The financial services group questioned the idea of hybrid property companies becoming a new trend in the sector.

These companies combine investments in direct property with investments in other property companies listed on the JSE Securities Exchange.

Kirshni Totaram, the head of Coronation's property equity fund, said the growing popularity of hybrid property companies was recognised recently by property investment holding company Growthpoint, which invested in a portfolio of listed property funds in an attempt to follow in the footsteps of Redefine. Redefine listed in 2000 as the first hybrid property company in the sector.

Despite this, these companies remained controversial as many in the industry questioned the merits of their structure.

Among
the main concerns was the fact that property companies could use the hybrid structure to grow assets under management and, in so doing, bring in high fees for the property management company.

'As property loan stock companies earn fees on the size of their assets, management is motivated to invest in a listed portfolio as an easy means to grow assets. However, we believe the formation of these hybrid companies is not necessarily in the shareholders' best interests,' Totaram said.

Another concern was the double taxation effect as a result of hybrid companies having to pay capital gains tax (CGT) on their trading portfolio while investors also paid CGT in their own right.

Other issues included reduced exposure to the direct property investment and increased susceptibility to index performance.

Investing in hybrid companies reduced the exposure to the direct property investment.

'When buying a share in a hybrid company, the actual exposure to that company's direct property investment may, for example, be only 50 percent instead of 100 percent. This is because the listed property portfolio will make up the other 50 percent,' he said.

The value of the underlying portfolio of a hybrid company was more vulnerable to the listed index performance and this could lead to increased volatility in the company's performance.

This made it much more difficult for investors to control their risk exposure to any one company in the index.

There was also the issue of the management skills in these hybrid structures.

The management team of a property firm had the skills to manage investments in direct property but this was very different to investing in a portfolio of listed property stocks.

'There are companies which specialise in managing listed property portfolios. We believe that this activity should be left to them,' Totaram said.

Coronation closed R1.28 up at R56.28 on the JSE yesterday.