Listed property had a weak quarter with a total return of -1.3% despite rebounding 6.7% in September. The total return is now 7.3% year to date and 10.3% over the past 12 months. The quarter's performance was significantly worse than the FTSE/JSE All Share Index (+12.5%), the All Bond Index (+1.9%) and general retailers (+7.5%). Over September property outperformed the All Share and All Bond Indices.

Evident from the underperformance to the All Bond Index, property gave back some of its unjustified re-rating to bonds. Over the quarter listed property's yield increased by 33 basis points (bps), while the 10-year bond yield fell 7bps. Some of this yield increase is artificial, as property yields rose because many shares went ex-dividend over the period. Relative to equities property has become cheaper.

More than half the sector by market cap reported over the period. Notably, there were no disappointments, with results surprising on the upside. The sector continues to deliver above-inflation distribution growth, despite the tough operating environment. While capital values may remain volatile and at the mercy of the bond market, this growing distribution income stream should be the focus of long-term investors.

Listed property was flat over the quarter, with a -0.4% total return, despite the -11.1% total return in May. The sector gained 4.4% in June, and has delivered an 8.8% total return this year, and 24% over the past 12 months. The quarter's performance was in line with the FTSE/JSE All Share Index (-0.2%), but ahead of the All Bond Index (-2.3%) and general retailers (-3%).

Property's resilience over the quarter was impressive. Listed property's yield increased by only 10 basis points (bps), compared to the 78bp rise in the 10-year bond yield. Considering this bond move, we would have expected a larger decline in property prices. Nonetheless, over the period, property did not become more expensive compared to equities and cheapened against financials and industrials.

Capital risk attached to movements in bond yield, a perennial feature of this asset class. Property has been a beneficiary of the trend reduction in bond yields, but will suffer when yields rise, and bond yields may continue to be volatile.

Listed property had a strong first quarter with the benchmark FTSE/JSE Listed Property Index (SAPY) producing a +9.1% total return. The index has returned +48% since 1 January 2012. This compares to +2.5% from the FTSE/JSE All Share Index (ALSI), +0.9% from the All Bond Index (ALBI), and -9.7% from general retailers.

Property was strong in its own right with listed property yields falling more than the bond yield over the quarter. It ended the period at around the most expensive levels relative to bonds of the past three years. Company results over the period were supportive. Corporate action remains a feature and this was particularly pronounced in size terms over the quarter.

There were significant changes in the portfolio during the quarter as the fund exchanged most of its large Fountainhead position for Hyprop and Redefine units as well as cash at an attractive premium price.

For 2012, the SAPY (SA Listed Property Index)'s total return was 35.9%. This is the second highest calendar year return since the SAPY's inception 10-years ago. The capital gain was due to a strong bond market. The yield on listed property compared to the 10-year bond only firmed a marginal 13 basis points (bps) over the year. Property was better than the FTSE/JSE All Share Index (ALSI)'s 26.7% and the All Bond Index's 16%, but worse than some domestic interest rate cyclicals like general retailers (50.2%).

In the fourth quarter, the SAPY provided a 2.8% total return. This compared poorly with the ALSI's total return of 10.3%, general retailers' 13.2% and the All Bond's 2.6%.

To date, the Old Mutual SA Quoted Property Fund's policy has been to restrict investment to pure domestic exposure, precluding purchasing non-domestic property shares even if part of the SAPY benchmark. The constraint hindered flexibility when there is more value offshore than onshore. Going forward, this restriction will be removed and the fund can buy non-South African property companies listed on the JSE. The fund's performance was pleasing considering the SAPY benchmark's top performing 2012 share (+69%) was foreign, so not then investable.