Certain commentators are anticipating that the next movement in interest rates could be upwards, albeit by only 50 bpts (0.50%).

The view of Investec Listed Property Investments is that earnings growth from the listed property sector on a 12-month forward basis is sufficient to counterbalance a 1% increase in interest rates. On this basis, in the event that interest rates are increased by 50 bpts, there is still capital upside potential from the listed property sector as sustainable growth in earnings drives share prices upwards.

The listed property sector has demonstrated some volatility over the past month. This was in line with the rest of the market. Speculation of a possible interest rate hike has softened yields on long bonds and listed property stocks. Property Unit Trusts and Property Loan Stocks are interest rate sensitive given the taxable income nature of these stocks.

Provest's view is that this volatility is temporary and provides attractive trading opportunities. The portfolio has been actively managed and exploits these opportunities for the benefit of the fund. This is prevalent in the unit price of the fund, which has remained relatively stable despite the volatility in the market. The fund distributed 2.90 cents per unit for the quarter-ended September 2005.

From having been a neglected asset class, commercial property today is very much sought after. Demand for listed property stocks has driven listed property yields downwards, resulting in listed property companies and funds having a window of opportunity to acquire properties at yields that are earnings enhancing. Purchasing properties cheaper than the cost of capital will contribute to further growth in distributable earnings for those listed property companies and funds that have been, and continue to be on acquisition trails. Further growth in earnings will translate through to further share price appreciation in 2006. Property acquisitions, an issue of new listed property stocks and an increase in market capitalisation is important at this stage of the listed property cycle, in order to meet the demands for stock being placed on the listed property sector.

The PPEF distributed 2.15 cents per unit distribution for the quarter-ended March 2005. This was in line with expectations with the fund aiming to achieve between 60% and 80% of SA prime lending rates (currently 10.50%). Prime lending rates decreased from 11.0% to 10.50% in the period under review, and in line with the Reserve Bank's 50 basis point cut in the repo rate in the same period.

As listed property stocks are interest income generating, there is a correlation between interest rates and yields on listed property stocks. Provest is of the opinion that the recent cut in interest rates is not reflected in the current listed property stock prices, and therefore the price of the PPEF.

A further appreciation in listed property stock prices has been counter-balanced by a second increase in rates in the US Fed Fund's target rate, which increased rates by 25bpts two weeks after South Africa's 50bpts drop in rates.

Last month, Provest was of the opinion that April's 50 bpts cut in the repo rate was not reflected in listed property equity prices, and therefore the price of the PPEF.

During the month of May this situation was corrected. There was a firm appreciation in listed property prices resulting in an increase in the PPEF unit price from 138.17 cpu end April to 144.69 cpu end May. The capital growth of 4.72% compares against the SA property Index (J253) growth of 3.9% over the comparable period.

Some stability is expected to be restored into the sector in the short-term.

The Provest Property Equity Fund unit price continued to appreciate in the month under review, with a price increase from 144.69 cents per unit (cpu) to 148.98 cpu.

The listed property sector has been active with the declaration of results. Many of the PPEF's listed property holdings are declaring results reflecting attractive earnings growth. Earnings growth is translating through to appreciation in listed property equity prices, and therefore an appreciation in the PPEF unit price.

Provest is of the view that, in a stable interest rate environment, the key driver for continued capital appreciation from the listed property sector is earnings growth. Property fundamentals are strong in a stable and growing South African economy. There is take-up of previously vacant office space, consumer spending is rife, driving up turnovers and increasing demand for manufacturing and warehousing. Rental reversions are largely upwards, and earnings growth from listed property is likely to exceed expectations.

Investment outlook
Recent results declared by many of the JSE listed Property Unit Trusts (PUTs) and Property Loan Stocks (PLSs) reflect a robust property market.

This is attributable to a number of trends: property values increasing; vacancies decreasing, rentals are firming and the cost of funding property acquisitions and investment is dropping. In line with this, earnings growth is prevalent in the results declarations for most of the listed property stocks. This is forecast to continue for the remainder of 2005 with earnings growth translating though to share price performance. Provest remains bullish in respect of its outlook for 2005 and will continue to actively trade the PPEF portfolio, taking into account the outperfomance expected from those stocks that deliver strong growth in distributable earnings.

The hike in US prime lending rates impacted on the SA bond market. There is a correlation between local bonds and listed property yields. This is because bonds and listed property stocks distribute taxable income. As a result, listed property prices came under pressure as bond and listed property yields increased.

Provest is of the opinion that the softening in SA bond and listed property yields was exaggerated, and presented good trading opportunities, and attractive entry levels for new investors, or investors seeking to increase their investments into listed property.

The recent weakness is expected to be temporary and a strengthening in unit prices to previous levels is projected.

February 2005 is expected to be as volatile as the previous month, particularly in light of the ever changing, and often-contradictory views of asset managers in respect of the Monetary Policy Committee's decision on the repo rate at their next meeting scheduled for the second week of February 2005.

Provest remains committed to its view that the next movement in repo rate is downwards and is likely to occur in the first half of 2005.

Any downward movement in interest rates should translate through to further capital appreciation in listed property stocks.

The past month's activities and announcement from various listed property funds (PUTs) and companies (PLSs) should attract further interest from both private and institutional investors. Results announcements are reflecting the robust property market and an overall improvement in letting conditions in industrial, office and retail sectors. Furthermore, upward valuations on properties are increasing net asset values and closing the gap of premiums to stated net asset values, which is an area that listed property skeptics are focused on. Another development in the past month is the first announcement of securitisation in the listed property sector. The impact of securitisation is the reduction in borrowing costs, which should translate into increased distributable earnings to unitholders.

There was a significant re-rating of most listed property stocks over the past month. This was in line with a firming of long bonds on the back of sentiment that the South African interest rate cycle had not yet bottomed.

The PPEF returned 13.12% during the month of November. Its outperformance can be attributed to Provest sourcing lines of stock at attractive prices relative to the market. Surplus cash resources were invested into stocks identified as "lagging" the market. The volatile prices of certain property stocks presented good trading opportunities, which Provest will continue to exploit in the future.

A distribution of 1.97 cents per unit was paid for the quarter-ended December 2004.

The Provest team enters 2005 bullish about the prospects for listed property for the year ahead, and in particular bullish about the prospects of the PPEF.

Provest will continue to actively trade the portfolio which is underpinned by quality stocks that are expected to generate a sustainable and growing income stream and achieve its ultimate goal of generating handsome total returns for investors.