By Pauline Larsen

Listed property innovation battles newly regained sparkle of direct property holdings      
 
Planning a property empire? You can choose between direct holdings and listed funds. But though creativity in the listed property sector is long overdue, investors don't seem too wild about new ideas. The double-whammy is that direct property is doing better than it has for years, with a 15,1% total return in 2003. 

One innovation is the property warrant. This gives an investor the right to buy a share in a listed property fund, at about half the listed price, by a specific expiry date, typically in five years.  Since property warrants are priced lower than the underlying shares, investors can buy more exposure for less outlay. 

Think of it like this. If you want to buy 1 000 listed property units at R10 each, you'll need R10 000. If you bought warrants at R5 apiece, you would have 2 000 for the same sum - each giving you the right to buy one unit.  Over the five years the dividends from the fund accumulate and, if they are large enough, will pay the cost of the share.

Plus, potential losses are limited to the original investment.  Investec offers five property warrants: two over property unit trusts (PUTs) Grayprop and Martprop, and three over property loan stocks Growthpoint, Pangbourne and Redefine. 

Says Investec equity derivatives specialist Asher Levien: "Property warrants are targeted at longer-term, savvy investors." He explains that warrants exploit the high yields on listed property, and offer an attractive tax advantage.  But warrants are constrained by a number of factors.  When market yields start to collapse, say analysts, warrants don't make sense. They are also limited by the tradability and liquidity of the underlying property funds.  "If you are bearish about the listed property sector, geared instruments aren't a good idea," admits Levien.  But there is a view that the listed property sector, and its investors, may not be ready for innovative instruments just yet. 

Provest asset management MD Angelique de Rauville says further growth in the sector is needed before creativity will be welcomed. She believes that critical mass has not been achieved, as evidenced by limited interest in Investec property warrants and in Catalyst's residential fund, Habitat. 

"First size, then creativity," is her view. She adds that critical size would be anywhere between R30bn and R50bn. Current market cap is R25bn. Madison Property Fund Managers director Marc Wainer reckons that simpler options may be better for the typical investor.  "We're an innovative sector, though," he argues, pointing to hybrid funds like Redefine, and spotlighting opportunities for property-linked derivatives and property hedge funds. Securitising property debt is another possibility. The listed property sector has R31bn of assets, and just under R7bn debt. 

Direct property, say commentators, is often simpler and more straightforward for investors to understand. And latest results show that direct property is posting returns well above expectations.  Indeed, direct property has shown the strongest returns in almost a decade, according to Investment Property databank data released last week.

Total returns for all property rose by more than 5% to 15,1% for 2003, or 8,8% in real terms.  Analysts say the market is starting to right itself after several years of struggle, and point to gross rental rises, lower vacancy rates and steady operating cost levels.  But what's good for direct property may also be good for the listed sector, anyway.