Market review

Most news flow in the recent past has concentrated on the global search for yield, which in SA has translated into strong flows into bonds, a stronger rand, and lower short-term interest rates.

Against this backdrop, SA listed property provided strong positive returns of 14% over the quarter, in line with equities, and outperforming bonds. Holdings in the fund that outperformed were Capco (+19%), Capital (+18%) and Capshop (+16%), while Sycom (+4%), Hospitality B (+6%) and Emira (+10%), though delivering positive returns, were the worst performers in the portfolio. Several listed property funds reported results during the quarter, which featured positive distribution growth and reassuring outlook statements.

What SIM did

We changed the benchmark against which the performance of your fund is measured on July 1 this year. Until then, we used J254, the capped SA-listed property index. The new benchmark is J253, or SA Listed Property Index, which includes only SA listed property funds, and is not capped. The difference is that the former included Capshop PLC and thus smaller holdings in SA funds Growthpoint and Redefine. The new benchmark will better suit institutional investors, as well as retail investors who now benefit from having the fund managed against the same benchmark as most other SA listed property funds.

To give effect to this benchmark change, we switched a portion of the Capco and Capshop holdings into Growthpoint and Redefine, which are large balanced listed property funds. We made full use of the former fund's distribution reinvestment plan to buy more units. We also added to Acucap and Fountainhead, which have portfolios tilted towards retail property.

Growthpoint, Redefine and Fountainhead are now the largest holdings - together they constitute 40% of your fund. We expect retail property to remain relatively resilient and favour funds that have significant quality retail holdings, such as Hyprop, Acucap, Sycom and Fountainhead, as well as Capshop, which is the largest owner of major UK shopping centres. At the same time, we are underweight in the far more cyclical office and hotel sectors.

Performance
Over the last year, SA listed property has outperformed both equities and bonds. Relative to equities, the property business model is transparent because it is based on contractual leases; asset rich and high yielding. This model serves listed property well in times of uncertainty regarding economic growth.

In contrast, the UK property cycle was badly hit by the credit crisis. The one UK property stock that we have held in your fund from inception is Liberty International, the 'parent' company of Capshop and Capco. Due to its relative underperformance, the fund has underperformed its peers, which hold exclusively SA listed property funds.

Outlook

On a clean-price basis, we forecast distribution growth of 8% for SA listed property for the next 12 month period. Vacancy rates have increased, especially in office space, but seem to be manageable. Most management teams expect office vacancies to peak before the end of the year.

Escalations of 6% to 9% are being achieved on renewals, and expiring rents are not too far from market rents due to rapid increases in the latter during the up cycle. Currently the SA sector yield 12 months out is 8%. Listed property valuations have run ahead of direct property valuations, as is to be expected in bull markets. Time will tell if this was justified.

Market review
SA listed property delivered small positive returns during the quarter, outperforming equities but underperforming bonds. Holdings in the fund that outperformed were Vukile (+9%), EMIRA and Growthpoint (both +5%), while Capco and Hospitality B (both -17%) and Capshop (-12%) were the worst performers. Several funds reported results during the quarter that featured positive distribution growth and reassuring outlook statements. Liberty International demerged into two listed entities during the quarter: Capital Shopping Centres (Capshop), which holds UK shopping centres, and Capital and Counties (Capco), which holds predominantly three groupings of mixed-use property in central London, of which Covent Garden is best known. The latter is an 'inward listing', meaning that rand holders are restricted to a twoyear holding period. The purpose of the demerger is to give the two businesses separate focuses

What SIM did
We continued to accumulate further holdings in Redefine and Growthpoint. Although Redefine has not met income projections made at the time of the merger, in our opinion the price has fallen to attractive levels relative to other SA listed property funds. We also added to Fountainhead for similar reasons - in this case, disappointment over the returns likely to be received on refurbishing a shopping centre caused the price to languish. Growthpoint, Redefine and Hyprop are now the largest holdings in the Fund. We expect retail property to remain relatively resilient to the cyclical downturn, as it has been in the past, and favour funds that have significant quality retail holdings, such as Hyprop, Acucap, Sycom and Fountainhead, as well as Capshop. At the same time, we are underweight in the far more cyclical office and hotel sectors.

What added to - and detracted from - performance
Over the last year, SA listed property has outperformed both equities and bonds. Relative to equities, the property business model is transparent, based on contractual leases, with counters asset rich and high yielding. This model serves listed property well in times of uncertainty over economic growth. At the same time, listed property does not suffer from the perceived oversupply associated with SA bonds. In contrast, the UK property cycle was badly hit by the credit crisis. There were fears that debt funding would not be made available when property holdings needed to be refinanced, and thus equity had to be raised at dilutive prices. The one UK property stock that we have held in the Fund from inception is Liberty international. Due to its relative underperformance, the fund has underperformed its peers, which invest exclusively in SA listed property funds.

SIM strategy
From the beginning of the quarter, your fund will be benchmarked against the SA listed property index (J253), as are most SA listed property funds, rather than the Capped SA listed property index (J254). The change means that only SA funds will be included, whereas previously the benchmark included UK property company, Liberty International. Accordingly, we will continue to seek opportunities to increase the fund's exposure to SA property funds.

On a clean-price basis, we forecast distribution growth of 7% for SA listed property over the next 12-month period. Vacancy rates have increased, especially in office space, but seem to be manageable. Escalations of 6% to 9% are being achieved on renewals, and expiring rents are not too far from market rents due to rapid increases in the latter during the upcycle.

Currently the SA sector yield 12 months out is 8.4%. Listed property valuations are starting to run ahead of direct property valuations, as is to be expected in bull markets. Time will tell if this is justified.

Market review

SA listed property provided very strong returns during the quarter, outperforming both bonds and equities. Fund holdings that outperformed were Sycom, SA Corporate and Hyprop (all +13%), while Liberty International (Libint) (-5%),Capital and Acucap (both +6%) were the worst performers worst.

This performance was achieved against a benign market backdrop, with SA bond yields declining and global listed property continuing to recover off the credit crisis lows. Several funds reported positive results during the quarter, which featured attractive growth in distributions and reassuring outlook statements.

Diversified fund Redefine signalled its intention to acquire units in specialist retail fund Hyprop to increase its holding from 33%.

What SIM did

We were active at the beginning of the quarter when prices initially fell and we accumulated holdings in a range of funds, notably Libint, Growthpoint and Redefine. We sold down our holdings in Vukile and Capital, both of which have generated excellent total returns of 36% over the last year. As at the end of the quarter, Libint, Growthpoint and Redefine remained the largest holdings in the fund.

We expect retail property to remain relatively resilient in the cyclical downturn - as it has done in the past. We favour funds that have significant quality retail holdings, such as Hyprop, Acucap, Sycom and Fountainhead, as well as Libint. At the same time, we are still underweight in the far more cyclical office and hotel sectors.

What added to - and detracted from - performance

The fund underperformed its peers, which invest only in SA-listed property funds, during the quarter because of its Libint holding. At quarter end, Libint comprised 11% of the total fund because it provides attractive diversification in terms of both the SA property cycle and the currency.

However, the UK property cycle was badly hit by the credit crisis. There were fears that debt funding would not be made available when property holdings needed to be refinanced, and equity had to be raised at dilutive prices. These fears have subsequently abated and the UK direct property cycle bottomed in the second half of last year. Over the past year, Libint has outperformed SA listed property by 5% (32% versus 27%). Recent underperformance has been a result of the rand firming 10% against the pound.

The fund's overweight position in SA retail property added to the performance during the quarter. Recent figures from benchmarking firm International Property Databank confirm the resilience of retail property in 2009. Office property has been the least resilient sector, mainly as a result of rapidly increasing vacancies. For instance, Emira, the underlying fund in the portfolio that holds the largest proportion of office property, has office vacancies of 15%.

Outlook

On a clean-price basis, we expect SA listed property distribution growth to be 10% over the next 12-month period, elevated by the Redefine merger benefits. Vacancy rates are increasing, especially in office space, but seem to be manageable. Escalations of 6% to 9% are being achieved on renewals, and expiring rents are not too far from market rents due to rapid increases in the latter during the upcycle.

Currently the SA property sector yield 12 months out is 8.5%, again using clean prices. Listed property valuations are starting to run ahead of direct property valuations, as is to be expected in bull markets. Time will tell if this trend is justified.

Libint shareholders have approved a demerger, in terms of which the shopping centre business will take over the Libint listing. It will be renamed Capital Shopping Centres and remain a REIT. The smaller, demerged portion will be called Capco. It will no longer be a REIT and will be inwardly listed (meaning that rand holders are restricted to a two-year holding period). Capco will hold and redevelop London property. The demerger is scheduled to take place in early May and is intended to allow the separate businesses to develop their own identities.

Market review
SA listed property returns moderated to 4% over the quarter after their strong 12% performance last quarter. Fund holdings that outperformed were Hyprop (+8%), Acucap (+8%) and SA Corporate (+7%), while Hospitality A (+3%), Redefine (+1%) and Hospitality B (-17%) were the worst performers. The listed property sector has progressively aligned itself with international best practice, with one of the funds' most significant moves to eliminate external management. Last quarter three funds, namely Hospitality, Vukile and Hyprop, internalised their management teams, with Hyprop doing so only partially after also entering into a consultancy agreement with two non - executive directors.

What SIM did
We used the cash received from distributions to resume buying for the fund. During the quarter, we selectively bought more Libint, Growthpoint, Acucap, Fountainhead and Hyprop units. As in the past, we expect retail property to remain relatively resilient to the cyclical downturn and favour funds, such as these, that have significant quality retail holdings. At the same time, we are underweight the far more cyclical office and hotel sectors. Growthpoint's rating is now more reasonable, having retreated from the elevated levels it reached a year ago when it was included in several indices, including the ALSI Top40. Growthpoint, Liberty International, and Redefine are the three largest holdings in the fund.

Performance and reason
The SIM Property fund is differentiated from most of its peers, which hold exclusively SA listed property funds, by its holding in Libint. Our view is that Libint's assets have a role to play in diversifying the SA listed property holdings, if only against rand weakness. The UK property downcycle, which has been more pronounced than SA's, has probably ended. We participated in the May rights issue to position the fund for Libint's recovery, which now seems to be underway. At quarterend the Libint's weighting in the fund was 12% of the total fund - below the level of about 40% that is warranted as a result of its diversifying properties. Timeous buying of Libint, combined with an underweight exposure to Growthpoint, accounts for most of the fund's performance relative to its benchmark index over the year. The SA listed property sector's delivered lower returns than equities in 2009 but outpaced bonds.

Outlook
The physical property sector has remained weak as the economy has recovered from recession. A particular concern for investors is that occupancy costs, mainly administered municipal and electricity costs, are now rising faster than income and this is leading to a further rise in vacancies as affordability is eroded. Occupancy costs are expected to continue rising for several years as a result of the proposed Eskom tariff hikes. Income growth has remained positive, with contractual escalation rates above inflation. Renewed leases have also experienced positive, albeit marginal, growth.. Thus we expect listed property to continue providing a moderately growing income over the next year as the physical property market experiences an orderly downswing. At some stage, however, listed property will start to discount recovery in the market for physical property.