Traders say there is increased optimism that the rock-bottom derivatives prices represent a buying opportunity in the UK, although the US and French markets are still under pressure owing to prevailing negative sentiment.

Contracts now reflect a total return from the IPD all-property index of about minus 11.6 per cent, which many feel is too negative.

Tuesday saw the most optimistic signal yet that losses in the direct property market are improving.

CB Richard Ellis, the property agent, reported that total returns were minus 0.2 per cent in April, a significant improvement on previous months.

It took total returns for the year to date to minus 3.4 per cent.

Traders say that pricing on 2008 contracts has improved by some 50 basis points in the past few days.

“People are now buying again in the hope that the bottom has been reached,” said Rob Atkin, head of property derivatives at Tullett Prebon.

“Certainly, with pricing at current levels, we are seeing more buyers than sellers.”

The derivatives market is also pricing in an improved picture for next year, when total returns are forecast to be 2.5 per cent, although this still reflects the expectation of a loss in capital values during the year once rental income is stripped out.

Total returns for 2010 are priced at about 5 per cent, which suggests a flat market in terms of capital growth.

“There is a swing back toward buying at these levels, particularly from the institutions and hedge funds,” said Alex Winward, property derivatives trader at Merrill Lynch.

“After the declines in property value, there is some light at the end of the tunnel.”

Trading in European commercial property derivatives is still very low, with most activity in French offices and Germany.

A two-year contract in French offices is currently reflecting a drop in total returns of minus 5 per cent per annum, and minus 3.25 per cent per annum for the three-year contract.

Traders say this is because the French property market is lagging behind the UK in its cyclical downturn.

German property is more positive, however, showing positive total returns of 2.25 per cent per annum for a two-year contract and 3 per cent per annum for a three-year contract.

The US market, likewise, is still in its infancy, with trading only really taking off last summer.

Pricing on a 2008 property derivatives currently reflects a total return of minus 5 per cent.