Listed property returns bounced back strongly from the negative returns of the March quarter. The total return of 12% on the SA capped listed property index was led again by Liberty International (+27%), followed by property loan stocks (+10%) and property unit trusts (+7%). Holdings in the fund which outperformed during the quarter were Libint, ApexHi B (+24%), ApexHi A (+18%) and Hyprop (+17%), while Resilient (+2%), Martprop (+3%) and Growthpoint (+6%) underperformed.

The reason for the reversal in performance was the stabilisation of long bond yields, in spite of increased policy interest rates and rand weakness. We took advantage of the higher Libint price to lock in some profits.

Growth fundamentals remain sound. The market is expecting income growth of some 10% per annum for the next two years. Higher interest rates will not disrupt this much as most debt in the underlying funds is at fixed rates. The capital outlook remains less certain. Property is priced off bond yields, and the 10-year bond yield has risen towards the top of the 7%-9% yield band that we are anticipating. We think that the sector will benefit from a period of consolidation after performing so strongly over the past year, when the capped index total return was above 25%.

Diversification into Liberty International has served the fund well as the holding, being offshore, has benefited from the same pattern of higher domestic interest rates and weaker rand that negatively affected domestic property. We have begun to implement the view that local listed property will outperform Libint over the next few years (as it did post the 2001 rand meltdown).

The 21% property total return for the March quarter (on the SA Capped Listed Property Index) was followed by a negative return of 15% over this quarter, behind the return on equities (+5%) and bonds (-4%). Of the fund's three investment categories, Liberty International performed best (+15%), followed by property loan stocks (-17%) and property unit trusts (-22%). Holdings in the fund that outperformed during the quarter are Libint, Resilient (-15%), and Acucap (-17%), while Grayprop (-27%), Hyprop (-22%) and Emira (-21%) underperformed.

The reason for the reversal in performance was the unexpected increase in short-term interest rates implemented by the Reserve Bank in order to cool down the economy.
The market is expecting income growth of some 10% per annum for the next two years. Higher interest rates will not disrupt this much as most debt in the underlying funds is at fixed rates.

The capital outlook is less certain. Property is priced off bond yields, and the 10-year bond yield is rising towards the top of the 7-9% yield band that we are anticipating. We think that the sector will benefit from a period of consolidation after performing so strongly over the past year, when the capped index total return was 26% (down from 63% at the end of the previous quarter).

Diversification into Liberty International has served the fund well as the holding, being offshore, has benefited from the same pattern of higher domestic interest rates and weaker rand that has affected domestic property so badly. Collective investment scheme rules preclude the holding from rising above 18% of the fund.

Listed property continues to perform exceptionally well - the 21% property total return for the quarter (on the SA Capped Listed Property Index) was ahead of the return on equities (+13%) and bonds (+2%). Of the fund’s three investment categories, loan stocks continued to perform best (+22%), followed by property unit trusts (+20%) and Liberty International (+16%). Holdings in the fund which outperformed during the quarter are Resilient (+41%), Vukile (+36%) and Metprop (+30%).

Property funds continue to experience strong inflows, and the fund has grown in value to above R400m. We used part of this cash to buy new listing Hospitality Property Fund, which diversifies the portfolio by investing in leisure properties.

Other reasons for the exceptional performance are better than expected distributions and property revaluations reported in the December round of results.

The market is expecting income growth of some 10% per annum for the next two years.

While there is huge price momentum, the capital outlook is less certain. Property is priced off bond yields, and the 10-year bond is trading towards the bottom of the 7% - 9% yield band that we are anticipating. We believe that the sector would benefit from a period of consolidation after performing so strongly over the last year, when the capped index total return was 63%. (Strong cash flows seeking investment have made it difficult to match this in practice.)

One trigger of consolidation could be increased supply of listed property to meet investor demand. Several of the underlying property funds are currently seeking to grow by consolidation with other listed funds or by acquisition, and new listings are likely.

Listed property continues to perform exceptionally well - the 11% property total return for the quarter (on the SA listed property index) was ahead of the return on equities (+8%) and bonds (+5%). Of the fund's three investment categories, loan stocks continued to perform best (+12%), followed by property unit trusts (+11%) and Liberty International (-4%).

The fund's benchmark is the Capped Property Index, which achieved a lower, but satisfactory, return of 9% (in exchange for more diversification through Liberty International, which represents 11% of the fund). Holdings in the fund that outperformed during the quarter were Metprop (+26%), ApexHi B (+17%) and Sycom (+14%).

Property funds are experiencing strong inflows, and the fund has grown in value to above R280m. Other reasons for the exceptional performance were a 65 basis-point fall in long bond yields, and better than expected distributions and property revaluations reported in the September round of results.

Distributions have been exceeding expectations, and the market is expecting income growth of some 7%-8% per annum for the next two years.

The capital outlook is less certain. Property is priced off bond yields, and the 10-year bond is trading towards the bottom of the 7%-9% yield band that we are anticipating. We believe that the sector would benefit from a period of consolidation after performing so strongly over the past year, when the capped index total return was 43%. (Strong cash flows seeking investment have made it difficult to match this in practice.)

Corporate activity in the listed property sector is set to increase, resulting in increased supply of scrip. Several of the underlying property funds are currently seeking to grow by consolidation with other listed funds or by acquisition, and new listings are likely.