Market and portfolio review
The global economic backdrop remains weak and the prospect of a period of substantially lower growth than the norm in many parts of the world remains a distinct possibility. Central bankers continue to remain open to creating further stimulus as embattled economies navigate their way through the current economic climate. Primary strategies to spur recovery in the global economy have included buying short-dated bonds in Europe, lowering borrowing costs and injecting further liquidity into the US. Events in South Africa have mirrored those across the rest of the global economy. Weak economic activity has continued to focus policymakers' attention on ways to boost growth. Against a backdrop of weak demand and no immediate signs of any broad-based inflation threat locally or abroad, the monetary policy committee provided further stimulus by dropping the repo rate to 5% in July 2012. The recent mining labour unrest coupled with a downgrade by rating agency Moody's highlights the deterioration in domestic fundamentals and concerns around the government's ability to deliver on its mandate. The outlook for the local economy remains uninspiring and growth projections for this year and 2013 are continually being revised downwards. This backdrop provided a favourable environment for local listed property counters because weak growth is likely to result in lower inflation and interest rates (and hence bond yields) for longer. The domestic real estate sector therefore enjoyed another strong quarter, returning 11% for the 3 months to end September 2012. For the year to date, the sector has delivered an impressive 32.2%. Equities came in second over the quarter, gaining 7.3%. Bonds followed with a return of 5% and cash added a marginal 1.4% and 4.3% for the year to date.

Portfolio activity
The third quarter is traditionally a busy reporting period for the listed property sector with heavyweights such as Growthpoint, Hyprop and Capital reporting results. Other counters that also reported results included Hospitality, Resilient, SA Corporate, Fortress and Vunani, as well as Synergy that declared its first set of results. Across the sector, results were in line with our expectations, except for Hyprop and SA Corporate that both reported better results than we expected. They delivered distribution growth of 9% and 5.7% respectively. Resilient and Fortress led in terms of distribution growth, both delivering 10%, whilst the sector laggard was Emira which delivered -2.5%. The benefit of portfolio scale was a theme that was evident during the results season. Large caps like Growthpoint, Capital and Hyprop were all able to benefit from their size and economies of scale to reduce costs, with the balance of funds still experiencing the negative impact of higher utility costs. The cost of borrowing continues to decline with the repo rate at an all-time low. Management teams have taken advantage of the opportunity to secure cheaper funding, which should make capital investment more attractive going forward. We increased our position in Fountainhead in a bid to reduce our underweight position in the stock and take advantage of its pricing relative to Redefine, in light of the potential corporate action between the two counters. Further sales in Emira were enacted, a counter where we continue to have concerns about the portfolio's substantial, struggling B-grade office exposure. Units in Sycom were also sold into relative strength. Contributors to the listed property sector's stellar performance over the period were led by Investec Property which gained 29.5%, followed by Synergy A (+23.3%), Synergy B (+20.4%), Hospitality A (+25.3%), Dipula B (+19.1%) and Nepi (+17.6%). The only counter to produce a negative return over the period was Hospitality B, delivering -11.8%.

Portfolio positioning
Local policymakers remain open to further monetary easing in light of persistently weak global growth expectations. Countering this tailwind for the real estate sector is the uncertainty about continuing industrial action and the lead up to the ruling party's December conference. This could place pressure on the currency and bond yields. Despite a healthy sector forward yield of 7% and distribution growth of between 6-7% projected for the year ahead, sector returns in the coming 12 months are likely to be far more muted than the exceptional levels we have already witnessed this year. We are of the view that property fundamentals remain stable and that in a weak growth environment the defensive nature of income from property should continue to support the sector and the portfolio.

Market and portfolio review
The looming banking crisis in Spain and the near-term prospects of a pro-Europe and pro-austerity vote in Greece, were always likely to bring volatility to markets. European leaders discussed various proposals and it was hoped that these deliberations would lead to a potential solution to the debt crisis. Germany - the protagonist in the euro crises - has stood firm over its pro-Europe position, with its support based on clear fiscal reforms and binding targets. Locally, the South African Reserve Bank (SARB) continued to promote an accommodative monetary stance. Interest rates remain low. The SARB is citing a fragile global economy as the core reason for at least keeping rates at current levels, with economic activity in both the US and China weakening over the past few months. Manufacturing and mining in South Africa remain under significant pressure, due to a combination of weaker demand and a lack of investment and domestic growth. Inflation had increased to levels of around 6%, but has started to decline in line with SARB targets in recent months. This has been supported largely by declining oil prices and lower food inflation. Globally, a flight to perceived safer assets has led to bond yields firming. This has supported the domestic bond market over the quarter. Property, which has a close correlation to bonds, has also benefited from the shift in capital allocation. Domestic real estate returned an impressive 10.3% over the three months to end June 2012, taking year-to-date total returns to 19.2% for the sector. Bonds followed with a return of 5.2% for the quarter, along with cash (+1.4%) and equities (+1%).

Portfolio activity
This was a busy reporting season with 11 listed property stocks declaring results, including sector heavyweight Redefine and debutant Dipula declaring its maiden set of interim results. Others that reported over the period included Octodec, Premium, Rebosis, Redefine International, Fountainhead, Investec Property, Acucap, Vukile and Sycom. Earnings were largely in line with expectations. However, in the case of Octodec, which delivered interim growth of 9.5%, and Investec Property, which exceeded the pre-listing forecast as the company reported its maiden full year results, expectations were exceeded. The key conclusions from the results were that market conditions are still difficult to navigate, and that the office sector is substantially lagging industrial and retail. Management teams in general have adopted a more cautious stance, with distribution expectations slightly more muted than previously anticipated. Portfolio changes included reducing a previously substantial overweight position in Growthpoint, which we sold into strength. We further reduced our already underweight exposure to Emira, where distribution expectations remain muted, largely as a function of the fund's overweight and underperforming office exposure. During the quarter, we traded Vukile by participating in a discounted equity raising, but reduced our already substantial overweight position in the company after this event. We also participated in a discounted Rebosis equity raising. In May, we participated in the listing of Annuity Properties, brought to market by sector stalwarts Derek Greenberg and Martin Ettin. Both were previously involved in the local listed property sector through Primegro and CBS Properties. Another new entry to the sector was government-focused Ascension Properties that listed in June 2012, and in which we initially chose not to participate. Contributors to the listed property sector's stellar performance over the period were led by Investec Property, which returned 21.4%, followed by Vukile (+15.6%), Growthpoint (+13.6%), Hospitality A (+13.6%) and Dipula A (+13.5%). We hold overweight positions in four of these five stocks. The detractors to performance were led by Hospitality B (-12.8%), Arrowhead B (-3.5%) and Arrowhead A (-1.72%). We have an overweight position in Arrowhead, which we believe will be a top performer going forward.

Portfolio positioning
Locally, policymakers have continued to moderate growth expectations in light of the ongoing global risks and uncertainty. With the Consumer Price Index starting to trade well within the targeted 3% to 6% range, inflation fears are subsiding. Local bonds have rallied in recent weeks and consequently supported appreciation in local property share prices. Continued flight from risky assets to defensive assets like property should aid in underpinning local property shares prices. With improving property fundamentals and our bias towards funds with quality assets and good management teams, we believe that the portfolio remains well positioned to continue outperforming its peers and the sector.

Events in Europe and the US again took centre stage during the first quarter of 2012. A strong take-up of emergency funding from the European Central Bank by hundreds of European banks boosted sentiment, driving equities higher and global bond yields lower. Improving US economic data boosted the prospect of positive, albeit muted growth.

On the local economic front, the monetary policy committee (MPC) left the repo rate unchanged at 5.5% at its March meeting. Rates are expected to remain flat for the rest of 2012. The Investec Property Equity strategy enjoyed a strong performance over the quarter, in absolute and relative terms.

Portfolio activity
This was a busy reporting season with eleven listed property stocks declaring results, including the debut results for Synergy Income Fund and impressive results from Vunani Property Investment Fund. The reporting stocks produced a solid 6.6% weighted average distribution growth, outpacing the latest inflation figure of 6.1%. Fortress B again produced the highest income growth at 54%, thanks largely to the A and B unit capital structure which leverages the operational performance of the fund. The stock remains tightly held and is excluded from the SA Listed Property (SAPY) benchmark. The top-performing benchmark stocks that released results included Capital (+9.1%), Resilient (+8.9%) and Hyprop (+7.3%). The laggards were Hospitality B units (-79.4%), Emira (-2.5%) and SA Corporate (+1.4%). A clear trend is that quality assets and strong management teams succeed in outperforming. The recently unbundled Arrowhead A and B units were the top two performing listings over the quarter. The A and B units made a positive gain of 15.3% and 34.2% respectively. They are currently excluded from the SAPY benchmark due to size, with a combined market capitalisation of R1 billion. The top-performing stocks in the index were Resilient (+14.6%), NEPI (+11.6%) and Growthpoint (+11.4%). NEPI has benefited from increased investor interest as a result of its inclusion in the SAPY Index in December 2011. We have held overweight positions in all these stocks with the exception of Resilient, given liquidity and current pricing of the stock.

It was a particularly active quarter from a trading perspective. The portfolio's underweight exposure to the SA Corporate Real Estate Fund detracted from performance during 2011, but we retained our conviction in the positioning. The portfolio was rewarded in February 2012 when SA Corporate released its final results which disappointed the market, causing the share price to fall sharply. This was a key driver of alpha over the quarter. Exposure was switched from Redefine Properties into Hyprop as Redefine reached our target price. We are confident of Hyprop's prospects under the able leadership of CEO Pieter Prinsloo. The portfolio's holding in this sought-after, fairly illiquid stock was increased by sourcing it from a significant unit holder at an attractive price. We have also taken two new positions in funds, namely Premium Properties and Vunani Property Investment Fund. Vunani has already performed exceptionally well for us and we are bullish on Premium's prospects. We are very active sourcing lines of stock at attractive prices. Other significant off-market transactions concluded over the period include a line in Growthpoint at 1970 cents per unit (4.5% discount to the prevailing market price at the time of the transaction), and Dipula B. This is a long-term strategic position bought at market value and expected to outperform on the back of quality maiden results due for release in May 2012. We participated in a well-priced Sycom private placement and a Capital book build, but elected not to participate in an Acucap private placement. Most acquired exposures have materially outperformed or are expected to do so in the coming months. We have significant pipeline transactions which are expected to contribute to our portfolio's outperformance in the next quarter.

Portfolio positioning
The portfolio retains its preference for funds that have quality assets and management teams, with valuations underpinned by a strong yield and high income growth. Property fundamentals have shown signs of stabilising, but there has been increasing divergence between different sectors and nodes. B-grade offices continue to struggle with little sign of a turnaround, while vacancies have started to reduce in A-grade nodes. Although tenant inquiries have increased, this is yet to materialise into significant take-up of space. Pipeline speculative developments remain the greatest risk to further take-up of space in the A-grade market and will continue to put B-grade space under pressure. We are confident our portfolio is well positioned to deliver outperformance and add to the historic track record of the strategy

Market and portfolio review

Europe remained the focal point over the quarter with events centred on finding a solution to the unfolding debt crisis. A push by Germany and France to achieve greater fiscal unity and to establish an environment of joint liability for Europe's problems, continued to highlight the fragility of the current system. As a result, a debt relief package was secured through the European Central Bank, aimed at ensuring prudent fiscal policy and reducing the likelihood of default and possible contagion. Across the rest of the globe, the US Federal Reserve remained committed to its stance of supporting the frail economy through loose monetary policy, with a similar pattern emerging in the Far East where the Chinese economy is beginning to show signs of losing some steam.

Locally, the November meeting of the South African Reserve Bank (SARB) brought no policy change, with the repo rate remaining on hold and the committee reinforcing its commitment to accommodative monetary policy. The GDP numbers for the third quarter came in lower than expected with weak manufacturing and mining still plaguing the local economy. The inflation outlook remains unchanged, the expectation being that the measure will remain outside the upper end of the range of 3% to 6% in early 2012, but that it will return and remain below that band thereafter. The latest CPI data further underlined the SARB's view with November's reading showing growth of 6.2% year on year.

The quarter produced a mixed performance across the different asset classes. In October there was a strong rally in equities, with listed property and bonds showing marginal increases. As the quarter wore on, volatility returned to the market with returns from the broader asset classes slowing as the end of year approached. Equities were the clear winner over the quarter, followed by listed property. Over the year, listed property outperformed bonds, cash and equities.

Portfolio activity

Nine property stocks reported results over the period. Noteworthy were the two sector debutants, namely Investec Property Fund and Rebosis Property Fund. Others to report included Acucap, Sycom, Fountainhead, Premium, Octodec, Redefine and Vukile. Earnings were largely in line with expectations. Vukile continued to surpass expectations, delivering interim distribution growth of 7.5%, followed by Acucap (6%) and Sycom (5%), Redefine (2.6%) and Fountainhead (2.2%). The sector laggards were Premium (-4.9%) and Octodec (-1.1%).

Portfolio changes included increasing exposure to Acucap, Vukile and new listing Dipula. The medium-term budget policy statement proposed that JSE inward listings should no longer count towards foreign limits. At the conclusion of the JSE's most recent index review, the JSE took the decision to include New Europe Property Investments (NEPI) in the J253 SA Listed Property Index (SAPY). Based on this, we increased our exposure to NEPI. Exposure to Redefine and SA Corporate was reduced over the quarter, with profits also taken in Growthpoint when deemed optimal.

The main contributors to the listed property sector's steady performance over the quarter were Sycom (17.2%), Investec Property Fund (13.5%), Fountainhead (6.9%), Resilient (6.6%), SA Corporate (6.5%), Vukile (5.9%), Growthpoint (4.6%) and Capital (3%). The detractors to performance included Hospitality B (-4.3%) and Octodec (-1.3%). Individual stock performance over the year had Sycom leading the way, returning 24.1%, followed by SA Corporate (19.5%), Fortress A (18.9%) and Acucap (17.2%). The sector laggards included Hospitality B (-48.2%), Redefine International (-9.8%) and Emira (-5.8%).

Portfolio positioning

The fourth quarter of 2011 further reinforced the fact that global markets remain clouded by uncertainty. Locally, policymakers have continued to moderate domestic growth expectations in light of recent global events. Downside risks remain around local inflation, which has since breached the 3% to 6% target range. In the short term, inflation fears may therefore drive bond yields higher with concerns around possible increases in interest rates. This could negatively impact on property share prices. Property fundamentals continue to show some signs of recovery with evidence of improvement in letting conditions and also a decrease in the amount of bad debts and arrears.

The portfolio remains well structured with an exposure to a strong tenant base through an overweight position in Growthpoint, Capital and Rebosis, and an underweight holding in Redefine, Fountainhead, SA Corporate and Hospitality B units. Our view is that the portfolio remains well positioned to outperform the benchmark and peers in the coming 12 to 18 months. Potential risks remain in the form of increasing administered costs and expiring debt in what may be a rate hike cycle.