Listed property experienced a very volatile quarter in line with global capital markets; as was the case in the second quarter of the year. After a weak start to the three-month period, the sector came back strongly during September as the unexpected decision by the US Federal Reserve (Fed) to delay tapering their quantitative easing programme resulted in a bounce in the bond market. The seven basis points move lower in bond yields over the quarter, however, masks the intra-quarter volatility. The rolling 10-year bond yield moved to as high as 8.33% towards the end of August, only to rerate to 7.62% at quarter end as a result of the Fed's decision. With the relationship between bond and listed property yields remaining strong, the sector's clean forward yield moved from 6.9% to 7.4%, while the yield gap closed by 40 basis points, as expected. Within all of this volatility, the sector delivered an -1.3% total return for the quarter. The fund outperformed the SA Listed Property Index (SAPY) over the three months and remains top quartile over the one-, threeand five-year periods. Given the ongoing high intra-quarter volatility, it remains difficult to identify trading trends. However, the likely performance drivers of the past quarter include results releases and stock liquidity. Companies that underperformed in the past in terms of distribution growth, and exhibited some element of turnaround (such as SA Corporate and Emira), have outperformed during the quarter. Relative liquidity also played a role, with some of the more liquid counters initially underperforming as did some illiquid counters on small trading volumes, but then partly recovered in the strong run in September. Strong individual counter relative performance was delivered by Capital & Counties, SA Corporate, Hospitality A, Capital, Fortress A, Emira, Intu Properties and Nepi, most of which contributed positively to the fund's relative performance. Some of the fund's larger underweight positions also assisted, especially Redefine, Sycom and Growthpoint. A detractor to performance was the fund's relative positioning in Synergy A, Dipula A, Annuity, Ascension A and Vunani. Trading activity within the fund includes increased exposure via equity placements to Fortress A and Annuity and a marginal increase in exposure to SA Corporate and Vukile. We reduced exposure to a broad range of companies into strength towards the end of the quarter, including Growthpoint, Capital & Counties, Acucap, Emira and Resilient. The past quarter saw the listing of Tower Property Fund with a market cap of R776 million and a portfolio value of R1.65 billion consisting of 27 properties, the largest being the Cape Quarter precinct in Cape Town. Data releases during the quarter include the SAPOA 2Q13 office vacancy survey, which increased from 10.7% to 11.0% between March 2013 and June 2013, as well as the IPD South Africa Property Bi-Annual Indicator (the 6-monthly return of SA direct property) to June 2013. After delivering a total return of 10.4% for 2011 and 15.2% for 2012, All Property gathered further momentum (which started in 2012) to deliver a total return of 9.2% for the first half of 2013 vs 5.9% for the comparative period in 2012. This is the highest first half return in five years. During the quarter, companies that represent 60% of the SA listed property sector's total market capitalisation reported their results. Excluding Nepi, the sector delivered 8.6% distribution growth, which was an improvement on the 7.4% sector average delivered by the same companies in the December 2012 reporting period. Vacancies had in general been stable or improved, except for individual cases where speculative office developments had been completed. Going forward, the shuffling of some office tenants in the next two to three years may cause some large single tenanted building vacancies in areas like Rosebank (Sasol), Illovo (Webber Wentzel) and Sandton (Discovery & Cell C) as new consolidated trophy buildings/campuses are being constructed for large corporate tenants. Reversions on prime space saw an improvement from the previous reporting cycle, while B & C grade space and retail reversions deteriorated marginally, remaining in negative territory. Landlords achieved success in filling B & C grade office space, but at the expense of rentals - at least the negative reversions remain single digit. The successes of filling this space flowed into the filling of vacant space as well. Overrenting in some long industrial leases coming up for renewal continued to hit landlords. Landlords mitigated the risk of vacancy by entering into early negotiations to renew these leases and rather manage the process proactively. Examples from the past reporting period include RTT and DHL facilities. The trend continued that escalation rates being signed are decreasing closer to 8% than 9% on average with some national anchor retail tenants signing closer to 7%. Mixed trends, very similar to that of the prior 6 months, were reflected in property operating costs. Through active cost management and acquisition of better managed properties, especially of the more recent listings, operating cost ratios decreased. Some landlords achieved much lower property operating costs through new property management contracts, not only through lower negotiated fees than what the previous service provider charged, but seemingly also improved efficiencies through improved letting, area skills and economies of scale. Some of the filling of vacancies had been done through increased broker incentives and tenant installations, which impacted operating costs negatively. In general, tenant retention ratios increased at the expense of rental levels. Landlords did not stress the negative impact of administration cost increases as much as they used to; it may be that they had become accustomed to the increases or continue to simply pass the majority of it on to tenants. Many of the increases seem to have settled at high single digits, although valuation roll changes could impact this in the coming year, with appeals already taking place. The trend to look at the Domestic Medium Term Note (DMTN) market continued, but at a slower pace. Smaller players are testing the market, while the larger higher-rated players intend to increase the exposure of their funding pool to the capital market to as high as 50%. The move in the capital markets had a negative impact on pricing, reducing the benefit for borrowers, while the banks have become more competitive on pricing. Most funds have fixed 75% - 100% of their funding costs over two to five years, with three years seemingly the most popular. The disposal lists of most of the more established listed funds seem to have diminished substantially, with only a handful of properties remaining on each fund's list. Property acquisitions by the more recently listed funds moved beyond only the listed space, with a greater focus on large private companies as potential vendors. Larger acquisitions for the large caps were few and far between, thus the focus shifted to developments and redevelopments. The appetite for speculative office and industrial developments continued to increase. This is reflected in the SAPOA office vacancy survey where the increase in new space committed to was from 3.4% to 4.8% of the current total office space. One should expect capital market volatility to persist as an eventual tapering of quantitative easing is inevitable. This will impact the listed property sector as the relationship between bond and listed property yields remain strong, despite an appeal to investors to look beyond this historic relationship (mostly by the property companies themselves). Distribution growth prospects remain firmly intact for between 7% - 8%, which should support the sector in volatile times. There is, however, continued risk that ? despite the yield gap closing during the quarter ? listed property may suffer from a small derating relative to bonds.

Listed property experienced a very volatile quarter in line with global capital markets. After a strong start to the three-month period, the sector took its cue from local bond markets, which in turn followed global bond yields. The 10-year bond yield moved out by 78 basis points to 7.69% over the quarter, at one stage breaching 8.0% for a few days. The sector initially withstood the turning point in bond yields mid-May but succumbed a week later, which resulted in a 10% sell-off from this point to the end of the quarter. Perhaps Growthpoint's share placement of R2.5 billion at a 7.5% discount to prevailing share price levels was the tipping point for the sector, proving that the property companies were becoming too equity hungry, issuing scrip as a way of cheaper finance while share prices were high. Additional factors like rand weakness, ongoing labour unrest and a more hawkish Monetary Policy Committee statement have pushed bond yields up further. Within all of this volatility, the sector delivered an -0.4% total return for the quarter. Returns were characterised by strong underlying trading volumes, with both May and June being record trading value months. The sector's clean forward yield moved from 6.6% to 6.9%, with the yield gap widening by approximately 68 basis points. The fund has outperformed the SA Listed Property Index (SAPY) for the quarter and remains top quartile over the one-, three- and fiveyear periods. Given the high intra-quarter volatility, it is difficult to identify the trading trends within the period. It was however noticeable that the larger, more liquid companies (which have outperformed in the preceding 12 months) were the stocks that initially experienced the most severe sell-off during the period. As a result, many of the smaller, less liquid stocks are looking less attractive on a sector relative basis, taking into account their risk/return profiles. Strong individual counter relative performance was delivered by Capital & Counties, Dipula A, Redefine, Hyprop, Ascension A, Intu Properties, Nepi, Emira and Synergy A, of which most contributed positively to the fund's relative performance. Some of the fund's larger underweight positions also assisted, especially SA Corporate, Fountainhead and Growthpoint. A detractor to performance was the fund's relative positioning in Vunani, Capital, Acucap and Hospitality A. Trading activity within the fund includes increased exposure via equity placements to Redefine, Vukile, Growthpoint, Nepi and Ascension A. We also increased exposure to Resilient, Hyprop, Capital and Acucap. We marginally reduced exposure to a broad range of companies into strength, including Fountainhead, Investec Property, Capital & Counties and Intu Properties. Companies making up 40% of the sector's total market capitalisation have reported results during the quarter. The sector delivered 5.3% distribution growth, which was lower than the 7.4% sector average (which excludes the strong distribution growth from Nepi) delivered for the December 2012 reporting period. Individual company distribution growth varied from 13.5% by Arrowhead to -6.8% for Fountainhead. Excluding Fountainhead, which experienced exceptional advisory costs due to the Redefine and Growthpoint tussle, the lowest growth came in at 3.5%, delivered by Rebosis. The results season did point to a few noticeable trends, many of which are a continuation of trends from the December 2012 reporting period. Vacancies seem to be under control, with stock specific issues leading to some funds experiencing an increase in vacancies, i.e. rental guarantees expiring or large single tenanted industrial leases not being renewed. Despite the office sector being under pressure, the trend has been firmly established that landlords can keep vacancies intact if they are prepared to decrease renewal rentals substantially. Reversions continue to lose momentum with the bulk still being positive. Office reversions remain under pressure, with some recovery coming through in the Premium & A grade segments as renewals are in general at higher levels than six months ago. Coincidently much of the Premium & A grade space (rather than B & C grade space) is now being impacted by negative reversions due to the elevated levels of escalated rentals, rather than weak demand (which has been the case for B & C grade space for the last 18 months). Over-renting in some long industrial and retail leases (i.e. 10 or 15 years) coming up for renewal do provide once-off hits to landlords. Landlords are mitigating the risk of vacancy by entering into early negotiations to renew these leases and rather manage the process proactively. Escalation rates signed on renewals are up to 50bps lower than that which were contracted in expiry lease agreements. Mixed trends are coming from the recent results for property operating costs. Through active cost management and acquisition of better managed properties, especially by the more recent listings, operating cost ratios are decreasing. Some of the filling of vacancies has been done through increased broker incentives, which negatively impacted operating costs. Tenant retention ratios have been stable and gradually increasing, but where it is below 70%, operating costs are increasing due to heightened tenant incentives to fill the space once empty. After a stable December 2012 reporting period, arrears and bad debts have started to increase, pointing perhaps to increased tenant pressure. Administration cost increases seem to have peaked, although valuation roll changes could impact this in the coming year, with landlord appeals already taking place. The trend to look at the Domestic Medium Term Note (DMTN) market continues, but at a slower pace. The banks have become more competitive on pricing while the movement in the bond market has impacted the relative attractiveness of the DMTN market. Most of the funds are looking to increase its fixed debt portion before swap rates move out too far. There is still opportunity to benefit from the expiry of some longer date swaps entered into at a previous higher point in the interest rate cycle. When it comes to portfolio positioning, the more established funds are spending capital on existing properties through redevelopments, refurbishments or expansions, while decreasing their exposure to tail-end properties. In turn, it is the more recently listed funds that tend to acquire these properties. Appetite has increased for speculative office and industrial developments. The northern suburbs of Johannesburg could come under pressure in the short to medium term as developers (focused on Sandton) entice large office tenants to consolidate into a new flagship property close to the Sandton Gautrain station, which should result in vacant space elsewhere. Two months ago the potential of an interest rate cut was still on the cards. The more recent hawkish stance by the Monetary Policy Committee has resulted in a reversal of what the capital market expected interest rates will do. Although the sector average one-year distribution growth prospects of 7% to 8% remain intact, the rerating of listed property relative to bonds (which occurred in the last few weeks of the quarter) is not fully warranted. The likelihood of a pull back relative to bonds does exist in the short to medium term as further inflationary risks rear their heads and impact bonds negatively. At present, the market may rather be taking its cue from the Reserve Bank, which continues to take a stance of being growth supportive and inflation tolerant rather than being unnecessarily pre-emptive in hiking interest rates - hence the breakdown of the strong recent correlation between bond and property yields in favour of property. Gaining exposure to the sector in these volatile times therefore needs to be a two layered approach: taking your cue from both yield relative weakness and general capital market volatility opportunities, which we expect to persist.
Portfolio manager
Anton de Goede

The year started with strong momentum in the listed property sector as investors seemingly ignored the marginal weakness in the bond market, which has led to a 9.1% total return for the quarter. This was one of the few quarters in the recent past where the strong correlation between bond and property yields broke down. Performance was partly driven by strong underlying trading volumes (with March being a record trading value month), assisted by record index levels which were in large part due to increased trading in the final week of the quarter related to changes to the JSE index and free float. Whereas the sector's performance in 2012 was mostly driven by a strong bond market, the relative performance year to date has been driven by a rerating relative to bonds, with listed property being the most highly rated relative to bonds since 2011, and close to its highest rating in two years. The sector's clean forward yield moved from 7.0% to 6.6%, with the yield gap widening by approximately 40 basis points. The fund underperformed the SA Listed Property Index (SAPY) for the quarter, but remains top quartile over the one-, three- and fiveyear periods. With some of the larger more liquid counters within the sector all trading at yields of 7% and below, the smaller more recently listed counters (many of which have an A & B unit structure), outperformed strongly. These include Hospitality A & B, Arrowhead A & B, Dipula B, Ascension B, Fortress B and Synergy A & B. This indicates two types of investors coming through; those in search of defensive yield in an uncertain market and those in search of higherthan- sector-average distribution growth. The relative performance of some strong individual counters was as a result of better than expected results releases for the December reporting period, as in the case of SA Corporate, Vunani and Nepi. In addition, share prices were impacted by corporate action potential (as in the case of Fountainhead, Redefine and Growthpoint) and continued equity issuances from more recent listings. Positive performance contributions came from the fund's relative positioning in Hospitality A, Vunani, Capital & Counties (CapCo), Synergy B and Sycom. A detractor to performance was the fund's relative positioning in SA Corporate, Growthpoint, Vukile, Dipula A and Intu Properties (previously Capital Shopping Centres). Trading activity within the fund includes increased exposure via equity placements to Delta and Intu Properties. We also increased exposure to Acucap, Hyprop, SA Corporate, Emira and Vukile. We marginally reduced exposure to a broad range of companies into strength, including Fountainhead, Investec Property, Octodec and Rebosis. February included an onslaught of financial results releases, with roughly two thirds of the sector's market capitalisation reporting their results. The sector delivered a pleasing 9.3% distribution growth; even when excluding the strong distribution growth from Nepi, the 7.4% sector average is moving closer to in-force escalations. Individual company distribution growth varied from 24% (Vunani) to 3.5% (Emira). In addition to the local results, both CapCo and Intu Properties reported results. CapCo's were as expected with the benefits of the continued repositioning of Covent Garden and Earls Courth coming through. Intu Properties disappointed as like-on-like net rental income growth declined as the UK retail environment outside of London continues to impact the portfolio through retailers going into administration. We continue to believe that Intu Properties remains a medium- to long-term value unlock through the normalisation of the UK retail environment and change in management approach. The results season highlighted a few noticeable trends. Vacancies are generally either stable or decreasing due to the funds disposing of weaker properties; many of it to smaller, competing funds. Retail and industrial vacancies remain the strongest and below historical average, with some recovery in office vacancies, but mostly for those companies where the office vacancy base is high. Reversions are loosing momentum with the bulk still positive, but at lower growth rates. Office reversions remain under pressure, with some recovery coming through in the P and A grade space. The upcoming renewals of some overrented long industrial and retail leases (i.e. 10 or 15 years) will also result in once-off negative hits to the income statements of landlords. For the first time in a couple of years, property operating cost increases seem to be contained at a level that is in line with rental escalations. Funds with either a larger number of properties or geographically diverse portfolio, however, seem to be struggling with property operating costs. With many local authorities updating their valuation rolls in 2013, a substantial increase in rates and taxes could become an issue for landlords again. Arrears and bad debts seem to have experienced little movement. However, administration costs are increasing at much higher rates than escalations, thereby detracting from the bottom line. More funds are entering the domestic medium-term note market as funding source, with some targeting as much as 50% of its funding to come from the capital markets. Given that interest rates are at multi-year lows, funds are also prepared to capitalise on swap break costs to lower their average funding costs, with some increasing their exposure to variable interest rate funding. When it comes to portfolio positioning the more established funds are spending capital on existing properties through redevelopments, refurbishments or expansions, while decreasing their exposure to tail-end properties. In turn the more recently listed funds tend to acquire these tail-end properties. Growthpoint and Redefine continued their battle for the assets of Fountainhead. While it seemed as though Fountainhead unitholders were to be presented with two offers halfway through the quarter, Redefine withdrew their offer and subsequently acquired a total of 45.6% of Fountainhead's units in issue by using its Hyprop shareholding as swap currency to build up the stake. With the battle half won by Redefine, as Fountainhead suspended negotiations with Growthpoint, the outstanding issue remains whether Redefine would be able to vote as Fountainhead unitholder if an offer is presented to unitholders. Given that minority shareholders drew the short straw in all these actions, a case can me made that Fountainhead should still present the Growthpoint offer to unitholders to allow authorities to rule whether or not Redefine is a related party. Portfolio activity between listed property companies, additional acquisitions and subsequent equity issuances continue to be a trademark of the sector's landscape. We expect this to continue as the more recent listings are all on aggressive growth paths, many acquiring assets already within the sector. The battle for the assets of Fountainhead has also triggered the remaining PUTs within the sector - SA Corporate, Sycom and Capital - to closely look at the relationships with their respective management company shareholders, putting all of them on some type of path of effective internalisation, similar to what Emira has done in the past. The sector continues to surprise on the upside. It is clear that risks remain on the upside for bond yields. With marginal pressure on bonds in recent months due to weak local economic fundamentals, one would have expected property to follow a similar path as most of the performance in 2012 came from the correlation with the bond market. However, the rerating of the sector relative to bonds provided support, with potential yield seeking investors still driving the performance. The sector remains difficult to call in the short term as the dovish stance of the South African Reserve Bank continues to support all income yielding instruments. However, in the longer term the sector will suffer once the monetary cycle turns, putting pressure particularly on the large caps that are trading at historical premiums to the sector.

Portfolio manager
Anton de Goede

Please note that under a new fund classification system for the unit trust industry, effective 1 January 2013, the fund category name been changed to South African - Real Estate - General (previously Domestic - Real Estate - General).

Compared to recent quarters, the listed property sector delivered more subdued returns for the three months to December, although the 2.8% total return disguises some intra quarter volatility. This was in lieu of marginal local bond market yield compression on the back of improvements in US and emerging market bonds, despite continued rand weakness and weaker than expected inflation and trade deficit numbers. The sector's clean forward yield moved from 6.9% to 7.0%, with the yield gap remaining fairly constant. At quarter-end, the sector's market capitalisation reached the R200 billion milestone, driven not only by additional listings and capital raisings, but also a total return of 35.9% for 2012. The fund outperformed the SA Listed Property Index (SAPY) for the quarter and for 2012, and remains top quartile over the three- and five-year periods. Relative individual stock moves were mixed, but in general - if no corporate action was potentially involved - some of the larger, more liquid counters lost the most steam. This could be due to some selling pressure from generalists who gained exposure to the sector earlier in the year. The four largest listings according to market capitalisation all underperformed the SAPY during the quarter. In turn some of the higher yielding smaller listings, which started to gain momentum during the third quarter of the year, continued to attract interest, with names like Dipula, Ascension and Arrowhead coming through stronger on a sector relative basis. Some of these smaller, less liquid stocks did however suffer on the back of their larger bid-offer spreads. Positive performance contributions came from the fund's relative positioning in Capital Shopping Centres and Capital and Counties (both benefitting from a weaker rand), Rebosis, Nepi, Dipula A, Growthpoint and SA Corporate. A detractor to performance came from the fund's relative positioning in Redefine International, Sycom, Fountainhead, Synergy A and Hospitality A. Trading activity within the fund includes increased exposure to Emira after positive management interaction. We also initiated exposure to Annuity and Delta (two of the more recent listings), with Delta, which focuses on government leased properties within broader CBD areas, listing during November. We marginally reduced exposure to a broad range of companies into strength, including Arrowhead A, Fortress A, Investec Property, Capital Shopping Centres and Capital and Counties. November came with an onslaught of results releases, with roughly one third of the sector's market capitalisation reporting financial results. Besides maiden annual results for Rebosis, Dipula and Arrowhead, established names like Redefine and Fountainhead also released results. It is promising to see that the new listings are at least achieving the distribution guidance as set out in their pre-listing statements and in most cases outperforming the respective guidances. The negative impact of delayed property transfers at listing is more than compensated for by better funding margins and the decrease in vacancies. The average distribution growth delivered by companies with a likeon- like comparison came in at 2.8% year-on-year, which is much lower than the 5.9% year-on-year distribution growth delivered during the August results season. This was mostly due to the distribution growth reported by Redefine and Fountainhead. Even taking account the impact of the Arrowhead unbundling, Redefine delivered no distribution growth, while Fountainhead delivered only 1%; masking the gradual improvement we are seeing in the underlying direct property market. Reversions achieved continue to improve with low- to mid-single digit average reversions across the board, except for some office portfolios which continue to achieve negative reversions. The negative office reversions are the result of mainly overrented A-grade space (where market rentals have not grown in the recent past) or B-grade nodal specific space (where tenants can demand much lower rentals due to an oversupply of space in the specific node). We continue to experience an improvement in vacancies, although this is at the expense of rental levels. It is difficult to identify a trend within the management of property operating costs. Some companies seem able to successfully manage cost increases which are lower than rental growth, resulting in a decrease in operating cost ratio. Other companies, many of which have external management companies or older portfolios, continue to bear the brunt of maintenance spend to ensure that tenants renew their leases. Interest rate management is another area where companies are spending time and effort to ensure that the optimal capital structure and facility/fixed rate profile are achieved. Many companies, mostly the more recent listings, continue to utilise the low equity cost of capital by issuing shares for expansions or large acquisitions, while the three-year fixed or swap rate area of the yield curve remains popular to part debt fund acquisitions or refinance expiring fixes. The focus of the sector remains on the tussle between Redefine and Growthpoint for the assets of Fountainhead. Growthpoint presented a counter bid after an initial offer by Redefine subsequent to its (Redefine) acquisition of the management company associated with Fountainhead. Growthpoint's offer opened a legal minefield as no precedent exists for a third party to acquire the assets out of the trust associated with a property unit trust (PUT) independent from the management company. After some Fountainhead unitholder interaction, Redefine increased its offer for Fountainhead but at the time of the announcement (14 December 2012) the offer was still below the price implied by Growthpoint's offer. The Fountainhead board also entered into an agreement to deal exclusively with Redefine on any offer up to 31 January 2013 or until a formal agreement has been reached. Growthpoint is investigating its options on how to proceed prior to 31 January as management strongly believes in its legal case to acquire the assets independent from the management company. The sector continues to become more attractive relative to bonds based on improved distribution growth prospects driven by stabilising office vacancies and lower borrowing costs. In addition, we believe there continues to be relative value versus other interest bearing investments. However, the fortunes of the sector continue to be very closely tied with that of the bond market. Local bonds are at risk due to negative domestic factors. In the short term it should still find some support from low global yields and the associated continued inflow into higher-yielding bond markets. Though the likelihood of an interest rate cut seems to be dwindling as the reality of inflationary pressure becomes clearer, it is unlikely that we will see rates increase within the next 12 months. Investors should not ignore the long-term risks within the bond market and impact thereof on the sector while seeking higher yield plus potential income growth from listed property.

Portfolio manager
Anton de Goede