Listed property funds allow investors to buy and sell their interests as swiftly as any public company, overcoming property's main drawback - a lack of liquidity.
People who invest directly in property often find the properties difficult to sell when they decide to divest.
Even in boom times it can take six months or more for investors to get their money out. Bundling a property portfolio into a fund and listing it makes buying and selling an instant affair. But this liquidity comes at a price. Listed property funds start behaving more like other listed companies than property.
Fund managers start concentrating on the quarterly or half-yearly results. Insurers and other institutions, looking for annuity-type income to meet their obligations, invest in them as proxies for fixed income debt such as government's R153 long bond.
The price of listed property scrip starts moving up and down with the prevailing interest rates and the latest financial information. The result, says Andrew Baum, an academic at the UK's Reading University and head of Oxford Property Consultants, is that listed property is no longer the steady, low-risk, long-term investment that set it apart from other asset classes . He has found that listed property has a greater risk correlation with ordinary listed companies than property . Unlisted properties also give higher income than listed funds.
"The liquidity of listed funds is overstated," Baum says. Holders of large tranches of shares often take months to offload them, without pushing down the price and their ultimate return. Late last year Grayprop and Growthpoint unit prices underperformed the rest of the market because it was known that big shareholders - the Mines Pension Fund and Redefine - wanted to sell.
Independent SA analyst Liliane Barnard partly agrees with Baum. "Its relative," she says. "The SA property sector is much more liquid than it was. Most investors can buy and sell instantly, though large holders can sometimes take a few months to sell at the right price."
She also agrees that the volatility of listed funds contradicts property's low-risk character.
Baum says large investors in Europe are turning to unlisted funds to give them diversification and lower risk. The number of unlisted funds doubled from 200 in 1997 to 400 in 2004. And this trend has begun in SA. Attfund was formed as a private fund in 2002 and had grown its assets to R2bn by last year. It aimed to reach R5bn within five years.
But it has yet to show whether the risks and liquidity are similar to ordinary property - or its listed peers.
