U.K. House Price Surge Revives Structured Notes Tied to Property

The biggest surge in U.K. residential property prices since 2007 is reopening the market for structured notes linked to the cost of the nation’s homes.

Castle Trust, a London-based investment company, has started selling notes that track the performance of the Halifax House Price Index, while Banco Santander SA is planning to revive issuance that stalled during the credit crisis. The average price of a British house climbed 8.7 percent to 178,000 pounds ($299,000) in the first quarter from the same period a year earlier, mortgage lender Halifax said in an April 4 report.

Record-low interest rates and government incentives to help home buyers have fueled demand for U.K. housing, pushing up prices already bolstered by a lack of supply.

“The recent increase in prices has put residential property structured products and derivatives back in the spotlight,” said Helen Dixon, head of property derivatives at Santander Global Banking & Markets in London, the U.K. unit of Spain’s largest bank. “Synthetic property products eliminate many of the barriers to real property investment such as management, legal and tax costs.”

Castle Trust is selling five-year notes that offer a full guarantee on the principal and returns equal to increases in the Halifax index, as well as five-year unprotected securities that pay 1.5 times the amount of any gains in the benchmark. Investors can also buy 10-year notes that yield 1.7 times the increase in the index.

“There is a growing interest from institutional investors and wealth managers,” said Wyles.

London Prices

Castle Trust, set up by New York-based private-equity firm JC Flowers & Co. in 2012, is led by former Financial Services Authority chairman Callum McCarthy. Wyles said the company is now considering creating structured notes that track property prices in London, where home values jumped by 15.5 percent in the first quarter, data from Halifax show.

Santander is also looking to expand sales of structured products and derivatives tied to residential property prices, according to Dixon.

“We have spent a lot of time talking to potential investors about these products,” said Dixon. “It’s an asset class which is generating a significant amount of interest.”

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