The real estate index on the JSE Securities Exchange SA is one of the bigger sectors in terms of the number of companies it includes. Excluding UK-based Liberty International, which has a dual listing on the London Stock Exchange and the JSE, there are 27 companies in the index.

However, the sector is one of the smallest in terms of total market capitalisation, making up only 1%-2% of the total market capitalisation of the JSE.

Some analysts say that the consolidation of smaller funds

— and in some cases even some of the larger ones —will increase liquidity in the sector as well widen the shareholder base of merged entities.

Analysts say that although there would be fewer funds and companies for investors to choose from, those available would be larger and more attractive to investors.

Consolidation would also not increase the size of the listed property sector’s total market capitalisation and assets, which is what all property commentators would like to see happen.

Listed property portfolio management company Provest, which is part of the Investec Property Group, says consolidation is in the best interests of the real estate sector.

Provest MD Angelique de Rauville says its view is mainly motivated by the fact that certain property funds and asset management companies are responsible for the management of more than one property stock.

"In some cases these stocks invest jointly in certain properties, which confirms there is an overlap of investment strategy, and the separate listings then come into question," she says.

She says Provest’s motivation for the merging of certain stocks is that operational costs would be reduced. "Reduced costs translate into increased earnings and increased earnings translates to outperformance in the share price," says De Rauville.

She says another reason Provest favours consolidation relates to the issue of critical mass.

"A merged entity offers greater diversification and increased liquidity

—and increased liquidity will continue to attract players who have not had exposure to the listed property sector because of its lack of tradability."

She says relatively small listed property loan stock companies Octodec and Premium could be candidates for a merger.

The companies are managed by City Property Administration. A merger would substantially increase the resultant entity’s market capitalisation.

She says another example where there was room for a merger was listed property loan stock SA Retail Properties and listed property unit trust Martprop.

These two funds, managed by Marriott, jointly own a number of properties and this causes an overlap of strategy between the two funds, says De Rauville.

Alec Wapnick, chairman of both Octodec and Premium, says they are investigating the possibility of a merger.

"It’s always been a subject of interest and discussion. We are continuing our investigation, and we would advise shareholders accordingly if we made such a decision," says Wapnick.

Roger Perkin, MD of Martprop, says is important not to forget that Martprop still has a very big industrial property portfolio.

"A merger would effectively change SA Retail’s investment mandate. It wouldn’t be a purely retail fund anymore," he says.

Perkin says Martprop would only consider such a merger if it made sense for the unitholders in both funds.

Colin Young, fund manager of Old Mutual’s South African-listed property funds, says that although there may still be room for consolidation, the main emphasis should be on expanding the listed property sector’s size.

"There is a need to create high quality liquid stocks on the JSE.

"I want to see as many of these as possible," says Young. He says that if a stock does not have liquidity it should then think of merging with another company or fund to create liquidity and spread its shareholder base.

But Young says he is not concerned about the number of companies on the real estate index. "I would want even more. I want the sector to double in size in the next two years."

Mariette Warner, fund manage of the Stanlib Property Income Fund, says "consolidation is good up to a point", but there is a danger that there will be a smaller range of choice and less divergent performances.

Warner says if there are too few funds, fund managers who invest in the sector will be prejudiced in terms of being unable to outperform their competitors.

Commenting on a possibility of a merger between Octodec and Premium, she says the risk profiles of the two companies are different

— Octodec has more of a stable traditional property portfolio component and a smaller exposure to higher-risk trading activities such as development.