Market review
The listed property sector was subjected at the beginning of the quarter to volatile market conditions driven by external factors, such as subprime lending issues in developed markets, the increase in the oil price and an interest rate rise locally. However, the sector shrugged off the negative news in the latter part of the quarter as a result of the spate of good result announcements during the August reporting season.

The SA Listed Property Index (SAPY) outperformed the All Share Index (ALSI) for the three months ended 30 September, delivering a return of 9.5% vs. 6.7%. Most of this outperformance was as a result of strong relative performances in July (1.4% vs. 1%) and September (7.3% vs. 5%), despite the 50 basis points increase in interest rates at the August monetary policy committee meeting.

Fund performance
The Investec Property Equity Fund delivered a total return of 9.6% over the quarter, slightly outperforming its benchmark (9.5%). However, the performance for the month of September was slightly behind the benchmark (6.7% vs. 7.3%). This can be attributed to the fund not keeping pace with the strong performance of the sector as it did not hold shares such as I-Four and Siyathenga, it also had an underweight position in Pangbourne and cash during the period. All these shares had an exciting quarter due to potential corporate action in the stable. The fund continued to outperform its peer group as a result of stock selection.

The fund participated in a capital-raising exercise for Madison through acquiring shares at an 8.5% discount to the then ruling price of R9.50 per share. By the time the scrip was received, the price had increased to R10.00, unlocking value for the fund. Another material transaction during the quarter was the disposal of Pangbourne through a share swap for exposure to Acucap, Capital and Diversified. These shares have higher growth prospects than Pangbourne. Both these transactions have boosted the performance of the fund during the quarter.

A number of stocks that the fund has an overweight position in contributed to performance. Growthpoint (9.30%), ApexHi A (13.8%), ApexHi B (13.0%) all outperformed the SA Listed Property Index over the quarter. The strategy of having overweight positions in these stocks with high growth potential has been paying off for the fund.

Market outlook
As in the previous market outlook commentary, we still believe there is a case for further re-rating of the listed property sector based on exceptionally strong property fundamentals and underlying growth. This has been evident in the last quarter as the sector has shrugged off interest rates concerns as a result of the strong distribution growth. Year to date the sector has delivered 27.1% versus the expectation of 20% for the full year, we expressed at the beginning of the year. The performance is being driven by the outlook that the positive fundamentals in the sector could last longer than anticipated by the market. Therefore, the current prices are not as expensive as initially thought.

There are a few drivers of this:
a) The internationally recognised real estate investment trust (REIT) structure could be upon the sector as soon as June 2008, without any conversion penalties on the companies.
b) The listed property sector's average distribution growth over the next two years is projected (conservatively) to be 12.8%. This conservative figure could be grossly understated due to supply shortages in the market, especially the office and industrial sector, which could lead to higher rental reversions than expected.
c) There is also a possibility of further yield compression when pricing South African property relative to global property. South African property is offering value by global standards when taking into account both replacement values and current rental levels.

Market review
The recent inflation environment has deteriorated as the consumer price index excluding interest rates (CPIX) continued to breach the upper 6% limit of the targeted inflation band for two consecutive months. The South African Reserve Bank (SARB) increased the repurchase (repo) rate by 50 basis points in June 2007 and further increases seem likely. The markets are cautious and bond yields have increased. The All Bond Index lost 1.7% over the three months ended June. The listed property sector was up marginally over the quarter (0.3%) but remains firmly in the black year to date at 16.1%.

During last year's market volatility in the second quarter, investors panicked and there was a major sell-off in a very similar economic environment. The listed property sector then lost 24.8%. Whilst market conditions are similar today than they were twelve months ago, the sell-off has not been as extreme. At 30 June 2007, the sector had declined by 8.9% from its 2007 high on 21 May 2007, with recovery starting to occur. It is interesting to note that from the low of 17 July 2006 to the peak on 21 May 2007, the listed property sector delivered a total return of 77.3%.

Fund performance
The Investec Property Equity Fund earned a return of 0.8% over the quarter, outperforming its benchmark as a result of its relative positioning. We believe that this is in part due to the underlying stock selections, which include overweight positions in some of the higher distribution growth stocks, such as Growthpoint, Redefine and Resilient. Year to date the fund earned a return of 16% and the 12-month return is 51.9%. The fund's quarterly distribution has dropped substantially to 1.64 cents per unit from last year's distribution of 2.25 cents per unit, due to a number of reasons. Metboard, which had a March year-end, was acquired by Growthpoint, which has a June yearend. The other reason is that Vukile's exposure in the fund was reduced from its higher weighting in 2006 to about half. This resulted in the drop in distributions for the June quarter, whilst for the full year investors should see an increase in distributions over the full period.

Market outlook
At the beginning of this year we projected that the performance of listed property in 2007 was likely to mirror that of 2006. We take stock of this below:

2007 versus 2006 comparison:
o Similar trend in market volatility as in 2006, but not as severe
o Upward trend lasted marginally longer in 2007 than in 2006
o Downward trend not as severe in 2007

A recovery is expected in 2007 similar to that experienced in 2006. We projected that we were looking for 18% - 20% total returns for the year. Including the recent pull back, the listed property sector has delivered a total return of 16.1% for the first six months of 2007. We are of the opinion that the total return of 28.4% delivered in 2006 could be repeated in the event that earnings growth exceeds our expectations of 10% - 12%. The local listed property sector has achieved 13.7% earnings growth year to date, which if sustained could translate into total returns similar to 2006.

Physical property fundamentals remain robust and our outlook for the sector continues to be positive. An increase in interest rates should have a minimal impact on the distributions growth of listed property companies given the low level of gearing (23.6%) and high level of fixed interest rates (78% of total debt) within the sector. According to our calculations the impact of a 100 basis points increase in interest rates (which includes the most recent increase) on the sector's distribution growth is estimated to be between 0.4% and 0.6% depending on the probability and timing of the next increase.

The Investec Property Equity Fund is expected to remain relatively resilient to market fluctuations. We remain comfortable with the sector's fundamentals and prospects going forward.

Market review
The JSE saw heightened volatility in March. Local equities declined very sharply but as global risk aversion eased, stocks bounced back strongly. By month end the JSE had broken convincingly through its earlier February highs. The FTSE/JSE All Share Index returned 6.4% in March. This rally raised the first quarter return to 10.4% and the 12 month return to 37.6%. Resource stocks returned 11.1% on the month, massively outperforming the Financial and Industrial Index, which came in with a pedestrian 3%. For the quarter, resources were up 15.2%, financials 6.5% and industrials 5.6%. The bond market had a difficult month, losing 0.4%, which trimmed the quarterly return to a meagre 1.6%. In the run up to the national budget, bonds priced in so much good news that they became vulnerable to any signs that the rate cycle might not have reached its peak. Credit and trade data suggested that the imbalances in the SA economy might be unusually tenacious. This was enough to convince investors that the monetary authorities might have to keep their finger on the interest rate trigger for a while longer. The rand weakened by 4.1% against the US dollar and 4.6% against the euro over the quarter.

Fund performance
The SA Listed Property Index began the year with an aggressive start, delivering 15.7% for the quarter ended March 2007. The performance of the index was in part driven by a flood of positive economic data, low liquidity, increased demand for stocks due to inflows, anticipated corporate action and the abolishment of retirement fund taxation. The sector's stellar performance slowed during the latter part of the quarter, as a result of uncertainty over interest rates and inflation and consequent increased volatility from global markets. The Investec Property Equity Fund underperformed its benchmark over the quarter to end March, but outperformed over the month of March. The fund delivered a return of 15.1% over the quarter versus the peer average return of 13.3% and the benchmark's 15.7%. The fund's performance was hampered by a huge cash exposure for the first two months of the quarter, but with the fund almost fully invested through March, it outperformed the index delivering 3.9% versus the index's 3.2%. The fund was aided by the strategic position in certain stocks, which were expected to outperform the market. The substantial cash position due to inflows was also successfully reduced by investing in stocks that were lagging the market and where a re-rating was anticipated. The fund's cash exposure is currently 1.3%, reflecting our continued bullish view on the performance of listed property stocks over cash.

Portfolio activity
The cash position was reduced from 20.1% at the end of January to 9.9% at the end of February, finishing the quarter at 1.3%. The cash position was reduced as a result of investment and not cash outflows. The high cash exposure reduced the performance during the first two months of the quarter but despite relatively low levels of liquidity, we managed to secure lines of stock at attractive prices, reducing this substantial cash position. The fund started the year at R1.24bn and finished the quarter at R1.5bn. The underlying assets were largely unchanged over the quarter. Vukile and Capital were introduced in February and March respectively, with an increased exposure to ApexHi C over this period. In the quarter under review, Grayprop was held as a shortterm investment in order to reduce cash exposure, but was then switched into stocks where more suitable lines had been sourced. The fund's top five holdings have remained consistent and, if anything, these weightings have mostly increased in terms of the overall portfolio. These positions reflect our strategy of being overweight those stocks with the critical mass and liquidity to attract international interest and those stocks that are expected to deliver top quartile performance. We also have a number of positions in stocks that we believe may be the subject of corporate action, which could unlock further value for investors. After the reporting period, we sold the fund's holding in CBS, having accepted the cash payout which was offered by the Public Investment Corporation. The cash has been deployed elsewhere.

Market outlook
The South African property environment in 2006 was driven by an encouragingly strong macro-economic environment, strong demand for commercial property, increasing land scarcity, record-high income levels in the office sector, traffic and infrastructure constraints and an increase in government infrastructure projects. In 2007, the property environment continues to be driven by similar factors. We are not expecting the same interest rate increases as in 2006 and therefore we should not experience the same level of volatility. Although the interest rate hikes in 2006 are still to take full effect and domestic debt levels are at all time highs, rising disposable incomes are keeping debt serviceability levels sustainable. These factors will bode well for retail property and distribution and warehousing industrial property. Super regional centres are, however, likely to lag other retail types as shoppers seek more convenience - the day trip to the mall may not be as appealing as before. The Investment Property Data Bank (IPD) data shows a slight slowdown in the local market in terms of total returns, from 30.1% in 2005 to 26.7% in 2006. However, growth in income in absolute and relative terms shows that fundamentals remain strong in the overall domestic property market. The domestic market is likely to remain buoyant over the next five years as a result of escalating building costs caused by skills and materials shortages, the improving macroeconomy (e.g. GDP and inflation) and the seemingly relentless consumer. The economy's new real GDP growth phase of above 4% will lead to additional demand for space by tenants. One must be aware that office rental growth must be relatively high as tenant installations (at landlords' costs) are frequent and escalating as a result of rising building costs. However, we have seen increasing retention rates by tenants which tends to improve cost to income ratios for landlords. The recent reduction in office vacancies has not yet fully translated through to upward reversions in rentals and distribution growth, even though income growth was the highest in 2006. We are expecting this to be a key driver in the office sector in 2007 and beyond. In addition, we are expecting the current low levels of vacancies, the current stable and growing economy and the shortage of developments to continue pushing asking rentals, making it a landlord's market. Globally, SA property is particularly attractive on a yield basis as it is a full 200 basis points above the highest of the remaining 17 countries in the IPD index. South Africa also moved up eight places to 13 out of 56 in the Jones Lang LaSalle Global Real Estate Transparency Index in 2006. These two factors are likely to result in significant capital inflows from international and local investors over the next five years. With the decreasing need to issue bonds by the SA government and improving property fundamentals, we see listed property continuing to race ahead for longer.

The Investec Property Equity Fund achieved a total return of 29.6% for the year to 31 December 2006. Fund performance exceeded the 28.4% delivered by the benchmark (SA listed property index total return). Over 2006, the SA listed property sector has delivered total returns which are lower than the All Share Index (41.2%) but higher than bonds (5.5%) and cash returns (5.1%). The Investec Property Equity Fund has delivered a total return of 161.8% since its launch in June 2004.

The cash position has been reduced from 17% in November to 10.15% currently. The overweight cash position is as a result of meaningful inflows, which may have a short-term negative impact on fund performance. This situation does, however, present good buying opportunities for the fund. We are seeking to exploit any weakness in share prices that may arise in a volatile market, and to position the fund to take advantage of corporate activities arising out of the SA listed property sector. Consolidation, through merger and acquisition activities, presents opportunities such as increased liquidity and larger, well-diversified stocks listed on the local exchange. This could also attract additional international interest, which will result in greater demand for stock.
The fund's overweight exposure to top performing stocks (e.g. Growthpoint, Redefine, and ApexHi A and B) continues to bode well for the fund. These stocks are expected to deliver income distribution growth which is higher than average sector growth.
We continue to be cautious regarding the risks of further interest rate hikes in 2007. We still remain medium- to long-term property South African real estate "bulls" on the basis that fundamentals continue to be surprisingly positive. This is supported by increasing demand for space across all sectors and consequent substantial positive rental reversions.

Another driver of listed property will be the forecast out-performance expected against other high income yield asset classes such as cash and bonds.