In the fund manager's opinion, SA listed property is currently overvalued.
1. Interest rates appear to be at the bottom of the current cycle.
2. Current income yields at 10% are below historic averages.
3. Income yields are about 0.5% higher than long bonds. Bonds are generally considered expensive.
4. Positive signs of rental growth are becoming evident.
An income dependent investor having secured an income yield that is currently higher than most other options should expect capital volatility and short term capital loss may be experienced.

Distributions
The distributions declared at the end of September were 17.1973 cents per unit (17.38 cents per unit - Jun 2004). The income paid (last four distributions including June) to investors has equated to an average income yield in excess of 11.0%. Although there has been no growth in income over the last year, distributions are expected to increase by 3% to 4% in the year ahead.

Property Fundamentals
The direct property market fundamentals are improving with rentals strengthening across all sectors. A currently improving rental market will translate into income growth of approximately 3% to 4% p.a.

The next 3 to 5 years
a. It is likely that interest rates have reached the bottom of the current cycle with the 1 to 2 year expectation being higher rates than current levels. Bond yields are expected to increase over this period.
b. Inflation on average appears to be well contained under the 10% level for the next 2 to 3 years.
c. Economic growth over the next 2 to 3 years is expected to be 2% to 3% pa. This is positive for underlying property fundamentals and will ultimately lead to higher rentals which will translate into higher income growth. This growth is currently evident in the market.
d. A currently improving rental market should translate into income growth of 3% to 4% pa on average over the next three years.
e. Total returns over the next 5 years are expected to be approximately 10% to 13% pa. This forecast is based on an expected 11% to 12% income yield in 5 years time and an annual growth in income of between 3% and 4%. In a relatively stable interest rate environment with reasonable economic growth, these expected total returns are realistic. Please note that virtually all of the expected total return will be a result of the income yield.
f. In the fund manager's opinion, SA listed property is currently overvalued. Income dependent investors looking to secure an income yield that is currently higher than most other options should expect capital volatility and short term capital loss may be experienced.

In the fund manager's opinion, SA listed property is fairly priced.
1. Interest rates appear to be at the bottom of the current cycle.
2. Current income yields at 11% are around historic averages.
3. Income yields are about 1% higher than long bonds. Bonds are generally considered expensive.
4. Positive signs of rental growth are becoming evident.
An income dependent investor having secured an income yield that is currently higher than most other options should expect capital volatility and short term capital loss may be experienced.

Distributions
The distributions declared at the end of June were 17.3858 cents per unit (17.34 cents per unit - Mar 2004) from the Property Equity Fund and 14.2537 cents per unit (14.13 cents per unit - March 2004) from the Property Income Fund. The income paid (last four distributions including June) to investors has equated to an average income yield in excess of 11.0% from both of the funds. Although there has been no growth in income over the last year, distributions are expected to increase by 3% to 4% in the year ahead.

Property Fundamentals
The direct property market fundamentals are improving with rentals strengthening across all sectors. A currently improving rental market will translate into income growth of approximately 3% to 4% p.a.

The next 3 to 5 years
a. It is likely that interest rates have reached the bottom of the current cycle with the 1 to 2 year expectation being higher rates than current levels. Bond yields are expected to increase further over the next year. An 11% yield on the R157 by year end is a reasonable expectation.
b. Inflation on average appears to be well contained under the 10% level for the next 2 to 3 years.
c. Economic growth over the next 2 to 3 years is expected to be 2% to 3% pa. This is positive for underlying property fundamentals and will ultimately lead to higher rentals which will translate into higher income growth. This growth is currently evident in the market.
d. A currently improving rental market should translate into income growth of 3% to 4% pa on average over the next three years.
e. Total returns over the next 5 years are expected to be approximately 12% to 15% pa. This forecast is based on an expected 12% income yield in 5 years time and an annual growth in income of between 3% and 4%. In a relatively stable interest rate environment with reasonable economic growth, these expected total returns are realistic. Please note that virtually all of the expected total return will be a result of the income yield.
f. In the fund manager's opinion, SA listed property is fairly priced. Income dependent investors looking to secure an income yield that is currently higher than most other options should expect capital volatility and short term capital loss may be experienced.

In our opinion, SA listed property is fairly priced:
1. Interest rates appear to be at the bottom of the current cycle.
2. Current income yields at 11.25 % are around historic averages.
3. Income yields on quality funds are about 1% higher than long bond yields, however bonds are generally considered expensive at 9.5%.
4. Lack of rental growth continues to be a concern.
An income dependent investor having secured an income yield that is currently higher than most other options must be aware that capital volatility should be expected and short term capital loss may be experienced.

1. Distributions - The distributions declared at the end of March were 17.3378 cents per unit (17.33 cents per unit - Dec 2003) from the Property Equity Fund and 14.1310 cents per unit (14.57 cents per unit - Dec 2003) from the Property Income Fund. The income paid (last four distributions including March) to investors has equated to an average income yield in excess of 11.0% from both of the funds. Although there has been no growth in income over the last year, distributions are not expected to decline which protects income in an environment of low interest rates.

2. Property Fundamentals - The direct property market fundamentals are improving but still remain poor. Although the industrial rental market is strengthening, there remains excess office space in many geographic locations. We therefore continue to expect no growth in earnings (0% -1%) for the rest of the year ahead (2004) and only 2% to 3% over the following two years.

3. The next 3 to 5 years - (1 year is too short a period to give reasonable or even likely forecasts) -
a. Before giving an opinion as to the likely return that may be expected from listed SA commercial and industrial property over the next three to five years, it is necessary to make certain fundamental assumptions. These relate to the macro-economic variables that influence property prices and rental incomes. These variables are interest rates, inflation and economic growth.
b. It is likely that interest rates have reached the bottom of the current cycle with the 2 to 3 year expectation being higher interest rates than current levels.
c. Inflation on average appears to be contained under the 10% level for the next 2 to 3 years.
d. Economic growth over the next 2 to 3 years is expected to be 2% to 3% pa. This is positive for underlying property fundamentals and will ultimately lead to higher rentals which will translate into higher income growth.
e. Income for the rest of the year is not expected to grow. This takes into consideration the current weak SA property fundamentals. The average historical income growth has been 7% pa. The current situation should improve over the next 2 to 3 years, assuming economic growth.
f. Total returns over the next 5 years are expected to be approximately 12% to 15% pa. This forecast is based on a 12% income yield in 5 years time and an annual growth in income of between 2% to 3%. In a relatively stable interest rate environment with reasonable economic growth, these expected total returns are realistic. Please note that virtually all of the expected total return will be a result of the income yield.
g. In our opinion, SA listed property is fairly priced. Income dependent investors looking to secure an income yield that is currently higher than most other options must expect capital volatility and short term capital loss may be experienced.

A proliferation of stock market listings and the launch of new funds in a sector are some of the clearest signs of a bull trend nearing an advanced stage. Amid the hype, this is all too evident in the property sector.

One asset management group not joining in is Marriott, which in 1996 launched SA's first property fund, Marriott Property Equity. "If you feel, as we do, that the interest rate cycle is near a turning point, it's hard to justify property income yields at current levels," says joint fund manager Ian Anderson.

Just as pertinent is that property fundamentals are far from enticing. "While there are signs that office rentals hit a low in 2003, there are no signs of a significant recovery," says Anderson. Supply of office space still exceeds demand and there is a similar situation in industrial property. Retail property is the only bright spot, but overall he sees income distribution growth from property unit trusts (PUTs) and property loans stocks (PLSs) remaining modest at an average of 2%-3%/year over the next five years.

With property fundamentals still suspect, much will depend on the direction taken by fixed-interest bond yields. Here Anderson cautions that investors now coming into the property market risk capital loss over the short term.

Falling bond yields and a narrowing of the gap between bond and property yields have driven by far the greatest proportion of the property sector's bull trend since August 1998. At current bond yields, Anderson suggests PUT and PLS income yields should be at 12% rather than their 11,5% average.

Investors should also note the relationship between the earnings yield of the financial & industrial index (Findi) and PUT and PLS yields, says Anderson. He makes a valid point. After tax at the 30% rate paid on interest income by institutions, PUTs and PLSs yield 7,6%, on par with the Findi's earnings yield.

This is a far cry from the normal large premium at which PUT and PLS yields stand relative to the Findi earnings yield. Marriott's caution on property investment undoubtedly appears warranted.

In the fund manager's opinion, SA listed property is now overvalued for the following reasons:
1. Current income yields are below historic averages
2. Income yields on quality funds are only marginally higher than long bond yields - bonds are generally considered expensive
3. SA listed property is more expensive than equivalent open market property
4. Lack of rental growth would indicate current prices reflect an over priced asset class
An income dependent investor securing an income yield that is currently higher than most other options must be aware of the capital risks associated with the investment.

Distributions
The distributions declared at the end of December were 17.3351 cpu (17.83 cpu - Sept 2003) from the Property Equity Fund and 14.5704 cpu (14.20 cpu - Sept 2003) from the Property Income Fund. The income paid (last four distributions including Dec) to investors has equated to an average income yield in excess of 11.5% from both of the funds. Although there has been no growth in income over the last year, distributions are not expected to decline which protects income in an environment of low interest rates.

Property Fundamentals
The direct property market fundamentals are improving but still remain poor. Although the industrial rental market is strengthening, there remains excess office space in many geographic locations. We therefore continue to expect little growth in earnings (1% -2%) over the year ahead (2004) and only 2% to 3% over the following two years.

The next 3 to 5 years
(1 year is too short a period to give reasonable or even likely forecasts)
a. Before giving an opinion as to the likely return that may be expected from listed SA commercial and industrial property over the next three to five years, it is necessary to make certain fundamental assumptions. These relate to the macro-economic variables that influence property prices and rental incomes. These variables are interest rates, inflation and economic growth.
b. It is possible that interest rates may decline marginally over the next 6 months, however the 2 to 3 year expectation is higher interest rates than current levels.
c. Inflation appears to be contained under the 10% level for the next 2 to 3 years.
d. Economic growth over the next 2 to 3 years is expected to be 2% to 3% pa. This is positive for underlying property fundamentals and will ultimately lead to higher rentals which will translate into higher income growth.
e. Income for the year ahead is expected to grow at 1% to 2%. This takes into consideration the current weak SA property fundamentals. The average historical income growth has been 7% pa. The current situation should improve over the next 2 to 3 years, assuming economic growth.
f. Total returns over the next 5 years are expected to be approximately 8% to 10% pa. This forecast is based on a 12% income yield in 5 years time and an annual growth in income of between 2% to 3%. In a relatively stable interest rate environment with reasonable economic growth, these expected total returns are realistic. Please note that virtually all of the expected total return will be a result of the income yield.
g. In the fund manager's opinion, SA listed property is now overvalued relative to expected 5 year average yields. Income dependent investors looking to secure an income yield that is currently higher than most other options must be aware of the capital risks associated with the investment.