Fund Overview

The fund outperformed the benchmark by 1.25% during the quarter, delivering a gross total return of 0.82% versus the benchmark return of -0.43%. The top contributors to fund performance was the respective under- and overweight positions in NEPI and Ascension-A. NEPI underperformed following the Brexit outcome and changes in management. Ascension-A outperformed on a potential acquisition. The top detractors were the overweight positions in Octodec and Tower Property Fund. Octodec had underperformed on muted distribution growth whereas Tower had concluded a capital raise during the quarter.
Market Overview

Listed property pulled back in the quarter (-0.43% total return), underperforming bonds (+4.40%), cash (+1.78%) and local equities (+0.44%). Volatile bond yield movements and Brexit were the main drivers for the underperformance of the sector. Year-todate however, listed property was the second best performing asset class (9.6% total return), outperforming equities (4.3%) and cash (3.5%) but underperforming bonds (11.2%).

Within the Emerging Market listed property universe, South Africa was the most impacted by the Brexit outcome given its significant exposure to the UK and Europe. Unsurprisingly, the major losers for the quarter were dominated by UK counters such as Intu, Capco, Capital & Regional and Stenprop to which the fund had no exposure. The fund does however have minimal exposure to MAS and Redefine International (less than 1% combined). Results reported during the quarter confirmed that the local economic environment remains challenging. Vacancies remain relatively stable but rental growth remains under pressure, particularly in the office and industrial sector. Emira, an officefocused fund, recently announced that it expects negative distribution growth in 2017 due to higher office vacancies and negative rental reversions. We believe this is an indication of a sector wide trend and expect more companies to achieve slower distribution growth going forward.

Outlook

Over the next 12 months, we are reducing our income growth expectation from 10% to 8%. With the stronger ZAR, the boost from offshore earnings to income growth will be limited. Furthermore, we expect income growth to slow given the challenging economic environment. Listed property currently offers a forward yield of 6.8% which is below the 10-year bond yield (8.7%) and cash (8.5%). Listed property however, provides the benefit of a growing income stream in comparison to cash and bonds. Over the next 12 months, we expect listed property to deliver a total annualised return of 2.5% in our base case, 8.2% in our bull case and -2.6% in our bear case. This is based on the assumption that bond yields are 9.0%, 8.5% and 9.5% respectively.

Fund Overview The fund underperformed the benchmark by 1.07% during the quarter, delivering a gross total return of 9.02% versus the benchmark return of 10.10%. The top detractor to fund performance was the large underweight position in Resilient. The stock had outperformed market peers significantly as its year-end results had exceeded market expectations. We continue to find Resilient excessively overvalued (3.9% yield vs sector yield of 6.6%) and ranked amongst the most expensive property stock globally. The top contributors were the overweight positions in SA Corporate and Arrowhead-A. SA Corporate outperformed on achieving strong distribution growth of 10.8% for its full year. Arrowhead-A converted to a single class of shares which improved its liquidity.

Market Overview

Listed property rebounded strongly in the quarter (10.1% total return), outperforming bonds (6.55%), equities (3.87%) and cash (1.68%). The sector recovered on the bond yield strengthening from 9.7% to 9.1% in the quarter and another strong results season.

Despite the weak economic backdrop, listed property funds continued to achieve above inflation like-for-like net property income growth of ±6%. Fixed leases with annual escalations have provided short-to-medium term protection against the economic downturn but some pressure on rental growth is expected in the medium-to-long term if economic growth remains subdued. This explains why listed property companies are venturing offshore in search for growth. Offshore earnings now comprise 38% of total earnings generated by the sector and 54% for the total universe of JSE-listed property stocks. We remain cautious against chasing offshore-dominant counters purely on a rand-hedge basis. Performance of offshore counters may reverse rapidly as it did in the quarter given the recent Rand strength. Furthermore, the majority of offshore property acquisitions are of a secondary nature and transacted on a fully priced basis.

Outlook

Looking ahead, we are expecting income growth of 10% over the next 12 months. This has been largely boosted by increased offshore earnings. Excluding offshore earnings, income growth slows down to 6% - 7%. Listed property currently offers a forward yield of 6.6% which is below the 10-year bond yield (9.1%) and cash (8.5%). Over the next 12 months, we expect listed property to deliver a total annualised return of 2.2% in our base case, 7.6% in our bull case and -2.6% in our bear case. This is based on the assumption that bond yields are 9.50%, 9.0% and 10.00% respectively. The biggest risk facing the sector is downside risks to the bond yield given the potential credit downgrade and rising inflation.

Fund Overview

The fund outperformed the benchmark by 0.96% for the quarter. It achieved gross total returns of -3.70% versus the benchmark's -4.66%. For the 2015 calendar year, the fund delivered 9.33% ahead of the benchmark's 7.99%. Despite the market volatility, the fund remained fully invested. We keep minimal cash only for liquidity purposes and not to time the market. Our performance was boosted by the merger between Capital and Fortress Income Fund and overweight positions in MAS and Investec Australia. Having no exposure to Attacq was positive for the fund. Attacq continued to underperform the sector. The biggest detractors to performance were our underweight positions in Resilient and Rockcastle. We find these stocks overvalued.

Market Overview

The quarter was extremely volatile. This led to listed property delivering a negative return of 4.66%. Despite a tough 2015, the listed property sector was again the best performing asset class with a 7.99% total return. This was ahead of cash (6.46%), equities (5.13%), and bonds (-3.93%).

The SA listed property sector continued to deliver positive distribution growth. Most companies are signalling challenging times ahead and are looking to increase their offshore exposure. There was no slowdown in terms of activity. There were two new listings in the form of specialised funds - Stor-Age focussing on self-storage properties and Balwin Properties a residential focussed fund. Over R30bn of new equity was raised in 2015. Capital Property Fund was taken over by Fortress Income Fund. Tradehold, MAS and Stenprop were included in the benchmark. Capital Property, Delta Property Fund and Dipula B fell off the benchmark. MAS and Stenprop are 100% offshore property stocks. Their weighting has increased largely because of the weakening rand and increased offshore interest. There was increased interest in the rest of Africa too. Delta Africa and Pivotal have formed a partnership to create the largest sub-Saharan (excluding South Africa) listed property fund called Mara Delta. Growthpoint has partneted with IFC to get rest of Africa property exposure. SA Corporate bought Zambian retail assets. Rockcastle sold some Zambian assets to Delta Africa. Attacq and Hyprop jointly bought a mall in Nigeria.

Outlook

We are forecasting income to grow by 9% to 10% in 2016. This has been largely boosted by increased offshore exposure. If we strip out offshore exposure, the income growth slows down to 6% to 7%. Listed property is offering a one-year forward yield of 7.2%. This is below the 10-year bond yield at 9.7%. The risk remains in the volatile bond and currency markets as well as slowing economic growth. However, some of this will be mitigated by the diversification in the region and offshore markets.