FTSE/JSE SA Listed Property (SAPY) Index provided a -4.7% total return in the last quarter of 2015, following +6.2% in the third quarter. Over the fourth quarter, the sector underperformed the FTSE/JSE All Share Index (+1.7%) and general retailers (+2.7%), but outperformed the JSE All Bond Index (-6.4%).

The inexplicable removal of the Finance Minister dominated the quarter, where bond yields rose 132 basis points (bps). The SAPY’s yield decreased by 13bps, but this was due to technicalities around index composition. The SAPY was also assisted by its roughly one-third exposure to offshore income.

The SAPY total return was 8% in 2015, while the FTSE/JSE All Share Index delivered +5.1% and the JSE All Bond Index -3.9%. Your fund comfortably outperformed the SAPY. Performance was enhanced by overweight positions in some strong performers, like Capco and RockCastle, and underweight positions in poorer performers, for instance Growthpoint, as well as exploiting corporate action. Underweight positions in Resilient Group companies were the main detractors. The fund will continue to hold meaningful positions in property shares we believe offer the most long-term value.

The SAPY has a 6.9% forward dividend yield (excluding Attacq and Pivotal) compared to 9.5% on the 10-year bond.

Near-term distribution growth should comfortably exceed inflation. Vacancies may still increase in some sectors. A genuine recovery in conditions may take longer than many anticipate, with disappointing GDP growth; cost increases constraining net rental growth; and significant over-rentals on renewal in some pockets (our key concern, especially in offices also faced with significant potential new supply). Large malls remain robust, but oversupply in some nodes and tenant and medium-term consumer health are a concern. Bond yields are the key short-term driver of capital value volatility. A higher cost of capital may become an increasing headwind.