Developing the real estate derivative market for Singapore: issues and challenges

Abstract

PurposeWhile the development of real estate derivative contracts has important implications for real estate as an asset class, it has not been widely accepted in Asia. This paper aims to examine the issues involved in developing the real estate derivative market for Singapore.Design/methodology/approachThe concept of real estate derivatives is reviewed. The limitations to the extant real estate index are discussed. Different approaches to constructing real estate indices are discussed in particular reference to the features of the Singapore real estate market.FindingsThe Singapore residential market is dominated by public housing, heterogeneity and relatively low turnover. The applicability of repeat sales approach may not be well suited. Geostatistical models appear promising. The commercial real estate market suffers from even lower turnover. The most appropriate commercial real estate index could be similar to that offered by IPD. Several issues were also highlighted. First, the index must pass the stringent scrutiny of academia and experts. Second, the index must be well understood and accepted by the industry. Third, the index must be published in a timely fashion and without biases. Fourth, there must be a trustworthy producer of the index.Research limitations/implicationsFor an index to be accepted, it must satisfy the issue of fungibility. International investors looking for exposure or hedging strategies are likely to be familiar with established methodologies such as the repeat sales and appraisal‐based approaches.Practical implicationsMarket acceptability of RED. If the experience in Europe is anything to go by, this is not an insurmountable issue that cannot be addressed with education and knowledge dissemination.Originality/valueWhile real estate derivatives have immense potential and a tremendous growth in its development in Europe has been witnessed, it is clear that the real estate derivative industry is in its infancy. The paper examines the issues peculiar to Singapore with regard to the establishment of real estate derivative contracts. The paper is of interest to policy makers and industry practitioners.