In practice, because individual real estate assets fall victim to market inefficiencies and are hard to accurately price, property derivative contracts are typically written based on a real estate property index.
Under the total return swap or forward contract the parties will usually take contrary positions on the price movements of a property index.
IPD indices have also been used in a number of other countries such as Australia, France, Germany, Italy, Japan and Switzerland as the basis for commercial property derivatives.
In the United States property derivative trading is primarily through forwards and future contracts.
Futures trading is done by the CME Group via Globex utilizing the S&P/Case-Shiller Home Price Indices.
The cash flows of these bonds are structured in a way that is meant to be similar to a transaction in the physical property.
[1] Since February 2009 Eurex, the international derivatives exchange, has listed Property Index Futures.
Though a nascent market, in 2010 a total of 3,304 contracts traded according to the Eurex website - representing £165m in notional property value.
The definitions set out various market standard definitions which can be used in property derivatives transactions together with a standard form total return swap template and forward transaction template[2] It is hoped that standardised documentation will kick start the market.