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LARGE listed property groups are expected to bid for their smaller rivals, as they struggle to sweat their assets in a stagnating economy.

Investors are hungry for returns and improved liquidity in the sector, which should encourage merger and acquisition activity. A number of smaller property funds that listed in recent years could be targets.

While many listed South African real estate investment trusts (Reits) have gone offshore where they can fund acquisitions more cheaply, not all of them have found their feet in competitive markets such as the UK, Poland, and Germany. Buying local funds could be their best option.

Funds that listed in the past two years, when investors were quick to support new entrants, could now be ripe for consolidation, according to Evan Robins, the listed property manager of Old Mutual Investment Group’s MacroSolutions boutique.

"They must be targets, especially if larger funds become cash constrained and need capital, but they cannot raise it," he said.

One fund that has been aggressive and grown rapidly through acquisitions is Arrowhead Properties.

The group is expected to be at the centre of consolidation activity in the listed property sector this year.

Led by property doyen Gerald Leissner, Arrowhead has grown its assets from less than R800m at listing in 2011 to about R10bn.

Arrowhead has also bought stakes in Rebosis Property Fund and Dipula Income Fund. While it may desire Rebosis and Dipula’s retail asset offering, it would struggle to pry these away from existing shareholders. Rebosis has a separate management company, for example, that a would-be suitor would have to buy.

Meanwhile, Dipula CEO and co-founder Izak Petersen said he was focused on increasing returns for shareholders and maintaining the fund as a medium-sized player.

"I’m not looking to take strategic positions in other funds nor sell out of mine. I am focused on serving shareholders and enhancing the performance of Dipula’s assets," he said.

Tower Property Fund, which listed in July 2013 with a property portfolio of R1.65bn, could also be an attractive target. It has since grown its assets to more than R3.5bn.

One major fund that has been trying to gain exposure to Europe is Growthpoint Properties, the biggest South African-based Reit.

Speculation is that the company could make a move for Stenprop, which invests in Germany, the UK and Switzerland, and has exposure to high-quality office properties.