After a negative second quarter, the domestic listed property index rallied strongly to deliver a total return of 23.1% in the third quarter. Factors in favour of the sector included market sentiment that turned positive on the interest rate front with bond yields following suit. In addition, more than two thirds of the sector (in market capitalisation) reported during the August 2008 earnings season and strong distribution growth of, on average, between 11% and 12% came through, with guidance of double digit growth to continue in the short to medium term. Many listed property companies have been relatively sheltered against interest rate increases and thus higher debt servicing costs in their own income statements due to favourable fixed debt profiles.

The fund performed in line with the domestic listed property index for the quarter, while outperforming the benchmark domestic property funds mean return. The relative movement in share prices during July and August was used to reposition the portfolio. We actively reduced exposure to Sycom into share price strength and trimmed exposure to Fountainhead, ApexHi A and Liberty International. The cash made available by these sales was used to acquire Growthpoint and Redefine. Despite this repositioning, the fund continued its high retail exposure, currently 61% within domestic listed property. Most of this retail exposure remains defensively positioned to include super regional shopping centres. As pointed out in the previous quarterly commentary, this may intuitively seem aggressive in the current consumer environment, but in the past this asset type has shown to be the most resilient in an uncertain macro economic environment. While companies with this kind of exposure were used to decrease listed property exposure by asset allocation funds during the first 6 months of the year, the aggressive moves in bond yields and subsequent institutional asset allocation repositioning during July and August stood these counters in good stead. This benefited the fund as counters like Growthpoint, ApexHi A and Fountainhead rerated strongly, as did retail focused Hyprop and Resilient.

Liberty International's 2008 interim results were disappointing. The usual defensive nature of Liberty International's retail portfolio did not safeguard it against the current torrid UK consumer environment. The risk in increased vacancies seems to be on the upside. There is evidence that middle income market retailers, not those with either a premium brand loyalty or discount value proposition, are under pressure. Although the results led to share price weakness, the fact that during the quarter the two largest specialised retail property owners in the world (listed within property vehicles, Simon Property Group and Westfield Group), made the acquisition of significant stakes of Liberty International public, supported speculation of a potential bidding war for a takeover. We reduced exposure into the subsequent strong speculative share price movement to decrease our risk exposure to the UK retail environment. However, the weakness in the GBP impacted the local share price, resulting in a lower quarterly return of 4.9%. This detracted value from the fund's performance relative to domestic listed property stocks.

Although the relative value proposition against other asset classes reduced during the quarter, long-term value in the listed property sector prevails. The sector average forward yield is above that of long bond yields (9.8% vs. 8.8%). The risk lies in that bond yields could come under pressure due to rand weakness, impacting listed property in a negative manner. For the distribution growth underpin to stay intact, which is key for current valuation levels, the current low vacancy levels need to be maintained. One must bear in mind that listed property companies have contractual lease agreements in place which provides a solid revenue base. In addition, lease agreements have annual escalation rates, resulting in a natural inflation hedge over the long term. The revenue base can only go backwards if leases which are up for renewal are signed at lower than current rental levels, or if not renewed, the subsequent vacant space is not filled.

Edwin Schultz & Anton de Goede
Portfolio Managers

The domestic listed property index delivered a total return of -19.6% for the quarter. Listed property yields usually track long bond yields and with yields weakening by nearly 150 bps, listed property yields followed suit. Inflationary risks and the subsequent potential interest rate increases were the main drivers behind these yield increases. The extent of the listed property yield increase has overshot that of bond yields, indicating a return to risk aversion, partly due to the combination of thin volumes and wide market spreads pushing prices down when forced sellers liquidate their positions. All of this resulted in a 28.4% total return for listed property over the past six months.

As in the previous quarter the fund benefited from the inclusion of Liberty International. Despite the strength of the local currency against the British pound over the quarter, the share price outperformed the local index by 5.5%. Capital values in the UK direct and listed property market remain under pressure as the liquidity crunch on debt funding, consumer slowdown and higher inflation all impact property values. Growth in rental levels for quality regional retail assets, the bulk of Liberty International's exposure, remains resilient. This supports the attractive long-term value we see in the share and therefore continue to include the maximum 10%.

The fund continues to be defensively positioned within South African focused companies leaning towards defensive portfolios which include super regional shopping centres. This may intuitively seem aggressive in the current consumer environment, but in the past this asset type has shown to be the most resilient in an uncertain macro economic environment. Rental levels tend to be less volatile while the turnover of food retailers, which are mostly the anchor tenants, should benefit from a higher inflation environment. Unfortunately the companies with this kind of exposure tend to be the larger and more easily tradable counters. With the increase in risk aversion towards interest rate sensitive sectors on the local bourse, it was mostly these counters which investors used to decrease their exposure to listed property. This led the fund to perform in line with the domestic listed property index for the quarter. Most of the fund activity during the period related to these shares, reducing our exposure to counters like Fountainhead, Apexhi and Liberty International, where the maximum permissible level has been breached. The exposure to Sycom was also reduced as the share lost its value appeal relative to the sector in the first part of the quarter as a dedicated buyer provided an underpin to the share price.

A wave of consolidation conclusions occurred during the past few months. Resilient finalised the acquisition of Diversified, while Pangbourne concluded the take-out of its sister companies iFour and Siyathenga. The consolidation trend is seen as key in attracting international investors to the local sector. However, it is important that such deals are value enhancing for current shareholders over the long-term. This determinant is probably the main reason behind the withdrawal of the potential tie-up within the Madison managed group of companies, Hyprop, Apexhi and Redefine.

Short term interest rate risks still prevail, most of them linked to the macro economic environment. These include on the one hand, a prolonged higher interest and inflation rate environment and the potential negative impact on bond yields, and on the other, a downturn in both the investment and occupier markets of commercial property (in line with what has been happening on a global level). We remain confident that the long-term value in the listed property sector prevails as the sector average forward yield of 12.0% is above that of long bond yields, while above average distribution growth should remain in place for the next 2 to 3 years. We believe that a relative value unwind should occur within the next two main company reporting periods as company earnings streams which are dependent on development pipelines start to come under pressure, as well as those with predominantly below par property exposure.

Edwin Schultz
Portfolio Manager

The domestic listed property index declined by 10.9% over the quarter, as the reality of higher interest rates and a fast declining consumer economy set in.

The fund had been more defensively positioned, as mentioned in the previous quarterly review, and declined by 8.4% over the quarter. The fund benefited from the holding in Liberty International, which added significantly to performance over the period as the currency weakened. The share is still down over the past year though, and we continue to believe that the share is very attractively valued in an environment of huge pessimism to property in the UK. We still hold the maximum 10% permitted.

The A shares in the portfolio also proved to be more defensive, with ApexHi 'A' declining by only 5% over the quarter, and Hospitality 'A' shares up by 4%. These two counters jointly make up 13% of the overall portfolio. The two main detractors from performance over the quarter were Acucap and Resilient. We continue to believe that both counters offer good value for the long term. There were few transactions over the quarter - wee reduced the holding in Growthpoint, sold out of Hospitality 'B', and sold some of the Liberty International as the weighting increased above 10%.

We believe that domestic listed property is again offering reasonable value, after declining by as much as 18% since the peak in November last year. The forward yield of 8.9% is now more in line with bond yields (which now look more realistic after the recent rise), and above-average distribution growth is still expected for the next 2 to 3 years. Interestingly, share prices are now more or less in line with published NAVs, which are no longer lagging market reality as significantly as they did before.

Consolidation is on the increase, as expected, with announcements made in the Resilient stable and also the Madison group of companies, comprising Apex Hi, Redefine and Hyprop. We will be actively involved to ensure that deals proposed are in line with unit-holder interests, and that take-out prices reflect long term value for unit-holders in the respective companies we own.

Our big theme in the fund remains one of a focus on quality, which we believe will continue to add value in the current uncertain environment. There are a number of lower quality properties in some of the listed counters, which may come under pressure in the tighter economic environment that we have entered. At the time of writing we await an MPC interest rate decision which could be quite detrimental to the economy if market expectations of a further increase are met. Positions in the fund thus remain very concentrated, with a focus on quality and defensiveness, which should prove of some value going forward.

Edwin Schultz
Portfolio Manager

The domestic listed property index declined by 0.4% in the last quarter of the year, after a strong performance in the third quarter. The fund held up well with a positive return of 0.1% over the quarter. This brings the return for the past year to 18.8%, and 29.7% for the past five years.

The main contributors to positive performance over the quarter were Sycom, Acucap, Fountainhead and Resilient. Both the Acucap and Sycom positions were increased in the previous quarter.

The main detractor from performance over the past quarter was Liberty International on the back of continued negative sentiment in the UK. While the environment for UK property is likely to remain challenging, we continue to believe that this counter represents an excellent investment opportunity. Negative sentiment to UK retail has reached a new level with the release of disappointing sales growth numbers from Marks & Spencer. This negative sentiment has impacted UK property stocks severely, with the index down by 43% since the beginning of 2007. Rental growth for prime UK shopping centres has always been significantly less cyclical than retail sales, given long lease terms and high quality tenants. We will continue to maintain this position at the maximum permissible level of 10%.

During the quarter we increased our holding in Hospitality A shares during a rights issue. With a yield comparable to current government bond rates, and growth in distributions of 5% guaranteed before B shareholders receive any income, we believe this to be an attractive investment with low risk as well. A new position was established in Pangbourne properties during the period. We believe that management changes instituted by the Resilient group will create value for unitholders, and that a new focus on costs and efficiencies will benefit distribution growth going forward.

A new position was also established in Diversified property fund. While this counter appears expensive on a yield basis, we believe that superior growth will be driven by a strong management team and exciting development opportunities. We also like the alignment of interests with a significant (and growing) directors' shareholding.

Our positioning within the fund remains cautious, with a 14% investment outside domestic listed property, and a significant investment in 'A' shares. In an increasingly uncertain environment with regards to interest rates and the domestic consumer, domestic property stocks have hardly reacted, as opposed to the situation in the UK and elsewhere internationally.

We continue to believe that a focus on quality counters with prime properties is important, and that the yield differential between these and secondary properties are too low.

Edwin Schultz and Ndabe Mkhize
Portfolio Managers