South Africa's listed property sector advanced 3.4% in June, despite stable bond yields and a slightly weaker rand. Investors are clearly expecting interest rates to remain lower for longer, which should support current valuations and help keep funding costs lower for longer.

Although the current forward yield on South Africa's listed property sector is below the yield on longer-dated government bonds, the gap is appropriate given the listed property sector is expected to grow distributions by between 7% and 9% per annum over the next three years. This growth is achievable, despite the weaker economic backdrop and ongoing labour issues, as most of South Africa's real estate investment trusts (REITs) have spent the last three years bringing rentals into line with market and absorbing higher vacancy rates in their office portfolios. With most of the hard work now behind them, they can benefit from the annual escalations, improved occupancy and lower funding costs in the years ahead.

Corporate activity in the sector remains a key theme in 2014, with Equites Property Fund listing in June, while Annuity Properties was acquired by Redefine Properties and subsequently delisted. Growthpoint Properties is likely to acquire Acucap, which recently merged with Sycom, while Octodec and Premium are exploring the possibility of a merger. The three-way merger between Delta Property Fund, Rebosis Property Fund and Ascension Properties has been called off, with Delta selling their stake in Ascension to Rebosis.

Although there is still significant uncertainty with regard to the pace and extent to which the South African Reserve Bank will raise official interest rates in South Africa, the listed property sector is poised to continue delivering a high and growing income stream (inflation-hedged), as well as capital appreciation in the long term. The one year forward yield on the Nedgroup Investments Property Fund is currently 8.7%, which is significantly higher than the current yield on the market (7.2%) and distributions are expected to grow at more than 9% per annum over the next three years.

South Africa’s listed property sector posted another strong performance in March, gaining 4.8%.

The sector is now up almost 10% since the South African Reserve Bank surprised investors by raising official interest rates by 50 basis points at the end of January. Investors appear to have drawn some comfort from the impressive results posted by those property companies that reported results during the first quarter. Distribution growth for the sector as a whole has now accelerated above 8% and is expected to remain at these elevated levels for the next 2 to 3 years. This should support listed property yields trading at levels below the yield on longer-dated government bonds and lead to strong capital growth from the sector over the medium term.

In the short term however, listed property yields should track yields in the South African bond market, which in turn will be influenced by bond yields in global markets (particularly the United States). With quantitative easing set to end this year, there is likely to be upward pressure on global bond yields, which will place upward pressure on South African bond and listed property yields, resulting in some capital losses in the short term. Recent rand strength has countered the impact of rising global bond yields and has resulted in lower bond yields in South Africa during March. This also had a positive impact on investor sentiment towards listed property during the month.

As a result of the recent rally in the property sector, the one year forward yield on the market as a whole has declined to 7.5%, with distribution growth forecast at 8.3% per annum over the next 3 years.

The Fund, which continues to favour investments in some of the smaller listed property companies, has one a year forward yield of 8.6% and is expected to produce distribution growth of at least 9% per annum.

Despite a substantially weaker rand and an announcement from the US Federal Reserve that it would taper its bond purchase programme by $10 billion a month in January, South Africa's bond and listed property markets posted modest gains in December. The Nedgroup Investments Property Fund advanced 0.9% in December and 10.2% for 2013 as a whole. The Fund outperformed the SA Listed Property (SAPY) index by 1.8% in 2013 and by 5.5% since it was launched in July 2010.

2014 is likely to be a challenging year for South Africa's listed property sector given an expected increase in global bond yields and a weaker rand which will place further upside pressure on domestic bond yields. Property fundamentals in South Africa are unlikely to improve in the short-term as the domestic economic growth is not expected to accelerate in 2014 and consumer spending is set to slow. On a more positive note, official interest rates are unlikely to rise in 2014, despite the expected increase in consumer inflation on the back of a weaker rand. All told, this should place moderate upward pressure on listed property yields, leading to a further de-rating of the sector during 2014. Most of the upward pressure on yields will be experienced by the larger listed property companies which are trading on yields substantially below the yields on longer-dated government bonds. Resilient and Hyprop trade on forward yields more than 200 basis points below the yield on the R186 bond, while Growthpoint's yield is 100 basis points below the long bond yield.

By contrast, the yields on a number of the smaller, less liquid listed property companies trade on forward yields more than 200 basis points above the yield on the R186 bond, despite offering investors the prospect of higher distribution growth than the likes of Growthpoint and Hyprop over the next two to three years. As a result, the Fund continues to favour investments in these smaller companies, a strategy that not only produced sector-beating returns in 2013, but also delivered those returns with lower levels of volatility. The focus on smaller listed property companies means the forward yield on the Fund (8.9%) is substantially higher than the forward yield on the sector as a whole (7.3%). Distributions from the Fund are expected to grow 1-2% more quickly per annum than the sector average over the next two to three years.

The Fund declared and paid a distribution of 2.12c per unit at the end of December, bringing the total distributions paid in 2013 to 9.16c per unit. This represents growth of 28.1% over the distributions paid in 2012. Distributions are forecast to grow by 14.5% in 2014 and 14.0% in 2015.

September was characterised by increased uncertainty in global financial markets after the US Federal Reserve opted not to taper its bond purchase programme. At the same time, US lawmakers were not able to reach a compromise on a budget for the remainder of the US fiscal year, which has resulted in a partial shutdown of the US government. Equity markets fell, albeit marginally while the dollar weakened and US Treasury yields fell more than 30 basis points.

Despite the volatility in global financial markets and negative price action in global equity markets, the Nedgroup Investments Property Fund advanced 3.9% in September on the back of strong price gains in the listed property sector, which responded to a stronger rand and lower global bond yields. A number of companies reported strong distribution growth for 2013 and the outlook for 2014 continues to suggest distributions will accelerate from the current level of 7%.

The Fund continues to offer investors a high level of initial income, as well as inflation-hedged income and capital growth over the medium and long term. The current one year forward yield on the Fund is 8.5% and distributions are expected to grow by 8.9% per annum over the next 3 years.