Hybrid funds invest in the scrip of other JSE-listed real estate funds, as well as holding portfolios of directly owned properties.  Many institutional investors and analysts don't like the funds they invest in to hybridise. Redefine, part of the Madison stable, was the first when it listed in 1999, with a 50% split between directly held properties and other listed funds.

It has since been followed in a smaller way by sector giant Growthpoint, Pangbourne, Spearhead and Resilient.  Large investors say they don't want the complexity of hybrids.

Old Mutual Asset Management's Colin Young says direct investors "can control their own properties, which they can't do with the properties owned by other funds in which they have a stake. This makes a hybrid a riskier investment than a pure property fund, so we discount it in our portfolio. I wouldn't put more than 5% of our funds in Redefine."

First South Securities property analyst Leon Allison says he also uses a discount when analysing Redefine. "For instance, what's the true geographic spread and lease profile of their investment?" he asks. 

Institutional fund managers also object to the double fees that are paid - to Redefine's management and the management of the funds they invest in. Nor do they like the borrowing ratio (the gearing) of Redefine on top of the gearing of the invested funds, giving Redefine an effective 70% gearing.  There is also the danger of a double plunge in share price when the market eventually turns, and Redefine and its invested funds move down together.

Young and Allison don't mention, though other fund managers have, that the hybrids also compete for limited scrip with the funds the institutions put together for policyholders and investors.  Yet there are signs that hostility to hybrids is softening. "I'm not massively against hybrids," says Young. And Allison, who expected Redefine's payout to increase by 5,5% in the first quarter of 2005 - it increased 11,3% - now feels it's a lower risk. 

His latest analysis of Redefine makes no mention of its hybrid nature, mainly because good management under CEO Brian Azizollahoff and a change to fewer, larger properties reduced the cost ratio from 31% to 15% and added to the fillip from interest rates.

  The advantage of being a hybrid is likely to show itself in the coming year. The yields on listed scrip dropped far faster than the yield on the underlying properties. So Redefine has been selling its listed investments at a profit, bringing the ratio of investment in direct property close to 60%. It sold most of its Resilient, Spearhead, Growthpoint, Martprop and Freestone scrip at low yields and bought properties at higher yields. This will enhance future payouts.

Young grumbles that Redefine is not selling its listed scrip quickly enough.  But are large investors being logical in wanting pure listed property funds?

Research by the Investment Property Databank and the UK's Oxford Property Consultants show that the volatility of listed funds correlates more closely with other listed companies than with directly held property. This is mainly because the very institutions that want pure property are the ones that treat it as a proxy for long bonds, so that its price movement is usually more affected by interest rates than by property performance anyway. 

"We're a listed company and what investors want is the highest possible payouts," says Madison deal maker Marc Wainer, one of the designers of Redefine. "We have the flexibility to move from one form of investment to another to give them the results they want."