Are property derivatives a leading indicator of the real estate market ?

This paper is the first attempt to analyze the statistical characteristics of changes in property forward prices. Four years and nine months of data on the UK Investment Property Databank (IPD) all property total return swaps during the period 2006 to 2011 are examined. We derive the forward curves using a bootstrap method and study their statistical characteristics. The relationship between forward contracts, the underlying asset, and other assets (risk-free rate, listed real estate) is also explored. The UK IPD All Properties Total Returns index appears significantly less volatile and less efficient in term of correlation than its own derivative contracts. Moreover, changes in forward prices are leading indicators of the IPD index. Regarding the forward price discovery function, investors should collect information not only from the spot market but also--and maybe primarily--from the derivative market. Doing so could well be the better compromise among the various ways of understanding real estate market prices and dynamics