Investment bank Merrill Lynch reckons investors have become more discriminating about new real estate share issues recently.

It follows what it calls an earlier "indiscriminate" flood of cash from investors into real estate initial public offerings (IPOs) with "hazy" business plans and generous fee structures.

In a note on the sector, the firm said: "The flood of money seeking European opportunities did seem to us to be somewhat indiscriminate, and prepared to overlook the flaws in some of the offerings - blind funds with only hazy business plans, externally managed on long contracts for large performance fees with low thresholds returns (often just the income return)."

It added that some even offered cash performance incentives based on unrealised valuation gains. It summed up the situation as "easy money".

"You could be forgiven for having a view that many business plans were manufactured to generate fee streams by grabbing investors' money while it was on the table and, in the rush, not being very discriminate."

And it commented that "much of the prospective return appears likely to come from market drivers rather management value-add".

Some of the property portfolios being assembled were incoherent "so the justification for performance fees is not always clear.

"It is now encouraging to see some discrimination and investor pressure returning to the IPO scene."

Recent examples include the Crownstone IPO which Merrill suspects was pulled because "some investors baulked at a five-year management contract with a performance fee of 20% of returns above 8%".

And the Vivacon German Properties issue was "forced to withdraw the performance element" although it was eventually pulled.

Merrill concludes: "One day, we suspect that there will be a massive consolidation of all of these companies, management will go internal and all of the management contracts will have to be paid off."