Hybrid property loan stock companies mix direct property holdings with investment in other listed property funds.

The concept was pioneered by Redefine on the JSE Securities Exchange SA.

The emergence of a second property loan stock company in listed property fund Growthpoint drew fire from asset management company Coronation, which criticised the merit of using a hybrid property loan stock company as a value-adding investment strategy. Coronation says the advantage of the strategy is limited, and that it is not worth the trouble of creating hybrid property loan stock companies. In addition, it questioned the asset management capacity of property loan stock companies' management.

Coronation Property Equity Fund holds 5,4-million Redefine units.

Penhall says property portfolio managers have a comprehensive knowledge of the property market and can appraise the nature of the underlying property assets held by a listed security, and the contributions these make to the counter's performance.

Redefine holds interests in 12 listed property companies with a market value of R1,1bn, or more than 25% of the listed property sector.

'We invest to add value for shareholders in earnings and every counter in which we consider investing is analysed in detail,' says Penhall. 'Specialist equity managers would not necessarily have this detailed professional knowledge of the property market.'

Penhall says the hybrid model allows flexibility in making asset management choices as market forces change.

The investor in a hybrid stock spreads risk across a wide spectrum of property categories and locations.

Critics of the hybrid model seem not to consider this diversity of risk, says Penhall.

Redefine linked units' 54% tradability factor in the financial year to August is testimony to the flexibility of the hybrid model, he says. This liquidity made it relatively easy for investors to trade out of Redefine if the risk element was deemed to be unacceptable.

It was incorrect to imply that the hybrid structure could motivate the growth of listed security assets as an easy means to earn management fees, he says.

'Fees for managing property portfolios are subject to negotiation and are in line with responsibilities to ensure that investments deliver sustainable yields and capital growth, and will always be related to what the market will bear.'

While investors face double penalties on capital gains tax incurred within a listed counter and in the hands of the investor, Penhall says Redefine is primarily an income fund active in the property market for the long haul, not a property trading entity. 'We do not trade for trade's sake, and never excessively.'

As the asset base is adjusted in terms of strategy or market forces, a capital gains tax position could arise. However, the effect on distributions will not diminish the return on investment, says Penhall.