Market Review
The FTSE/JSE SA Listed Property Index (SAPY) returned a total of 1.45% during the first quarter of 2019 against the -4% in the last quarter of 2018. This was still much worse than the FTSE/JSE All Share Index (ALSI) return of 8% and below that of cash (1.8%) and bonds, which returned a credible 3.8%. For the last 12 months the SAPY materially underperformed all other major domestic asset classes, returning -5.7% versus 5% for equities, 3.5% for bonds, and about 7.3% for cash.
The best performing shares in the SAPY for the quarter included Stenprop (+15.6%), Sirius (10%) and Investec Property Fund (+8.7%). By contrast, the worst performers were Fortress A (-20%), Accelerate Property Fund, also an underperformer during the last quarter of 2018 (- 16.7%), and Hyprop (-9%).

The South African commercial property market continues to trade in a weak macroeconomic environment with low investor confidence. The office market is experiencing high vacancy rates across the different sectors of the market. High vacancy rates are facing downward pressure on rental escalations, which are trending close to the inflation rate. Super regional shopping centres are outperforming the market, with mid-tier malls lagging the pocket.

In the industrial sector vacancy rates are presently close to the long-term average. While economic growth is impacting negatively on the sector, demand is being underpinned by the logistics sector and the demand for e-retailing-related space.
Fund performance
The current quarter was again somewhat quiet on the corporate action front. During the March 2018 FTSE/JSE/SAPY rebalance, Hospitality B was included in the index again, despite being one of the worst shares regarding liquidity previously, replacing the underperforming Rebosis, and the weightings of Redefine and the Equity Fund increased while EMI and Growthpoint decreased in the SAPY Index. The one-way turnover was a low 1.44%.

Your fund performed in line with the SAPY benchmark. Any deviations from the benchmark could solely be attributed to cash flows. Outlook Following the weak return for the last 12 months, the SAPY has derated to an attractive 9% trailing income yield, and about a 9.5% clean forward yield. The trailing and forward yields are now at a slight discount (i.e. higher) to the SA long-bond yield of 8.6%. This is a good rule of thumb to highlight cheapness in the sector, just as US investors may, for example, compare the dividend yield on the S&P 500 Index to US Treasury yields. The income yield alone is also over 3.5% higher than inflation expectations, and over 1% higher than cash rates. With the SAPY also likely to show growth in dividends (unlike cash and bonds) at the same level as CPI in the long run (4% to 6% p.a.), the total return spread relative to inflation, cash and bonds looks very attractive.

Further, given the sharp sell-off in 2018, it is possible that investors at these levels also benefit from a rerating of the sector back to about 8% or, these levels also benefit from a rerating of the sector back to about 8% or, in a best-case scenario, a 7.5% yield. One negative, however, over the short term is the recent interest rate hike, albeit small, which affects the finance costs of REITs given their debt gearing. Another negative is the fact that valuations are currently depressed, which makes it difficult for them to do any accretive acquisitions, which has in the past added to dividend growth rates. So, for now, they will have to rely almost entirely on organic g