As the graph shows, the mid spread over Libor that an investor has been asked to pay for three years of total return of the IPD UK all property index has seen considerable movement since the start of the property derivative market.
The spread has been driven by expectations of the future return of investment property, as well as supply and demand from the participants in the property derivative market. For much of the past two years this supply and demand has been relatively inelastic, with most new entrants to the market facing time-consuming hurdles before their first trades.
This has resulted in a small number of buyers pushing spreads to their peak in March 2006. Then an increasing number of sellers, together with market sentiment taking a softening view of future property performance, have lowered spreads to their current level.