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The fledgling market, which offers over-the-counter trading mainly in swaps based on property indexes, could grow by about 7 percent year-on-year to 7.5 billion pounds ($11 billion) by end-2008, said Rawle Parris, head of property derivatives at ING Wholesale Banking.

"It's modest growth, but still quite good considering what's happening in other real estate markets," said Parris at the Global Property Outlook conference organised by Thomson Reuters.

Plans to set up exchanges as clearing houses for property derivatives could help promote the market as investors hunt for cheaper and more efficient ways to adjust their real estate exposure, he added.

The use of derivatives is holding up even as the volume of direct commercial real estate investment falls, with UK direct investments down 45 percent year-on-year to 21 billion pounds by end-2008, estimates broker Jones Lang LaSalle (JLL.N: Quote, Profile, Research).

The property derivatives market is yet to capture significant interest outside Britain however, with France, Germany, the United States, Spain and Japan seeing just a small number of trades, industry executives said.

"It's the wrong time to promote derivatives in the U.S." said Steve Felix, Aviva Investors' head of client relations for real estate.

"When I talk to pension, endowment funds in the U.S., these guys don't get compensated for risk and anything new to them is risk," he said.

But Ian Cullen, co-founding director of Investment Property Databank which compiles most of the indexes used for property derivatives trading, argued that investors will put themselves at a disadvantage without a derivatives market.

"Real estate investors managing their positions without a deep and liquid derivatives market, when every other asset class investors are managing theirs with derivatives markets, is like fighting with one arm tied behind their backs," he said.

(See www.reutersrealestate.com for the global service for real estate professionals from Reuters) (Reporting by Daryl Loo; editing by Richard Chang.

Source: http://uk.reuters.com/