Morgan Stanley has completed the UK's first residential property derivative trade with an embedded exotic option, the company told Reuters on Thursday.

Morgan Stanley and an undisclosed counterparty have agreed to an exotic swap based on the Halifax House Price Index, the UK's definitive index for trading movements in UK house prices, Morgan Stanley told Reuters.

Under terms of the groundbreaking deal, the counterparty gains if the Index rises, subject to a maximum payout but his capital is protected unless the Index falls beyond an initially specified point.

This type of exotic contract includes a knock-in put option and Morgan Stanley said this is the first property derivative trade to include the component.

The pricing of the deal and length of contract remains confidential but Guy Ratcliffe, who joined Morgan Stanley to spearhead its growing real estate derivatives operations in July, told Reuters the deal was worth more than 1 million pounds ($2.01 million).

We have always enjoyed a leading presence in the direct property market but this deal illustrates our ambition to expand into the exotic derivatives market, said Ratcliffe.

It shows we are willing to do more than just the typical vanilla contract, he said.

Morgan Stanley hopes the deal, which comes amid turmoil in global debt markets and a weakening in the fundamentals supporting direct investment in the physical asset class, will breathe life into the nascent derivatives market.

Demand for these products is growing. This deal is tailored to cater for customers with a specific risk profile and these trades could become a larger feature of the retail investment market in the future, Ratcliffe said.

Britain's property derivative market offers over-the counter trading in mostly total return swaps based on movement in indexes over a fixed period, in exchange for the London Interbank Offered Rate (LIBOR) plus a spread.

It gives investors opportunity to gain or hedge exposure to real estate synthetically, without investing money upfront. Some 970 million pounds of derivatives trades were struck in the second quarter of 2007.