What is a House Swap?

Real estate swap transactions. Swap transactions refer to the form of transaction in which both parties agree to exchange certain assets with each other in a future period. More precisely, swap transactions are transactions between parties that have agreed to exchange cash flows that they consider to have equivalent economic value within a certain period in the future.

Real estate swap

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Real estate swap transactions. Swap transactions refer to the form of transaction in which both parties agree to exchange certain assets with each other in a future period. More precisely, swap transactions are transactions between parties that have agreed to exchange cash flows that they consider to have equivalent economic value within a certain period in the future.

ABN AMRO and Sun Hung Kai Finance announced on February 27, 2007 that the two parties had entered into a "real estate swap" transaction based on the Hong Kong residential market price. This is Asia's first real estate swap transaction, a move that has brought the development of the global real estate derivatives market into a critical stage.

The emergence of real estate swap transactions has made real estate more than just real estate. It has become more like futures or securities.

Real estate derivatives transactions have first started in the UK over the past two years. The latest data released by the British research agency Investment Property Databank shows that the UK has reached more than 300 such transactions with a value of nearly 5 billion pounds. Increased market liquidity has encouraged more newcomers to conduct such transactions.

The way this derivative works is that ABN AMRO receives the annual rate of change of HKU-HRPI (an index measuring Hong Kong residential prices) from Sun Hung Kai Financial, which in turn is based on the Hong Kong Interbank Offered Rate (Hong Kong's local risk-free loan interest rate) Pay Sun Hung Kai a fixed level of interest rates.