The FTSE/JSE SA Listed Property Index (SAPY) provided a 2.2% total return (1% capital, 1.2% income) for the third quarter of 2011. This exceeded the FTSE/JSE All Share Index (ALSI)'s negative 5.8% total return, and the All Bond Index (ALBI)'s 2.8% total return.

In August, listed property funds - representing 62% of the sector by value - reported their results. On average, distributions were 6.6% higher than the previous six months. The results season was disappointing on balance, and highlighted the continued difficulty experienced in neighbourhood and community shopping centres, offices (especially B-grade offices) and hotels.

Investment Property Databank (IPD) released direct property index returns for the first half of 2011 in September. The results showed that the direct property market is beginning to take strain as the index recorded a total return of 4.1%, which was made up of zero capital gain and 4.1% income return. This compares unfavourably with the 13% total return produced by the index recorded in 2010, which was made up of 9% income return and 4% capital return.

The FTSE/JSE SA Listed Property Index (SAPY) provided a 5% total return (3.8% capital, 1.2% income) for the second quarter of 2011. This exceeded the FTSE/JSE All Share Index (ALSI)'s -0.6% return, and the All Bond Index (ALBI)'s 3.9%.

The capital gain was a function of the 37 basis point (bps) fall in bond yields. Absent the strong bond market, there would have been little capital gain in listed property. This has been the pattern over the past two years.

Property again demonstrated its defensiveness as it barely budged when equities sold off (and recovered) in late June. On a short-term measure against bonds, property yields are towards the more expensive recent levels.

Newsflow over the quarter on balance was unsupportive, with companies continuing to find conditions tough. Funds with high office exposure (e.g. Sycom Property Fund, which reported in June) have struggled, often having to reduce rentals on net lettings.

Listed property produced a -2.2% total return in the first quarter of 2011, with the 3.4% gain in March offsetting some of January's losses. The decline was due to the increase in bond yields with the All Bond Index (ALBI) falling 1.6%. The FTSE/JSE All Share Index (ALSI) gained 1.1%, and general retailers were down 2.8%.

More than half of the property companies released results in quarter one. On the whole, these were below market expectations, with significant increases in office and industrial vacancies reported, which is in line with our more bearish short-term outlook. Bucking the trend, heavyweight Growthpoint's operational results and outlook were welcome. The market modestly revised sector distribution growth expectations lower after the results.

The coming quarter will be active in terms of new listings, capital raisings and opportunities. The cash level of the fund is higher than target because of commitment provided in respect of these events. The cash holding will decline to target over time.

The total return of the FTSE/JSE SA Listed Property Index (SAPY Index) increased 29.6% in 2010. Remarkably, this is unexceptional as it is around the average return over the index's eight-year history. The return was a consequence of the almost 1% fall in bond yields. Property yields fell eight basis points (bps) less. For the year, the FTSE/JSE All Share Index (ALSI) provided a 19% return and the All Bond Index (ALBI) 15%. General retailers, one of the sectors most similar to property, gained 61.5%. Over the final quarter listed property returned 3.1%, less than the ALSI (9.5%) and general retailers (6.2%), but more than the ALBI (0.7%), as the yield on property was flat while bond yields increased. This was despite disappointing newsflow, with some results or prospects statements below expectations. Potential corporate action announced could see the listed sector enlarge and quality improve.

With less scope for bond yields to decrease and the lagging operating environment still tough, we expect lower double-digit returns from listed property in 2011 (if bond yields are flat). This is still a decent return from a high-yield asset, considering the current low-return, low-inflation environment.

The sector is around our fair value and provides a one-year entry yield of 8% with above-inflation distribution growth (around 6% over the year). Downside operational risk has declined, funding conditions are easier and commercial building plans passed have fallen materially. A genuine recovery in property conditions may take longer than many anticipate, with higher electricity and rate costs constraining net rental growth, and over-rentals possibly developing in time (a key concern). Large capital raisings may constrain prices. The direct commercial property market remains resilient. On a long term secular view, property is attractive, as existing rents are below feasibility rentals for new developments.