GAMBLERS who bet on the price movements of commercial property can now offset their losses against tax.
Changes to the tax treatment of commercial property derivatives, which are due to come into force today, will lead to the creation of a £10 billion market within two years.
The fledgeling market in commercial property derivatives has failed to develop because of their tax treatment.
Previously, capital gains tax was payable on profits but losses did not qualify for relief.
Phil Nicklin, tax partner at Deloitte who has been involved in shaping the legislation, said that the ruling would revolutionise the property derivatives market — fuelling its growth from a few hundred million pounds now to between £10 billion and £20 billion in the next two years.
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Derivatives allow companies to reduce their exposure to a particular section of the property market. such as shopping centres or office blocks, by entering into derivative swaps with another investor who does want exposure.
Property investors will also be able to bet on the performance of the Investment Property Databank return indices, which track the performance of more than £100 billion of commercial property assets.
Trading derivatives will be much quicker and easier than selling real properties, which is a lengthy and costly process.
Mr Nicklin said: “Property derivatives will make an illiquid asset liquid.
“The market for them will be huge once people realise how cheap they are, how flexible they are and how easy they are to transact.”
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Mr Nicklin points to the exponential growth of the market in interest-rate swaps, which has developed into a trillion dollar market since beginning in the early 1980s.
The tax changes come almost two years after the Financial Services Authority gave a boost to the derivatives market when it said in November 2002 that it would not object to property derivatives forming part of the assets of life companies.
Prudential, one of the UK’s biggest property investors, Barclays, Royal Bank of Scotland, Germany’s Eurohypo and some of the large property companies, such as British Land, are expected to be early players in the commercial property derivatives market.