The listed property sector was under pressure over the past quarter, with most stocks declining in value. The Coronation Property Equity Fund was also affected, and showed a return of -2.3% over the quarter. The fund's return for the year to date is currently 12.29%, and 22.44% for one year.

The past quarter was used to further reposition and improve the quality of the fund. The fund's holding in Sycom was significantly increased, by participating in their capital raising exercise. The fund manager's believe that the new projects and extensions they are planning, such as the new Paarl Mall and Somerset extensions, are exciting and that this will be a quality counter for the longer term. In addition, exposure to Resilient was also increased at attractive prices during the quarter.

Holdings in ApexHi B and Redefine were significantly reduced over the quarter. In instances where the fund manager's believe share values ran ahead of their fundamental values -as was the case with Pangbourne, Growthpoint and Grayprop - the fund manager's also reduced exposure.

The fund's holding in Liberty International was initially reduced, and then increased again close to quarter end. The fund manager's believe that the strength in the rand and the negative market reaction to their debenture issue has created an opportunity to repurchase at an attractive price.

Looking forward, the fund manager's believe that the spread between listed property and bond yields is currently attractively wide and the fund is well positioned to benefit from the expected tightening of this yield spread in the next quarter.

Property stocks performed well over the quarter on the back of lower long bond rates and a continued strong local currency. The fund benefited from a full allocation to domestic property stocks, having sold out of our exposure to corporate bonds. For the period, the fund produced a return of 5.9%, bringing the return for the year to date to 15%, and for the full 12 months to end June 2003 to 30.4%.

During the quarter, Acucap came to the market to raise additional funding for new investment opportunities, resulting in the fund manager's establishing exposure to what they believe is a well managed, quality portfolio. The fund manager's continue to favour the more retail and industrial based stocks on the expectation that tough fundamentals in the office market are likely to persist into the coming quarter. In this regard, the fund manager's have also increased the fund's exposure to Resilient, which added significantly to performance.

Another notable feature was a strong showing by Liberty International, returning 12% including dividends. The fund manager's have used this strength to significantly reduce the funds exposure to this counter, as the discount to NAV has narrowed significantly and the rand is expected to remain firm in the near term. The fund manager's will continue to trade this counter actively, as it is very liquid, has attractive diversification properties in an otherwise very homogenous grouping of domestic stocks, and has added significantly to the fund performance over time.

Looking forward, the performance of the property sector depends crucially on the direction of long bond rates going forward. The fund manager's believe that the momentum in yields is still downwards in the near term. In addition, there is still a sufficient yield spread in the sector to make it attractive relative to bonds. The fund manager's will, however, monitor the situation closely, and are ready to increase liquidity or implement other hedging strategies should the circumstances require it.

As the fund manager's mentioned previously, the new CIS bill has allowed for greater flexibility within the fund, and the fund manager's will continue to reposition the portfolio so as to enhance performance going forward.

The rand has continued to strengthen, bond yields have moved lower and investor interest in income-producing assets has risen substantially. The rally in the property market, which started in September 2002, continued strongly in the first quarter of this year. The sector, excluding Liberty International, is up almost 10% at a time when the JSE All Share is down 18% over the same time period.

At the start of the year, the fund manager's were expecting a re-rating of the property sector relative to bonds. This view was based on the expectations of interest rate cuts later this year and a resumption in earnings growth by the sector next year. The yield differential between the listed property yields and bond yields at that stage was over 3%. Part of that expected re-rating has already taken place, with the yield differential now trading at 2.7%. However, this does not fully capture the actual interest and flow of funds experienced by the sector in the last three months. At one stage, the yield differential was trading at 1.9% which is below the long-term mean. The interest in the sector was primarily driven by the reduction in the Retirement Fund Tax for income-producing assets from 25% to 18% (as announced in the Budget). Previously, this tax had placed listed property, bonds and cash at an after-tax disadvantage to equities in terms of potential return. The fund manager's expect further positive news in this regard in the next Budget, which should keep the sector well supported for the remainder of this year.

Over the period there has been much corporate activity within the sector. Hyprop, has finally concluded its purchase of the Rosebank Mall and JHI House from Cenprop - a deal which has been pending for almost a year. The remaining buildings in Cenprop have been sold to other parties and the stock has been delisted from the Exchange. Further such M & A activity and new listings are likely to take place during the remainder of the year. Existing companies are aggressively looking to expand their property portfolios whenever the opportunity presents itself - either via direct properties for sale or other more vulnerable listed entities. This activity should serve to increase the market capitalisation of the sector even further, aiding both liquidity and tradeability.

The new CIS bill has removed some of the restrictions which had previously limited the role stock selection could play in the construction of the fund manager's unit trust portfolio. It now affords fund managers the ability to outperform based on superior stock selection techniques rather than by simply tracking the index. The fund manager's welcome this change and the greater flexibility afforded in applying the principles and philosophy by which they have managed the fund since inception.

The Rand strikes back

Last quarter saw a reversal of events that took place one year earlier. The fund manager's were taken by surprise by the extent to which booming exports provided a boost to the rand, causing it to strengthen against all major currencies. Bond yields firmed as a result and the property market followed suit. The sector gained almost 8%, recovering losses incurred earlier in the year. Having underestimated the extent to which the rand could strengthen, the fund manager's defensively positioned portfolio could not benefit fully from the rally in the sector.

Corporate activity within the sector also resumed during the period. There were some new listings, as well as highly controversial acquisitions by a few property companies of listed property stocks. Corporate activity is likely to continue into 2003, raising the profile as well as the market capitalization of the sector.

The fund continues to maintain a stake in Liberty International. Despite its inclusion in the FTSE100 at the end of last year and its price appreciation in pounds sterling, the strengthening of the rand brought the share price on the JSE significantly lower. This caused the fund's return for the quarter to lag that of the sector.

Looking ahead, the fund manager's expect inflation to head lower during 2003, providing the SA Reserve Bank with sufficient scope to lower interest rates later in the year. This should be supportive for bond yields and hence listed property stocks. The fund manager's will look to cautiously increasing the funds exposure to the local sector.