The FTSE/JSE All Property Total Return Index (ALPI), the fund’s benchmark, was up 18.2% over the past quarter. This exceeded the All Share Index total return of 15.2% and the All Bond Index’s total return of 5.6%. There was an element of relative catch-up in the final quarter, as over the full 2022 calendar year, the ALPI returned -1.9%, which compares poorly to 3.6% for the All Share Index and 4.2% for the All Bond Index.

In a reversal of the previous quarter, the domestic-only REIT index (+15.5%) did not perform as well as the full index. Over 2022 though, the domestic-listed REITs were in poll position over the non-domestic JSE-listed REITs. It is instructive to compare property to the listed retailers (as shopping centres are a major segment of the sector) and banks (as a domestic financial that lends to listed property). Retailers did very badly compared to property over the quarter, down 2.3%, and over the year, down 2%, which is comparable to property. Banks underperformed property over the quarter (15%) but performed almost 20 percentage points better over 2022 with a 17.7% return.

Domestically, results announced by property companies continued to demonstrate the improvement and continued stabilisation that we mentioned last quarter. Generating real organic domestic income growth, even before (rising) interest costs, load shedding and global economic pressure, will be tough. Our main concern remains the level of direct property valuations, which we continue to believe are stretched relative to bonds. It will only be exacerbated by rising interest rates in addition to global and domestic stress. As listed property trades well below book value, this is reflected in listed pricing. On a positive note, there is scant development activity taking place outside the industrial space.

The fund has been positioned conservatively for economic and consumer stress, avoided high gearing, financing and operational risk, and held some quality companies. The fund’s offshore holdings detracted from performance. It will continue to hold meaningful positions in a diversified selection of property shares we believe offer the most long-term value considering the relative outlook, risk and changing environment.

On valuation metrics based on earnings (not dividend, as many REITs now retain some income) and discount to NAV, the sector is not expensive. On an implied value per square metre basis, domestic property is well below (accelerating) replacement costs. Consequently, there remains clear long-term value in the sector which requires domestic growth to unlock. Investors should be aware that operating conditions remain tough and there are headwinds