The FTSE/JSE Listed Property Total Return Index was up 3.53% for the month of September 2010, up 13.67% for 3 months, and up 25.68% for 12 months. Economic fundamentals in perspective: CPI inflation in August 2010 came in at 3.5% year on year versus 3.7% in July, fell slightly below expectations of 3.56% year on year. The downside surprise in the numbers stems mainly from slightly lower than anticipated inflation in the electricity and tobacco categories; there was broad-based disinflationary pressure from the rand. This was counteracted by somewhat higher than expected food inflation. The number might at the margin be interest rate friendly, but we still believe that the rand's trajectory will be more important and indeed one of the key determinants of the next interest rate decision. Our baseline view is that there will not be another rate cut, but that the risks are strongly biased downwards. Producer inflation in August came in at 7.8% year on year from 7.7% in July and was slightly higher than even our above-consensus forecasts (Renaissance BJM 7.6%, consensus 7.4%. The upside surprise appears to stem largely from a robust increase in the mining category. Strong adverse base effects will likely underpin relatively high producer inflation in the coming months. The elevated producer inflation rates do not derail our expectation that CPI inflation should remain com-fortably within the target range during the 18-month focus period of the MPC. Property fundamentals are showing little further deterioration with retail vacancies appearing to have troughed. From a sectoral exposure perspective, we still prefer high quality industrial and selective retail, with offices continuing to be the most exposed to speculative development

Repositioning of the fund
The fund had 24% in cash excluding distribution income because of a provision for a large withdrawal.

Outlook for 2010
Meago's expected total return for the sector for the next twelve months is anticipated at 15.4% comprising a clean forward yield of 8.4% and capital growth of 7.0%.

Despite the sharp decline in building material prices and pressure on contractors margins, average building costs in the commercial property sector, as determined by Hill Du Bois Quantity Surveyors, increased by 12% yoy. We attribute this to above-inflation wage increases. As demand for new space remains subdued and the cost of development still relatively high, we believe that the oversupply of commercial space in certain nodes could be absorbed sooner rather than later if sustained economic growth can be achieved. Property fundamentals have not changed significantly, with pressure on rentals as vacancies continue increasing, although at a lower rate than the last quarter. The plateau on retail vacancies is anticipated early in the third quarter. From a sectoral exposure perspective, we still prefer high quality industrial and selective retail, with offices the most exposed to speculative development.

While expectations for the economy as a whole are likely to improve in the coming 6 to 12 months with positive GDP growth expected, property tends to lag the general economic cycle by around 12 months+, hence 2010, while temporarily boosted by the Fifa World Cup, is still likely to show a slightly more muted performance. However, the listed property sector at a current forward yield of 9.6% continues to offer an attractive alternative to cash and bonds.

The fund invests primarily for the medium to long term and invests in quality counters with sustainable cash flow that can grow and support a high dividend pay-out. The fund selects a core portfolio with long term outperformance and maximize the portfolio yield with lower than average risk.

The FTSE/JSE Listed Property Total Return Index ended the year positive with a total return of 1.57% for the month of December 2009. The index was up 14.07% for the year and up 4.05% for three months.

Property fundamentals in perspective:

Retail
The current year has seen retail property impacted in different ways depending on the quality of the retail offering. The smaller community and neighbourhood shopping centres with their heavy exposure to "Moms and Pops" type line tenants were the first to show signs of stress. The more dominant regional and super-regional shopping centres which invariably are destination shopping venues which are well represented with National tenants tend to be more resilient during an economic downturn.

Office
Office vacancy levels continue to creep up because of the downturn in the economy, with many developers and listed property funds who had committed to office developments in 2008 and 2009 only completing their developments now or early in 2010. With breakeven Agrade rentals for office developments at around R130/m2, there is unlikely to be another surge of new office developments in 2010, as the existing vacancies will likely be mopped up first at competitive rentals as landlords get placed under further pressure.

Industrial
The smaller, multi-tenanted mini-unit industrial space, similar to the smaller retail shopping centres, has also endured a torrid 2009, with increasing vacancies, as more of the smaller tenants have become victims of the recession. With some continuing supply constraints for the better quality properties, rental growth for the industrial sector overall looks positive for 2010.

Conclusion
While expectations for the economy as a whole are likely to improve in the coming 6 to 12 months with positive GDP growth expected, property tends to lag the general economic cycle by around 12 months+, hence 2010, while temporarily boosted by the Fifa World Cup, is still likely to show a slightly more muted performance. However, the listed property sector at a current forward yield of 9.6% continues to offer an attractive alternative to cash and bonds. December performance was positive overall barring a negative trading update from Hospitality Property Fund. Hospitality announced that the fund's distribution for the six months to December 2009 will be down between 30% and 40% on the same period last year and the share prices responded by falling 14.06%. The latest STR Global Hotel Benchmark data for the period July to October 2009 shows occupancies down 14% and average daily room rates down 0.5%, resulting in a 14.6% decline in RevPAR. At the same time, staff and supplier costs rose by 6-8%. Forward bookings indicate that demand should pick up from February 2010, while most of the fund's hotels are contracted for the FIFA World Cup, which starts on 10 June 2010. The fund earns 25% of income from variable leases, with the income linked to the operating performance of hotels and resorts.

On the positive side the following counters contributed in excess of 5%: Fortress B 14.48% (non index constituent), Acucap 7.61% and Hyprop 5.42%.

The fund invests primarily for the medium to long term and invests in quality counters with sustainable cash flow that can grow and support a high dividend pay-out. The fund selects a core portfolio with long term out-performance and maximize the portfolio yield with lower than average risk.