mistakes of other exchanges
Use exchange products to target new customers and build
volume rather than cannibalize on existing OTC market
Use of exchange’s visibility to promote product awareness
and investor education

17. Thank you
17