The deal will reduce the listed sector's R91bn market capitalisation. Investors to whom the PIC is paying R12/share cash will probably put buying pressure on the remaining listed funds, by seeking to reinvest about R1,5bn.

Additional pressure could come from the likely purchase of SA's second-largest fund, the R8bn-cap Grayprop, by Australian investment bank Macquarie. And there's another R3bn from institutions looking for more property exposure.

This imbalance between buyers and sellers is a danger. There are already signs that the sector is being driven by the expectation that yields will continue to fall and prices to rise. A momentum-driven market dislocates from the property fundamentals and a price bubble can develop as investors scramble.

The CBS sale illustrates the pressure on the market. Redefine was negotiating to buy CBS for R10,70/share, but the PIC bid is 12% higher at a forward yield of 6,4% - and 45% above CBS's R8,30 NAV.

The Macquarie bid for Grayprop is rumoured to be at a price:earnings ratio of 18, or a forward yield of 5,5%. Historically, listed property funds have yielded as much as 2% or 3% above the 10-year government bond yield.

Some of the difference in the yield can be explained by the rapid recovery of office, retail and industrial rents, and by growing confidence in SA property. But mostly it's the simple equation of demand vastly exceeding supply.

"We will accept this very generous cash offer for our shares in CBS, but we have concerns over the long-term reduction of the listed property sector's market capitalisation," says Investec listed fund investment manager Angelique de Rauville.

The property sector lagged behind the rest of the world for 30 years because of low economic growth and risk concerns. Large-scale development is now hampered by an underdeveloped construction industry and a skills shortage.

De Rauville says rising demand and prices will make the shortage more acute. "One source of property stock for the funds is the properties occupied and owned by large corporations like Bidvest, Telkom and Eskom, but they will probably hold their properties back now."

However there is a medium-term solution: allow funds to invest in property outside SA. This could happen soon.

Treasury and the Reserve Bank have opposed major investment in offshore properties because it does nothing to increase exports and local employment.

Institutions and funds can use asset swaps, as Redefine has been doing to acquire its 18% interest in London-listed fund Ciref. "But it can be expensive and may dilute returns," says Redefine CEO Brian Azizollahoff.

"We would very much like to buy, say, a shopping centre in Poland or Brazil on an 11% return," says Marc Wainer, executive director of Redefine, Hyprop and ApexHi's asset manager Madison. De Rauville says a 9% or greater yield is available in many countries. But will government relent?

Another route could open with the proposed conversion of SA listed property unit trusts and property loan stock companies to US-style real estate investment trusts (Reits).

An important difference is that Reits are free to invest across borders. The listed property industry is in talks with treasury over the conversion and the FM understands that government is responsive because it will mean substantial international investment in SA.

If the principle is approved, there won't be an immediate flood of funds offshore. "It would be foolhardy to invest offshore without local knowledge, and that means finding the right partner," says Norbert Sasse, CEO of Growthpoint, SA's largest listed fund.

Azizollahoff says it will take at least a year after legislation goes through for the flow to start. Meanwhile, the pain will be relentless and yields will continue to fall.