Listed property had a good third quarter, with a total return of 11% (the return in September was -3.3%). This takes the year-to-date total return to 33%. Over the quarter the FTSE/JSE All Share Index (ALSI) provided 7.3%, the All Bond Index returned 5.0% and general retailers - which, like bonds, share some characteristics with property - delivered 10.1%.

As has repeatedly been the case, property strength can be attributed to the rally in bonds. The yield on listed property fell over the quarter, virtually to the identical extent as the yield on the 10-year government bond. The fall in property prices in September removed much of the over-exuberance that, as we noted last month, had occurred in August.

Listed funds are facing a low weighted-average cost of capital as borrowing costs and the equity yield on the funds are low. This should eventually filter through to increasing prices of investment grade direct property assets, which will improve but not remedy stretched listed property price-to-book value ratios.

The sector offers a one-year forward yield equivalent to the 10-year bond yield of 7%. Distribution growth should approximate inflation. Cost of debt and equity capital has reduced significantly. Vacancies are plateauing, but may still increase in some pockets.

A genuine recovery in property conditions may take longer than many anticipate, with higher electricity and rate costs constraining net rental growth, and significant over-rentals possibly developing on renewal (our key concern, especially in offices). Large malls remain robust, although supply is increasing. The direct investment grade commercial property market remains resilient. On a long-term secular view, property is attractive because existing rents are below feasibility rentals for developments, even with softer building costs. A rise in bond yields is a key short-term capital risk.

Listed property strength continues. The SAPY Index's total return in June was 6.9%, 19.2% year to date, and 29.8% over the last 12 months - three times the FTSE/JSE All Share Index (ALSI)'s 9.2% 12-month return. The quarter's return of 10.3% was ahead of the All Bond Index (5.2%), the ALSI (1%) and general retailers (7.3%), which share some characteristics with property.

Critically, it is the bond market, not property fundamentals, that is driving listed property prices. Property yields have remained in a tight band compared to bond yields, but did strengthen moderately compared to bonds over the quarter. Given the level of bond yields, listed property prices have actually done little. Over the short term, properties' fortunes are tied to those of the bond market.

Property prices do not fully reflect the more muted distribution growth outlook, as conditions remain tough. However, there is a good tactical case for listed property which is supportive: it's a high-yield, defensive asset in a low-yield and risk-averse world.

Listed property experienced a strong first quarter of 2012 with a total return of 8%. This exceeded the FTSE/JSE All Share Index (ALSI)'s 6% and All Bond Index (ALBI)'s 2.4%, but was less than general retailers (12.3%). We did not anticipate this degree of strength - especially against bonds. Investors should not expect this level of return to persist.

Property strengthened in its own right, as bond yields fell modestly over the quarter. Listed property yields fell by 29 basis points (bps) more than bonds, but the gap remains within the recent historical range.

The second quarter will be busier in terms of new listings and capital raisings. Redefine's intended takeout of Fountainhead (in which we have a large stake) is contentious and may facilitate follow-on consolidation in other counters.

Listed property provided an 8.9% total return in 2011, comfortably beating the FTSE/ JSE All Share Index (2.6%), but only on par with the All Bond Index (8.8%), and worse than general retailers (19.6%). The return came from income as, in price terms, property barely budged and the sector's historical yield rose marginally. Distributions increased around 5.6% over the year, slightly below the most recent inflation reading of 5.9%. In 2010, distribution growth was over 7%. We expect this to fall to under 5% in 2012 (even adding back Redefine's unbundled Arrowhead distribution).

During 2011, nine new relevant counters listed. We expect activity will move from new listings to capital raisings. As evidenced last year, listed property is more defensive than equities, as most earnings are medium-term contracts. Property should outperform in an economic downswing, even if the industry itself is under pressure, but should lag the recovery.

The sector offers a one-year forward yield of greater than 8%, which exceeds the 10-year bond yield, with distribution growth below inflation in that period. Downside operational risk has reappeared, but base funding rates have reduced. Vacancies are plateauing, but may still increase in some pockets. A genuine recovery in property conditions may take longer than many anticipate, with higher electricity and rate costs constraining net rental growth, and significant over-rentals possibly developing (our key concern). The direct commercial property market remains resilient, although signs of strain are appearing. On a long-term secular view, property is attractive as existing rents are below feasibility rentals for developments, even with softer building costs.