Posted By: Brad Martin

By Michael MackenzieThu Nov 9, 4:40 PM ET

GFI Group (NASDAQ:GFIG - news), the inter-dealer brokerage, is to start trading US commercial property derivatives in a bid to exploit interest in the huge US market.
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The company has opened trading on the products in London and more recently Hong Kong and expects strong interest from dealers, hedge funds and other investors in trading derivatives based on the US commercial property market, estimated to be worth about $5,300bn, or 35 per cent of the global market.

"Real estate is the largest asset class and the opportunities in derivatives look very promising," said Phil Barker, vice-president of real estate derivatives at GFI. He hopes trading will start early next year. GFI is developing the new business in conjunction with property manager CB Richard Ellis.

GFI is moving into a market that is in its very early stages, particularly in the US. The company pioneered broking on credit derivatives a decade ago and in the past few years this market has been the fastest expanding area of risk management.

"There are half a dozen banks looking at the US market and this is being driven by the interest of institutional investors such as insurers and pension funds," said Mr Barker.

He added that growing volumes in the UK commercial property derivatives market over the past year, where some 14 banks now actively trade, was fuelling interest in developing the US market. GFI and CBRE launched a joint venture in the UK market in 2005.

The collaboration between the two companies in the US will be known as CBRE Melody/GFI. This year, GFI teamed up with real estate consultant Colliers International to provide derivatives coverage in Hong Kong.

As banks explore the idea of trading derivative contracts, the Chicago Mercantile Exchange plans listing US commercial real estate futures and options contracts in the first quarter of 2007. "Pension funds, insurers and other institutional investors are looking at diversifying their portfolios by taking exposure to commercial real estate," said Sayee Srinivasan, associate director for product development at the CME.

Mr Barker of GFI said the advent of futures contracts would raise the profile of property derivatives in the broader derivatives market.

Derivative contracts for real estate mainly involve exchanging the capital and income returns on property for floating interest payments. Capital appreciation swaps, which protect principal or provide profit as real estate prices fall or rise, are also utilised. Options and futures are also available.

Listed futures and options contracts that reference residential property prices in 10 major US cities have been trading on the CME since May 2006.

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