A shortage of skills and the slow release of development land by local authorities is reducing supply that could ease the demand to a dribble. Large insurance companies and pension funds have been pouring an ever-higher percentage of their funds into the sector, and private equity investors are competing with them.

Institutional investors withdrew from property in the mid-1990s, when government allowed them to invest offshore. They reduced their property holdings to 2% or 3% of funds from as high as 25% in the 1980s. This opened the market to the re-entry of private investors. Within a few years they dominated the listed property funds, and entrepreneurs like Atterbury and Zenprop have built multibillion-rand portfolios.

In six years, Madison grew from a start-up to SA's biggest listed property asset manager, with over R30bn in enterprise value and about 30% of the listed property sector. Two years ago, when the sector had a market capitalisation of less that R50bn, Madison executive director Marc Wainer predicted it would grow to R100bn by this year - it happened - and R500bn by 2010, which he now concedes is unlikely.

"Funds are doing their own development," he says. "Our pipeline is about R4bn and will add 10%- 15% to our portfolio. Overall, development could add up to R20bn to market cap."

Investec listed fund investment manager Angelique de Rauville is less optimistic. "The speculators have been flushed out of the market and we've entered a new phase," she says. "This is creating an opportunity for the institutions again to dominate the sector."

She says institutions want to increase property holdings back to around 10% of funds, and are buying both direct and listed property, with the Public Investment Corporation (PIC) the biggest buyer. "They (the PIC) already own 6%-7% of Acucap, 6% of Growthpoint and a large percentage of SA Corporate."

Growthpoint is SA's biggest listed fund, with a market capitalisation of R16bn, and the FM understands that new corporate activity between PIC and Growthpoint could push their holding to nearer 20%. Other institutional buyers probably have another 6%. This removes nearly 30% of Growthpoint from free-float and could start affecting its liquidity.

"Further pressure is coming from international investors, who are showing increasing interest in SA property," De Rauville says. "They already own 6% of Growthpoint and 4% or so of Redefine."

The result, she says, is that the listed sector is probably trading at about a 10% premium - and this is unlikely to change. It s market cap is likely to stay at around R100bn.

Private investors are likely to suffer most through this congestion, given the choice of low yields in property or putting their money elsewhere. Listed property prices usually fall when interest rates rise, but have continued to rise in response to the 3,5% bank rate increase since June last year. "That's because investors expect rates to start falling sometime next year," De Rauvill e notes. Other options look more inviting (see graph).

An institutionally driven property market could see a decline in the enterprise and risk-taking that help build interesting cities. Developers could end up as they did in the 1970s and 1980s, putting development projects together on paper with no risk and selling them on to institutions. One result was a concentration on cutting costs rather than enhancing the built environment and attracting higher rents.

The primary problem is supply. Developers did not expect the rapid turnaround in demand for space that has occurred since 2002. When they started buying land to develop, they found municipalities unable to rezone and approve development plans quickly, and this slowed supply. T he inability of the local authorities and parastatals like Es kom to supply infrastructure worsened the problem. A lack of skills and materials didn't help.

The congestion of money, particularly institutional money, will continue until the supply of investment properties and opportunities increases. Old Mutual property investments research chief Belinda Clur suggests that Africa can eventually provide the stock investors want.

Fortress Asset Managers' Craig Hallowes says global investment could be a solution. "But if international investors are looking to SA to enhance their returns because yields in the rest of the world are so low, how are SA investors going to gain from going offshore?"

Wainer believes offshore investment is a serious part of the answer. "Property prices in Europe have fallen by as much as 30% since the sub prime crisis emerged," he says. "I can buy a good retail portfolio on a 10% yield. Even with exchange control restrictions and having to use asset swaps, that makes a good investment. We are also looking at opportunities in Namibia and Angola. There's no doubt the listed property sector is going to be very different from what it is today."

One other possibility, adds ApexHi CEO Gerald Leissner, is that supply could start catching up with demand sooner than people expect. "Property always works in cycles and the day will come when developers overbuild, rents fall and yields rise," he says. "It always happens and I see it happening sooner rather than later in retail property."

There is still one fairly good opportunity for investors willing to move into direct property investment and smaller properties; properties below R20m are often under the radar of the institutional and listed funds. These are already responding to the interest rate hikes and there could be a few distressed sellers in the second quarter of next year.