The FTSE/JSE SA Listed Property Index (SAPY) provided a -1% total return for the third quarter of 2018. This was worse than the JSE All Bond Index’s +0.8%, better than the FTSE/JSE All Share Index’s -2.2% and lower, but similar to, the general retail sector (-0.5%). Rising bond yields and a local economy now technically in recession took their toll.

Over the past 12 months, the listed property index’s total return has been a dismal -15.7% (against the FTSE/ JSE All Share’s +3.3% and All Bond Index’s +7.1%). Over this period, our fund’s performance after fees was more than 6% higher than its SAPY benchmark. This was primarily because we were very underweight to the Resilient group of companies, as on our analysis they were excessively expensive. Other stock picks also contributed to the fund’s outperformance. The fund will continue to hold meaningful positions in a diversified selection of property shares that we believe offer the most long-term value.

The sector’s yield has increased significantly. The SAPY benchmark has a 9.4% forward dividend yield (this was 6.8% at the start of the year), compared to 9.5% on the SA 10-year bond.

Near-term distribution growth should be broadly around the lower band of recent inflation and the sector offers an attractive yield. Conditions remain difficult, with disappointing GDP growth, cost increases constraining net rental growth and significant over-rentals on renewal in some pockets (especially in offices also faced with significant potential new supply). Malls are facing a tougher environment, a key concern. There is too much retail space in some nodes, sales are weak, trading density is flat and tenants’ profitability is under pressure. An improvement in economic sentiment is required.

Bond yields are the key short-term driver of capital value volatility. Increased foreign exposure continues to change the make-up of the sector.