First out the starting blocks was the Sycom Property Fund, which announced a R257.5m investment in the Stenham European Centre Fund, an offshore property fund listed on the Channel Islands Stock Exchange. The Fund holds as its only asset a regional shopping centre located between Leipzig and Halle in Germany.

The Capital Property Fund is the second PUT to make an investment offshore, and has done so through a Resilient Group listing initiative on the AIM’s market in London, called the New European Property Investment (NEPI). Craig Hallowes, spokesperson for the Association of Property Unit Trusts (APUT) and marketing head of Capital notes that: “NEPI has identified certain properties in Europe on behalf the fund and is quite far advanced in finalizing these direct property acquisitions.”

So what has prompted such actions and is this the start of a new trend?

“Historically, local funds were hampered by exchange control and a weak currency,” explains Michael Levin, a senior investment manager at Cannon Asset Managers. “In addition, we have had an extremely buoyant local property market, so there has not been the same need for PUTs to look to alternative property markets.”

With South Africa still in a rising interest rate environment, contrary to the US where Fed Chairman Ben Bernanke has recently cut interest rates, the outlook for property returns, relative to historic returns, is more muted. It makes sense to undertake some geographic diversification at this point in the cycle.

SA Corporate Real Estate Fund has also begun looking at investing offshore. Indeed, “we are looking at both sides of this,” says Roger Perkin, CEO of SA Corp. “We are investigating the purchase of foreign assets, in addition to encouraging foreign investors to purchase units in our fund.”

The appetite for purchasing foreign property has risen as quality local stock has become more scarce. “We are experiencing liquidity constraints in the SA market,” comments Hallowes. “It’s a supply-side problem. There are delays in getting land zoned for development and we have a very tight building and construction environment at present. This is leading to a shortage of quality developments.”

Another factor which is motivating PUTs to invest offshore is the restriction on investing in local listed property. PUTs may purchase offshore listed and direct property, but locally they may only invest in direct property.

“This can be appealing,” explains Hallowes. “Offshore listed property yields are similar to those in SA, at around 6.5% to 8%. But one is buying into high quality office blocks in European centres at these same yields. It makes sense for PUTs to diversify in a way that results in very little yield dilution, while getting the benefits of geographic and currency diversification..”

The PUTs are mostly looking to Europe and the US as destinations for their external capital, rather than countries closer to home, such as other countries in Africa. The Collective Investment Schemes Control Act, with which the PUTs must comply, restricts the funds to investing only in those countries which have an investment grade sovereign credit rating (BBB and higher, S&P). Few countries in Africa have such a credit rating, which makes investing in the continent more difficult for the PUTs.

According to the Investment Property Databank 2006 national figures, the top performing property markets (other than SA) were Ireland, which saw a 27.2% total return from commercial property, France, at 21.7% and the UK at 18.1%.