“Real estate derivatives as financial instrument – possibility prospects of usage in Poland”

The article refers to the theoretical framework of the possibility of using real estate derivatives in the Polish financial market. Although the Polish property market is well developed, and Poland is the leader in the Central and Eastern Europe region, there is a gap in the use of financial instruments concerning the property market. Given the lack of a property derivatives market in Poland, conditions and opportunities for this market development are presented. The experience of the United Kingdom and the United States in this field shows that one of the most important aspects is stable and a well-functioning financial market. Therefore, the macroeconomic data and the data of the Polish financial market are examined. The analysis carried out indicates sufficient conditions and opportunities for the devel- opment of real estate derivatives in Poland. The macroeconomic data and data from the capital market have shown the economic environment’s stability and balance. One of the limitations is the existence of a clear and respectable index used as an underlying asset in derivatives on the Polish market. Only WIG real estate index is listed on the Polish Exchange. Although there are sufficient conditions for introducing the real estate derivatives in Poland, the success of all financial innovations depends on the willingness of potential users to use them.


INTRODUCTION
The project is financed within the framework of the program of the Minister of Science and Higher Education under the name "Regional Excellence Initiative" in the years 2019-2022, project number 001/RID/2018/19, the amount of financing PLN 10,684,000.00.
Real estate derivatives are new instruments only available in developed countries with a well-functioning capital market, such as the United Kingdom, the United States, Germany, France, and Japan. The first attempt to create a market for property derivatives was made in May 1991 by introducing futures in the London Futures and Options Exchange. Syz (2008) mentioned that four contracts were offered. The underlying assets were indices for commercial property capital value, residential property, commercial rent, and mortgage rates. However, the market for property derivatives did not catch investors' interest in that time, and trading had to be suspended a few months after the launch. There is also a reference to the earlier use of financial instruments in the real estate market. Hinkelmann and Swidler (2008) have found that the early cases of use of financial assets on real estate are related to stocks and bonds introduced on the New York Real Estate Securities Exchange (NYRESE) in 1929. Due to the collapse of real estate and capital market prices, NYRESE was

THEORETICAL BASIS
Derivatives are poorly perceived after the last financial crisis. They were generally associated with a highly leveraged and speculative use of these financial instruments. The use of derivatives for the real estate sector is rather new and has only begun in the last three decades. Most authors have focused on commercial real estate derivatives (Fisher, Geltner, & Webb, 1994;Fisher, 2005;Geltner & Fisher, 2007;Clayton, 2007;Berk, 2016;Tunaru & Fabozzi, 2017). This market seems to be more advanced; however, this does not mean that residential real estate derivatives are not the subject of research. Shiller (2008) has presented important research in this area. He was the first to consider perpetual futures on residential property indices in 1993. The research was conducted in collaboration with Case (Case, Shiller, & Weiss, 1993;Case & Shiller, 1996) and Weiss (Case, Shiller, & Weiss, 1993;Shiller & Weiss, 1999).
The real estate derivatives market is mainly led by the United Kingdom and the United States, but the history of property derivatives in the US is far shorter. At the beginning of its existence, the property derivatives market was characterized by rare activity and occasional transactions (Venter, 2007 The possibility of using real estate derivatives is also closely linked to indices related to the property market. The derivatives market's growth is closely related to the ability to design instruments based on market indices (Millo, 2007). The existence of a clear and respectable index that accurately reflects the changes in the real estate market is a very important component. Deng and Quigley (2008) have rightly argued that the development of reliable and replicable indices of housing prices is the key to trading in property derivatives. Creating such an index for properties is difficult due to their heterogeneity (each property has a unique location, structural characteristics, etc.). Therefore, property indices can be classified according to various criteria. The most significant dimensions are the type of property and geographical expansion. Geltner, Miller, Clayton, and Eichholtz (2001) distinguish between owner-occupied res-idential housing, residential apartment renters, retail, office, industrial, and hotel and convention. It should be stressed that each index may require different conceptual bases.

RESULTS
The development of all new financial instruments is closely related to the national financial system. Its stability and the level of development of the financial market are prerequisites for the smooth introduction of new financial products. The environment for developing real estate derivatives in Poland is presented in terms of the most important macroeconomic indicators and stock exchange development. The real estate market situation in Poland is also presented with special attention to the property index as a potential underlying asset in real estate derivatives. The financial market has been developing in Poland since the early 1990s. After historical changes in 1989, this was possible when the new government system was introduced (Polanski, 2002). It was difficult to develop the financial market before that time due to the lack of democratic institutions at all levels. Nowadays, Poland's financial system functions stably and is supported by the domestic economic environment that exhibits no major imbalances (NBP, 2018). Table 2 presents the macroeconomic performance of the national economy.
The Polish economy continues to show stable development. Real GDP growth reached 4.15 percent in 2019. It is mainly driven by last year's in-vestments and domestic consumption. A different situation is observed regarding investments in residential property. The annual growth rate has declined in recent years, and in 2018, it was more than two times lower than in the European Union.
Apart from financial institutions, including banks, which play a crucial role in financing the economy and settling payments, stock exchange also supports economic growth and financial instruments development. In Poland, the stock exchange has been operating for 28 years. Since the establishment of the Warsaw Stock Exchange (WSE) in April 1991, the domestic financial market has become increasingly liquid and offered a growing range of oppor-    Figure 1 shows that the position of derivatives on the Polish Stock Exchange is gradually strengthening. As has already been mentioned, real estate derivatives do not exist in the Polish capital market, so there is no data.
The capitalization of the WSE had been growing systematically until 2007 when it reached its highest value ( Figure 3). It was found that, in general, the capitalization of the WSE is similar to that of the Euro area, although its level, measured as % of GDP, has Source: Own study based on World Bank data.  remained around twice lower over the past ten years. Figure 4 shows a turnover ratio, which is one of the measures of stock liquidity. As far as the liquidity ratios for derivatives are concerned, large differences can be observed when futures and options are taken into account ( Figure 5).
The lowest liquidity is recorded for options. The liquidity ratio oscillates around 7% during the period analyzed, while the average value for futures was 150%.
In addition to the state of the financial system and the stock exchange development, the real es-tate market situation is also of great importance. Poland's real estate market as a basis for the development of property derivatives should be considered in connection with the value of the property market, existing real estate indices, and the legal and tax aspects of investments. Due to its specific nature, the latter aspect will only be presented in general terms. Table 3 presents the value of the market concerning residential and commercial properties.
The value of the real estate market in Poland reaches slightly more than PLN 4 trillion. As shown in Table 3, the commercial real estate market has Source: Own study based on World Bank data. a much smaller market share, but it offers more attractive yields than those found in Western European markets.    indices cover residential property. Figure 6 presents the index for the selected nominal residential property prices (2010 = 100) in Poland and the Euro area.
As for commercial properties in Poland, the indices include office and retail premises. They are collected at annual intervals. However, no aggregated indicator covering all commercial properties is available in Poland. The office and retail price index for the whole country and Warsaw are shown in Figure 7.

DISCUSSION
Based on the previous section's data, one can conclude that there is a sufficient environment for the development of real estate derivatives in Poland.
Poland's economic indicators show that it can be classified as a country with a medium level of financial development. The Polish economy's strength can be attributed to the large domestic market and the growth in investment activity. Nevertheless, investment in residential real estate is limited.
The macroeconomic situation has a common interest in the financial system. There are clear indications of the relationship between financial market development and economic growth. The studies are usually conducted in two configurations. The first category includes studies on many economies (e.g., Demirgüç- For many years, it has also been known that financial assets traded on the stock markets are less risky (Levine, 1991;Bencivenga, Smith, & Starr, 1996). Therefore, the development of the derivatives market is important for the article. In the literature ( Unfortunately, the market lacks liquidity. The turnover ratio results indicate that the stock liquidity on the WSE is still lower than in the Euro area ( Figure 4). The difference is even higher than Source: Own study based on NBP database. countries like the USA, the United Kingdom, and Japan, where turnover ratios reach over 100%. In the case of Poland, it has fluctuated around 35% since 2012. The situation is different for the futures. The liquidity ratio was below 100% only in the first three trading years ( Figure 5). The results obtained confirm that WIG20 futures are the most popular derivative instrument in Poland and the most traded stock index futures of Central and Eastern Europe. The popularity of the WIG20 futures did not even decrease during the financial crisis. This could be because investors used them as tools to cover the market risk.
The results for the state of the Polish real estate market show that it is the leader in the CEE region in terms of size, range, and investor confidence. It remains strong due to good economic performance and a well-developed financial market. In Poland and the world, the real estate market is the most significant source of wealth. In Poland, the value of residential and commercial property accounts for almost twice the Polish GDP. It covers approximately 55% of the capital assets in the economy. Since the transformation period in Poland, there has been a continuous increase in residential assets. This contributes to the higher economic importance of these assets. However, the Polish market still lags behind the Western EU in terms of ownership structure (with a predominant share of housing stocks occupied by their owners), an undeveloped institutional rental market, age of housing stocks, and the degree of market saturation (EY, 2019). 2 Status as of November 2019. The number of companies is variable.
The latter of the presented results refer to property indices. As one can see in Figure 6, the Polish market's tendency is similar to the Euro area. It is worth mentioning that there are also many indices with geographical focus. There are two categories in terms of geographical location: urban and rural indices or local and national indices (Syz, 2008). A hedonic house price index is one of these in Poland. It is calculated for 16 largest cities, where a significant proportion of market transactions are created.
In addition to direct residential and commercial indices, there are indices covering assets related to the property market. The assets include property companies, real estate funds, Real Estate Investment Trust (REIT). The WIG real estate index is the only one listed on the Polish Stock Exchange. It currently comprises 29 companies 2 belonging to the real estate sector. The main advantage of using them as underlying assets for derivatives is their public listings and market valuation. Nonetheless, they do not strictly relate to property prices and are not substitutes for property prices indices. A proposed bill introducing the Real Estate Investment Trust (REIT) to the Polish legal system may significantly impact the development of the real estate derivatives market. As investment in commercial assets usually yields a higher return rate than investing in residential assets, the project should take this into account to attract potential investors.

CONCLUSION
The real estate derivatives are new instruments that are only available in some developed countries with a smoothly functioning financial market and well-reported property market. The analysis of the Polish economy's situation and the financial market concludes that there are sufficient conditions and opportunities for the development of real estate derivatives in Poland. The economic environment remains stable, and the financial system does not show major imbalances. This is also confirmed by the fact that FTSE Russell promoted Poland from an advanced emerging market to a developed market (FTSE Russell, 2017). The developed market status was put into effect after a semi-annual review in September 2018 (FTSE Russell, 2018). Poland has also been classified as a developed market by Stoxx. The reclassification of the Polish capital market acknowledges the progress of the Polish economy and the financial market. It can be a step forward in the development of the real estate derivatives market. Furthermore, the Polish real estate market is recognized as the top-rated market in Central and Eastern Europe for the transparency 3 . Poland was in the 20th position among all countries in 2018. Transparency is especially important in introducing new instruments. Transparent and liquidity markets are more likely to attract cross-border investors.
The major problem for introducing property derivatives on the Polish market seems to be the existing proper underlying assets. There are not many indices of the property market, especially for the commercial property market, which also requires education and acceptance actions. The idea of derivatives as instruments to gain exposure to property is still relatively unknown in Poland. Unfortunately, only one index referring to the property market is quoted on the stock exchange. Underlying instruments should have a large group of potential users. Creating a real estate derivatives market also requires actions related to the introduction of new regulations.
Establishing a real estate derivatives market also requires actions related to education and acceptance. The idea of derivatives as instruments to gain exposure to property is still relatively unknown in Poland. Both traditional property investors and all potential market participants should be educated about property risk awareness, understanding prices and volatility for new instruments, and their structure.