A buyers' market has sent three-year swaps on the commercial Investment Property Databank Index careering to about 300 basis points over LIBOR, up 50 bps in the last few months and 200 bps higher on a year ago. Dealers are pointing the finger at the brokers over-hyping the U.K. index and pumping up prices, putting both buy- and sell-siders off entering the swaps. Brokers, in response, say 300 bps over is accurate and reflects the lack of payers.
Paul Ogden, broker at GFI, said trades have been done at these levels, but he declined to specify prices or name counterparties. Property swap brokers at ICAP declined comment and at Tullet Prebon brokers were not immediately available. One trader, however, noted if trades are being done, they are unlikely to be in any significant size. The market does not have the capacity for the significant amounts asset managers want to hedge--such as EUR100-200 million, instead of EUR5 million--he noted.
Ogden expects more asset managers to jump in over the next few months. GFI has spoken to IPD sellers on the sidelines, he said, and many are getting final sign-offs in place. But dealers worry the existence of a handful of brokers, all calling potential end users and promoting attractive prices, could be putting off traditionally cautious asset managers. "This market is over-brokered," said one dealer. While brokers are performing a useful service by showing prices and aiding liquidity, "It's getting a little crowded," he noted.
Several firms are also noting a drop in interest in receiving the IPD index at these levels. End-user Kleinwort Benson Private Bank has been pitched IPD swaps wrapped in note form but has held back because of pricing concerns. "I think there's potentially big demand for a product that has exposure to commercial property," said Andrew Halford, director in investment products at KBPB in London, noting it needs to see lower prices and more liquidity before reconsidering.
"What we need is for the dealers to get together and settle on sensible levels for this index," said another end-user, noting this is unlikely. Dealers and brokers, meanwhile, seem to be waiting for either an influx of payers to prove the brokers right or a continued standoff to force brokers to reassess their offers.
