The latest blow was a trading statement showing that both income and asset value for the year ended June 2003 would be substantially down.

As expected (see Companies March 21), the original management of A-Prop was "consensually terminated" after reporting a 25% drop in earnings. That's spectacular for property funds, whose reputation for steady income is the prime reason for current investor buying.

Corovest, the highly rated manager of property unit trust (PUT) Sycom, has been appointed in A-Prop management's place. Corovest (and now A-Prop) director Mike Aitken says the trading update was preliminary and his team is still investigating many aspects of A-Prop, from the valuation of properties at purchase to the issuing of deferred units.

"We should be able to report any material matters by mid-August," says Aitken.

The most likely outcome, says Provest fund management MD Angelique de Rauville, is that Arnold "will form part of a Corpcapital/Redefine sector consolidation strategy, with Arnold and PUT Capital merged."

Redefine holds more than 30% on both funds.

But more likely is that a merged Arnold/Capital will become Corovest's B-grade property fund.

The initial merger will reduce Arnold's current gearing of 60% to 40%, with Redefine as the largest shareholder. Corovest would build its holding by contributing new properties to the fund.

This would suit Corpcapital, which would profit from Corovest's solid reputation and management skills.

The fall of the A-Prop share price, from 184c in January to 100c after the trading statement, is possibly overdone.

The risks are high because new problems in A-Prop could still be discovered, but there could be upside in the share over the next few months.