The STANLlB Property Income Fund achieved a gross total return of 13.61 % marginally underperforming the SA listed property index by 0.06%.
The listed property market has been phenomenally strong. It has been largely driven by the bond market that re-rated from 8.9% at the beginning of the quarter to 7.8% at the end of the quarter. There has been increased demand for listed property from both institutional and retail investors.
A number of listed property companies issued equity (private placements) to take advantage of the strong prices and huge demand. These companies include Hospitality Property Fund, Acucap Properties, Emira Property Fund, Vukile Properties and Growthpoint Properties. We were able to participate in all the private placements given the huge inflows that we have been getting.
The August results reporting season has been great as well. Property companies that reported during the season reported a weighted average income growth of 7.1 %. There was an improvement in the vacancies. Overall vacancies declined across the board save for one company that had a unchanged picture. Redefine International (RIN), a brainchild of Redefine Properties., listed at the beginning of September. Its portfolio has exposure to the UK, Australia and Germany. We participated in the listing and it has paid off. RIN's unit price is up 14% (SAPY up 2.6%) since listing.
There are more listings in the pipeline. These total over R20bn and include Old Mutual's Triangle Real Estate Fund, Healthcare Property Fund, Rebosis Property Fund and Attfund. These will give more diversity and liquidity to the sector.
We expect income to grow by 6.5% (well ahead of inflation) in the next 12 months resulting in a forward yield (income) of 8.3%. This is ahead of cash at 6.4 % and bonds (1O-year) at 7.9%.

Fund Review
The Property Income Fund delivered a total return of 0.75% for the quarter outperforming the benchmark by 0.11%. Once again, listed property showed its defensive qualities with a return superior to equities' negative total return of 8.17% in the same period. The fund also continued to receive huge inflows during the quarter. We were able to source lines of stock despite a generally illiquid listed property market. There were two major changes in our portfolio. We increased our Growthpoint holding and cut our exposure to Fountainhead. Growthpoint's distributions were below market average over the last year due to speculative developments that struggled to let. We believe that all the pain is priced in the numbers. These vacancies create an income growth opportunity when the physical property market turns. Fountainhead is doing a major redevelopment of Blue Route Mall in Tokai, Cape Town. This will dilute distribution growth. We expect the income growth to be lower than market average.

Market Review
Companies that reported during the quarter all posted positive distribution growth - Premium 16.8%, Vukile 10.2%, Sycom 6.3%, Acucap 6.2%, Fountainhead 6.0% and Octodec 4.7%. We are expecting similar trends in the next reporting season in August. We believe that the physical property market is nearing the bottom. The recovery however will be a muted one. Redefine announced its intention to increase its stake in Hyprop and to eventually take out the company. We are against this deal. We prefer Hyprop to remain a specialised niche retail fund rather than be part of a much diversified Redefine portfolio. There could be more choice in the sector by the end of the year. There are three companies looking to list. These specialise in different sectors - residential, healthcare and retail.

Looking Ahead
We are forecasting income to grow by 6.8% in the next 12 months, resulting in a forward yield of 8.8%. The income growth beats inflation and the yield is ahead of bonds' 8.5% and cash at 7%. The risk for the listed property market remains in the bond yields moving up due to continued increase in government supply and Eskom's electricity price increases.

With a 3.61 % return for the quarter the Fund marginally underperformed the benchmark, which returned 4.05%. However, over one year to 31 December 2009, the STANLIB Property Income Fund successfully outperformed the South African Property Index (SAPY) by 2.47% with a total return of 16.54%, which incidentally made it the best performing property collective investment in the country for the 2009 calendar year. The fund will continue to focus exclusively on outperforming the stated benchmark in aid of providing optimal 'property' exposure. While we are happy with our short term performance (1 year number) we must stress that our core focus is on long term results. The outperformance was purely as a result of stock picking. The first quarter saw a shaky start generating negative returns; however we stuck to our property focus, as many of our peers attempted to time the market into cash instruments. Our conviction in property paid off as we saw a marked improvement in returns from around March, and while several investors were simply trying to get back into the market, we were already holding our preferred stocks. The nature of our investment strategy does not call for aggressive trading in our portfolio, and thus there was not too much change to our position in the last quarter of 2009. However, our core overweight position in Capital, Pangboume and Hyprop stood out as top performers, while our underweight in Redefine also contributed to our relative success. We lost a bit of ground as SA Corporate had a solid quarter, but we still need more proof of its ability to turn around before we can be comfortable taking a material position in the company. Our bets from the 2008 year still continued to payoff for the year of 2009. The Capital Property Fund, being our biggest overweight, was once again the darling of the sector with a total return of 28% against the index of 14 %. One of the more recent holdings was Vukile, which also materially beat the benchmark. We continue to hold this position as we believe Vukile is still attractively priced, coupled with the fact that their relationship with Sanlam Properties opens up a wide array of opportunities in acquiring 'workable assets' . 2010 will be a challenging year for listed property as a whole as earnings growth continues to moderate and the potential supply in the bond market could further impact property valuations. With that said we continue our strategy of focusing on quality earnings streams that we believe have the ability to ride out general market