The quoted property sector held up relatively well against the wider financial sector in the third quarter of 2011 although this was cold comfort for investors who still watched their investments fall by 15% in Dollar terms versus a fall in the wider market of 17.3%. We have referred to the decoupling of the property sector from the wider financial sector in the past and this trend remains very much intact. To a greater extent, this reflects the poor attributes of the banking sector but it also highlights the fact that the property sector is underpinned by strong fundamentals and, in the case of our own holdings, because of balance sheet strength and quality of the underlying tenancy base.

Consensus earnings for the listed property sector are now forecast to slow by around 1% in 2012. Our work on dividend projections for the same period suggests either flat or slightly rising rates across most sub sectors. The downturn in the property market, though, reflects wider concerns over the economy and fears of a sharper deterioration in earnings than are currently being reported by property companies operating on the front line.

The sector, however, is not immune from this sort of global downdraft despite the apparent lack of correlation between, for example, government occupied office space in Washington DC and the threat of a Greek default. One area where we do have a more direct exposure to the global downturn is in the industrial sub sector where companies such as Prologis and Segro have been marked down in anticipation of a slowdown in their respective markets. At 6% in total, this is a relatively small component of the fund but more sensitive to the current crisis than the more domestic companies elsewhere in the portfolio.

We believe that, from a price perspective, the property sector will stage a recovery assuming that North America and the UK, in particular, manage to avoid recession and that the Eurozone produces a credible package to salvage the debt crisis. However, the breadth of the recent sell off has left very few areas unscathed and, despite the nature of the underlying holdings, property companies are not immune from a general flight to risk free assets such as treasury bonds and cash. At this point in the cycle, we are looking to add to some of our existing holdings in the fund to lock in dividend yields and prepare ourselves for the eventual upturn. Admittedly, this may be some time away but when it arrives, the best value will already have gone and the discount price gap to net asset value will have closed. Investors in the fund should be looking to do the same thing; adding to holdings at these lower levels and allowing the underlying equities time to recover whilst benefiting from the reliable income stream.

Unlike the beleaguered banks, the property companies in our universe have little or no exposure to the Greek crisis and the property sector has decoupled from the broader financial sector as a result. Property sometimes has a patchy record in times of high inflation which is usually accompanied by high interest rates and economic malaise.

Unusually, with interest rates so low, the better commercial property companies are neither struggling to raise capital nor worried about escalating levels of debt. It is, however, a sector of 'haves' and 'have nots'. The 'haves' include leading names in the commercial space with high occupancy levels and a great tenant mix across all sub sectors of the market. These companies typically own prime real estate in desirable locations, depending on their exact business. Industrial winners like Prologis own the best warehouses close to airports and other transport hubs; leading retail REITs like British Land or Riocan own the best shopping centres; downtown office owners like Washington REIT own prime real estate in key city centres and so on. These and others like them are the sort of names we own in the International Real Estate Fund.

On the other hand, the residential market in the US in particular remains in disarray. New mortgage approvals are at historic lows and most urban markets are overloaded with empty properties for sale, a legacy of the 2008/9 credit crunch. In the UK and swathes of Europe too, the commercial property market outside of major hubs and cities is still weak. The Fund, however, owns as many of the best real estate investment trusts in the UK, US and Europe that we are able to find. Yields remains good (gross dividend yields are typically over 4%) and the strong are getting stronger as second or third tier businesses struggle in an environment of lacklustre growth and high unemployment. In time, the strength of the urban sector will spread to the rest of the region but not for 2 or 3 years, in our view. However, despite the good performance of the REIT sector over the last 12 months, valuations remain significantly below their pre credit crisis levels and we believe that the next 5 years will prove to be particularly rewarding for the Fund's investors on a total return basis as economic growth slowly gathers momentum and investors revisit a relatively neglected asset class.

Commercial real estate has been a good performer in 2011 to date with the distribution units in Marriott International Real Estate Fund up by nearly 6% after adjusting for the recent dividend payout. In part, this is thanks to the first world nature of the underlying investments. Since the start of the year, developed economies have out-performed emerging markets, an area where the Fund has little direct exposure. Unlike the troubled residential sector, commercial property is proving to be a good investment both for income seekers and for investors wishing to put money into an inflation hedge other than gold which has the disadvantage of paying no dividend and proving impossible to value from a fundamental perspective. Commercial property occupancy levels on both sides of the Atlantic are very good and, as we have commented before, balance sheets are exceptionally strong, resulting in excellent dividend streams. Liquidity in the fund remains. The holdings in our fund are blue chip in nature; tenancy bases are of the highest quality and defaults, whilst not unheard of, are rare. We have also seen some corporate activity during the quarter with the recently announced $14.2bn merger of two of our US REIT holdings AMB and Prologis helping to support an already buoyant sector. With general equity markets remaining volatile, government bonds and cash yields at low levels and the political risk of emerging market investing rising daily, we believe that the commercial property sector is a relatively low risk area in which to be exposed in 2011, something which we expect stock prices to reflect as the year progresses.

Real estate owning equities have continued to outperform the broader equity market into the final quarter of 2010. It has, however, paid to be selective. Whilst major city centre properties have recovered remarkably quickly from the credit crisis of 2008/9, non-core markets in suburban areas continue to generally struggle, as do developers. Here, vacancy rates often remain high across all sectors, but especially retail where smaller players are still struggling to make headway against a backdrop of high unemployment and lacklustre growth. As we have noted before, the strongest players have already raised cash to provide a buffer against any further market weakness and a fighting fund to acquire distressed assets at low prices. These companies form the core of our portfolio and with dividend growth on the ascendancy, the real estate investment trust sector is rapidly returning to a period of steady inflation proofed growth with excellent dividend yields, particularly when compared to returns from bonds and cash. The latest round of Quantitative Easing will also help the sector. We do not expect interest rates to start moving higher at least until 2012 by which time credit markets should have eased further. Our principal worry is that the weakness of the Dollar will begin to sap returns in global terms but currency predictions are fraught with uncertainty and so our best course of action is to remain currency neutral, allowing us to concentrate on holding assets of the highest quality in those centres where we expect growth to continue to accelerate throughout 2010 and into 2011.