Forward Curve Dynamics in the UK Real Estate Market

The purpose of this paper is to investigate the factor structure of the real estate forward curve dynamics. Four years of price data on the UK Investment Property Databank (IPD) Total Return Swap All Property are analyzed. The choice of the UK market is justified by the fact that this market is the most mature all over the world. The forward curves are derived using a bootstrap method; a seasonal Principal Component Analysis (PCA) is used to reveal their volatility structure. Dynamics of the forward curve are important for practitioners pricing and hedging derivatives contracts. The factor structure, in real estate forward curves, is more complex than found in many other studies relative to commodities, securities or bonds. Possible reasons for this phenomenon are discussed.