The problem is that the sector is not growing, but property is becoming popular as an asset class after decades of disfavour. Demand is pushing prices up, despite the high interest rates that usually suppress them (Property October 25).

Two weeks ago, Kirshni Totaram, the head of Coronation property equity fund, criticised listed funds that buy units in other funds rather than stick to the direct property investment for which they were intended. This hybrid trend was started when Redefine was launched in the Corpcapital stable two years ago. It has been an aggressive buyer of both properties and listed scrip and now holds R1,1bn in listed units.

A few months ago, Growthpoint, the Investec PLS, bought the Mines Pension Fund's R650m listed property portfolio.

Totaram's comments could have been triggered when somebody bought R245m of R2bn Grayprop, the giant of PUTs and PLSs. The FM has learnt that it was Pangbourne, an independent PLS, which also holds about 14% of ApexHi worth about R125m.

Five unit trusts are competing for listed units. They are Marriott's R1,2bn property equity and property income funds, Oasis's R130m equity fund, Coronation's R270m equity fund and Stanlib's new fund of R10m so far. Then there is unlisted Durban-based Provest, which already has R600m invested in the sector.

Between them the funds now have about R4,5bn of the listed sector's minuscule market capitalisation of R13,2bn. But the playing field is not even. Unit trusts are restricted to a 5% holding in any fund under (and 10% over) R2bn. Only Grayprop is worth more than R2bn. But hybrids can borrow and buy as much as they like.

Pangbourne CEO Atholl Campbell says it is not becoming a hybrid. But its reasons for buying the Grayprops show their allure to the funds. 'Listed property funds are cheaper than their underlying properties, so it is difficult to buy properties themselves. We could buy the Grayprops at 245c cum (a
25c dividend) and use our spare borrowing capacity profitably. And we can use the units and a lower yield than our own to buy more property.'

Marriott asset management has already had to cap its income fund and stop any further inflows, because it has its full quota in all its chosen funds. The equity fund has only R30m-R40m to go before it is capped as well.

'Demand is pushing up the price of the funds,' says Marriott director Simon Pearse. 'Luckily, though property is outperforming most sectors, overall inflows into unit trusts have fallen and are unlikely to pick up until around March.'

There could be relief next year because funds should be able to exchange units for property as their yields drop to the same level as direct investment. The flow of new funds to the market, which was halted by this year's interest rate hikes, will also continue.

Next month Marriott launches Oryx, a fund of Namibian properties, as well as shares in local funds. NIB has two funds to launch early next year and RMB Properties is preparing one.

But there will be a place for hybrids even then, says Barnard Jacobs Mellet property analyst James Templeton. 'They give private investors a basket of property investments which they can't accumulate on their own,' he says.

Redefine outperformed all the other funds over the nine months to November (see table), emphasising its flexibility against the units trusts' restrictions. Totaram concedes that she would probably not complain if there was not a shortage of scrip. But she still opposes the hybrid concept. 'Investors
would laugh if Didata announced it was investing in the Nasdaq rather than in IT services,' she says.

Totaram adds that investors should also be wary of the cross-holding building up. Similar cross-holdings in UK investment trusts recently led to an implosion of those funds.
Publisher: INet
Source: INet