Fund Review

The fund managed to outperform its benchmark by 0.07% during the quarter, delivering a gross total return of 1.88%. The listed property sector delivered a total return of 1.8% for the quarter, was a decent outcome considering that the total return was around -7.7% at one point. The total return performance of listed property was ahead of bonds (0.9%) and cash (1.3%) but less than equities (4.3%). The demand and supply dynamics for the retail and industrial sector remain supportive of rental growth and we prefer these sectors over the office sector which remains under pressure. The economy is growing at too slow a pace to stimulate demand for office space and the supply of office space is increasing. Some of the supply is to cater for corporates such as Discovery, Sasol and Webber Wentzel who are looking to consolidate their physical presence in Sandton but a fairly significant portion of this supply is speculative in nature. This will continue to have a dampening effect on rental growth in the short to medium term. Industry heavyweights such as Growthpoint, Hyprop, Resilient and Capital reported results during the quarter. These heavyweights managed to deliver distribution growth ahead of the market's expectations. Resilient in fact managed to grow their distributions by an impressive 18.3%.

What was perhaps even more encouraging was the fact that SA Corporate and Emira, two companies which have disappointed in the recent past, managed to deliver a strong set of results. These two companies grew their distributions by 8.6% (SA Corporate) and 6.5% (Emira). MAS plc and Attacq successfully raised R2.7bn and R1bn respectively during the quarter. The demand for their private placements was incredibly strong and was significantly oversubscribed.

The fund participated in the R2.7bn MAS plc private placement. MAS plc invests in property is the UK, Germany and Switzerland and is in the process of moving across to the main board of the JSE

Looking Ahead

We are expecting income growth of around 8% over the next 12 months. This results in a forward yield of 7.8% which is below 10 year bond yields (8.3%) and considerably ahead of cash (6%). Listed property is expected to deliver a total annualised return in the region of 8% over a 4 year holding period. The consolidation phase has already started to take shape in the listed sector with the announcement of numerous proposed transactions such as the Acucap/Sycom merger.

We are generally supportive of this trend as it will become increasingly difficult for smaller companies to grow their portfolios through yield enhancing acquisitions in an increasing interest rate environment. Consolidation will lead to fewer but larger companies with stronger balance sheets in general.