Fund review
The SA listed property sector delivered a strong total return of 12.15% marginally underperforming equities and comfortably outperforming bonds. Our fund continued to outperform the benchmark. It was aided by the big overweight position in Vukile. Vukile outperformed the sector by almost 20% during the quarter. We built up a big position in the stock after realizing that it was undervalued - trading at a big discount to the market - dispite being one of the most consistent performers in the sector since listing. Nine companies that reported results for the period ended 30th June 2009 grew their distributions by an average of 8.4%. This is impressive growth given the negative GDP numbers reported in the period. The top two performers were Resilient (+15.1%) and Capital (+14.7%). These are our top overweight positions. There were casualties however, i.e. Hospitality B (-8.1%) and SA Corporate (-0.4%) which we have underweight positions in. The sector reported a marginal increase in vacancies save for one counter, Resilient. Most of the vacancies have been driven by speculative developments particularly in the office space. Counters like SA Corporate saw their vacancies increase as a result of holding weaker retail centres. Fortress Property Income Fund will be listing at the end of October 2009. The fund will be split into two units, i.e. A and B. The A units will offer a guaranteed 5% income growth and the B units will get the remainder of the distributions. We expect two or more property companies to list in 2010. This will bring more diversity into the sector.

Looking ahead
At our recent asset allocation meeting, the property call was moved from neutral to overweight. We are looking for the sector to deliver just over 9% income growth over the next year. This results in a forward yield of 9.5% which remains ahead of bonds and cash. Stripping out Redefine's superb 22% income growth, which has been largely driven by the merger, the sector's income growth rate comes down to around 6%. We still believe that this is acceptable growth and we take comfort from the fact that it is in line with inflation. Eskom's electricity hike poses a risk for the sector together with the supply that continues to flood the bond market.

Market Review
The Property Index behaved like the bond market and delivered a paltry negative total return of 0.88% (capital -2.2%, income +1.3%), underperforming equities by close to 8% for Q2. Several property companies that reported during the quarter delivered strong income growth. These included Premium 13%, Acucap 10%, Sycom 11 % and Vukile 12%. However, two disappointments, Redefine (-1%) and Octodec (+1%). Redefine attributed this to a delay in the transfer of trading properties whilst Octodec's portfolio suffered from deteriorating trading conditions in the retail market.
The mega-merger of Redefine, ApexHi and Madison is likely to happen mid in August due to the delays from the Competition Commission. On the other hand, there will be a new listing at the end of the 3rd quarter - a high yield Fortress Property Fund - a brainchild of the Resilient group. The trend in vacancies is on the up but is not out of hand. The smaller tenants in the industrial space and the line shopslboutiques are struggling. Fundamentally, the industrial market is still stronger than the office and retail market. The high end of the office market is coming under pressure mainly due to a number of new buildings that have come on stream.

Fund Review
The fund continued with its record of outperformance delivering a return of +0.35% versus the sector's return of -0.88% for the quarter. There were three major activities in the portfolio. We increased our underweight position in Growthpoint Properties. Growthpoint is expensive - it's trading at a premium to the sector yet it has lower income growth prospects. We bought more ApexHi B units as an entry to the Redefine merger. The merged Redefine entity is trading at discount to the sector despite superior income growth prospects. The fund capitalised on Liberty International's attempt to repair its balance sheet by participating in an equity raising at a discount to the ruling price. We invested 2% of fund and subsequently sold them at a profit of over 25%. We remain aligned to higher income growth and defensive counters like Resilient and Capital and underweight weaker counters like SA Corporate and Octodec.

Looking Ahead
We are forecasting income to grow by 7.2% over the next 12 months. This is off the highs of 2007 and 2008 but we believe it's decent growth given the current environment. In fact, three property companies recently upgraded their distribution growth guidance - Resilient, Pangboume and Capital.

Market Review
2009 began with property cooling off from a strong end to 2008, giving back just over 7% of the 25% run seen from October to year end. With the slow start to the year on track the asset class took a 180° turn bouncing back in March aided by positive global sentiment that the bottom of the market was perhaps behind us. Listed property lost 1.39% in a tough market, however it's defensive attributes still saw it outperform equities by almost 3%.
Interestingly enough the 1st quarter saw the property market more in sync with equity than with bonds, as general market panic and excitement shifted prices away from the relative yield comparison of the fixed income market. This created intrinsic value as property distributions now yield almost 2% ahead of both bonds and cash.
Company results were generally positive with the exception of SAC (STANLIB: material underweight). With this in mind we see the trading environment getting tougher and while we feel growth will persist, it will be at a lower rate. As vacancies are on the rise we will look towards a more conservative asset mix.

Fund Review
The fund was relatively flat for the quarter with a -0.71% return, outperforming the benchmark by 0.68bps. Despite market volatility the fund has shown consistent outperformance against peers and benchmark. Solid 'blue chips' combined with smaller active bets on the side has proven successful in both strong and weak markets. Stock picking again proved to be the differentiator to peers.
The material portfolio adjustment has been an increased exposure into the RDF merger, which is likely to be included into the Top 40. We believe that a liquidity re-rating as well as growth through reviewing certain contracts and listed holdings should provide superior returns.

Looking Ahead
Growth is looking muted around 8.5%, however the yield expectation of 9.9% is attractive and together with marginal capital growth should provide for a total return of 14.5% for the next 12 months.
We are pleased with the return potential in light of the current market; however it is necessary to highlight the risks we face. As usual we need to be cognizant of the bond market and the weakness it may show as Treasury issues paper into the market, however of primary concern at present is definitely the weakness shown by the consumer, which will impact significantly on vacancies as well as the rental levels across the sector. That said we believe that with the value present relative to other asset classes, we continue to buy property.
We are pleased with the return potential in light of the current market; however it is necessary to highlight the risks we face. As usual we need to be cognizant of the bond market and the weakness it may show as Treasury issues paper into the market, however of primary concern at present is weakness shown by consumers, which will impact significantly on vacancies and rental levels. That said we believe that with the value present relative to other asset classes, we continue to buy property.

Despite a volatile quarter, the SA listed property sector delivered a total return of 8.46%. The sector initially fell 16% as a result of the global markets turmoil led by the shake-up of global banks. It then recovered 29% due to the improved inflation and interest rate outlook. The 50bps cut in interest rates in December further supported the sector. The total return for 2008 was a negative 4.5%. However, this outperformed the All Share Index by 18.7%. Companies that reported during the quarter grew their distributions by an average of 12%. These included ApexHi, Redefine, Sycom, Ambit, Fountainhead, Premium, Octodec and Acucap. These companies, save for Octodec, all signalled a stable to positive outlook. The top 3 performers (price movement) for the quarter were Resilient, Pangbourne and Capital were the top 3 performers whilst Octodec, Premium and Hospitality B were the bottom 3 performers. Growthpoint Properties re-rated strongly after the inclusion in the Top 40 and MSCI Emerging Market Indices. Growthpoint became the first local listed property company to be included in the Top 40 index. Fund Review The fund delivered a total return for the quarter of 8.81% outperforming the benchmark by 35bps. The one year numbers are even more pleasing with the fund outperforming by 2.3% despite posting a negative total return of 2.17%. The outperformance was purely as a result of stock selection rather than asset allocation. The fund remained fully invested across the year in line with the strong property fundamentals. The fund has concentrated holdings - 13 stocks out of a possible 23. We increased exposure to ApexHi B, Redefine, Vukile and Capital and decreased exposure to Octodec, due to its rather negative outlook. We are comfortable with the fund's current holdings and the full exposure to listed property. Looking Ahead We are forecasting income to grow by 9.8% resulting in an attractive forward yield of 9.7%. This yield is fairly in line with cash and is superior to bond's 7.5%. We remain positive on the office and industrial markets. Our concern is the likelihood of an increase in vacancies in the retail space, more so in the smaller centres with higher exposure to line shops. We believe the upcoming interest rate cuts are likely to keep the listed sector buoyant but the risk remains in the bond market.