Listed property funds are moving beyond their traditional source of income, rentals from commercial investment properties. They are sweetening investor payouts by developing and selling residential flats, and by holding or trading in the shares of fellow listed properties.
But some analysts have warned that trading income is riskier than rents, though the share prices of funds that do this - Pangbourne, Spearhead, Octodec, Paraprop and Premium - do not suggest that the market is worried.
Old Mutual Asset Management's head of listed funds, Colin Young, says trading in other listed funds' shares or holding on to high-yielding shares to improve income should be discounted.
"They are outside the company's normal control and therefore riskier," he says.
Both Pangbourne and Spearhead have improved their performance through holding and dealing in other listed property funds.
Pangbourne's holding in high-yielding ApexHi helped it maintain payouts in 2002 and 2003, when vacancies rose, rents sagged and interest rates were high.
Allan Groll, who has been trading in listed property funds for his own account for years, has made regular contributions to the bottom line for Spearhead (of which he is a director) through share trading.
But Spearhead's and Paraprop's main source of nonrental income is residential and commercial sectional title developments.
Octodec and Premium also did this in a small way through holding 40% each in private developer IPS. This contributed 20% of Spearhead's profits in 2004.
Spearhead CEO Mike Flax defends sectional title development and trading as sustainable.
"It will continue to contribute 10%-15% to our bottom line for the foreseeable future," he says, "and ensure that our payouts to unit holders will increase by at least 10%/year over the next three or four years."
Young partly agrees: "I think their development pipeline is more sustainable."
The market certainly agrees, marking tiny Spearhead (market capitalisation R570m) up to the fourth-highest historic dividend yield in the sector, after R2,7bn Hyprop at 7%, R4,3bn Grayprop at 7,1% and R2,6bn Sycom at 7,7%.
Spearhead is also in the illustrious company of Liberty International, which is not averse to enriching the yield on its super-blue-chip UK shopping centres with share trading.
As Libint CEO David Fischel says: "Never let your investment strategy get in the way of a good deal."
It's a further sign of seasoned property people taking over the sector from institutional managers.
Expect more funds to be looking for nonrental sweeteners as the SA commercial property boom takes hold.
