The FTSE/JSE All Property Total Return Index (ALPI) recovered a further 8.4% during the year’s final quarter. This was interesting because while the All Share Total Return Index was up 15.1% over this period, the new Retailer Index (also linked to the SA consumer) was down 2.8% and the All Bond Index was up "merely" 2.9%.

Over 2021, the ALPI’s total return was 38.6% as the sector normalised. This is higher than the All Share Index’s 29.2%, the All Bond Index’s 8.4% and in line with the new Retailers Index, which was up 38.8%. Perspective is necessary. Listed property’s total return is still 10.6% below its 31 December 2019 (pre-Covid) level, so closer to -20% in real terms. In contrast, the All Share, Retailers and Bond Indices are respectively 38.3%, 17.4% and 17.8% above the prevailing total return levels at the time. There has been some permanent destruction to property earnings and fundamentals due to Covid, which means it will take time and organic growth to return to pre-Covid earnings levels.

Net of fees, the fund comfortably outperformed its benchmark over the past 12 months. It has been positioned conservatively for economic and consumer stress, and avoided high gearing, financing and operational risk. The fund held some quality companies and will continue to hold meaningful positions in a diversified selection of property shares we believe offer the most longterm value, considering the relative outlook, risk and changing environment.

Stabilising balance sheets has been a priority of many REITs and there has been progress in this regard. While there are some “green shoots” on a macro level, property is a lagging sector that had weak fundamentals prior to Covid. Looking post Covid, the lingering structural impact of the pandemic on the economy and property demand will remain a challenge. Some tenants may still fail, downsize or require rent reductions FUND COMMENTARY to remain viable. Pre-existing sector negative trends like online shopping and work from home may be exacerbated. We maintain direct property valuations were overstated even before the crisis, and while these are stabilising, in most of the reported results there remains scope for renewed devaluation based on their spread to bond yields. Listed property trades below book value, so this is priced into some extent. Low interest rates are supportive of potential new direct property buyers, but these are on the increase. On the bright side, there is scant development taking place and less REIT specific failure risk. Listed property will be a beneficiary of any improvement in activity and confidence in South Africa.

On valuation metrics based on earnings (not dividend, as many REITs now retain some income) and discount to NAV, the sector remains cheap. On an implied value per square metre basis, domestic property is well below replacement cost. Consequently, there remains long-term value in the sector. Investors should be aware that operating conditions will remain very tough over the medium term