In general, capital markets offer more attractive interest rates, says Eyal Shevel, sector head of corporate ratings at Global Credit Ratings.

Shevel says the appetite to lend to property funds is largely owing to to their low gearing and stable income flow which can help underpin general asset management products and strategies.

He says the South African property fund industry is generally in a strong financial position, with many funds carrying a loan-to-value (LTV) ratio of 30% or lower.

"This is extremely low compared with international benchmarks and even funds whose portfolios may not be performing well are still financially very sound, given their low gearing and strong asset base."

"This is largely as a result of the fact that many of these property funds were spun out of life companies and other financial institutions that grouped their properties together and listed them as a means to introduce liquidity into their portfolios. As a result, the funds were listed with very little gearing and those with good properties have also been increasing in value, pushing the LTV down further."

"In the past, the only alternatives to bank borrowings were complex securitisations that proved very cumbersome to manage and significantly limited management's ability to trade properties. As interest rates have fallen, these products have become a less viable option."

"With many of these securitisations reaching maturity, property funds are looking for simpler, refinancing products such as a medium term note programmes, which enables companies to tap capital markets far easier. On the other hand banks have been forced impose more onerous requirements on their clients to comply with the tightening bank regulations, making traditional facilities less attractive."

"From a risk perspective the outlook for the listed property fund sector is positive. Not only do the funds have stable income flows but increased to access capital and low interest rates, mean they are also in a prime position to be able to access new capital and look for opportunities in the sector.

However, with increased competition in the sector, acquiring assets at an acceptable yield will present the key challenge. As a result, we are likely to see a trend towards consolidation within the sector over the next 18 to 24 months." concludes Shevel.