The South African economic environment has remained challenging during the past quarter with the economy lagging our global peers by up to 6 months. The strengthening of the Rand has exacerbated the problem with the mining and manufacturing related sectors bearing the brunt of this. This comes through in the PMI data where South Africa has remained in negative territory for the past 4 months while some of the major developed nations have turned positive. Above inflationary wage increases and the 31 % increase in electricity costs points towards pressure on profitability for South African corporates in the short term. The response by South African corporates to the current environment has been fair~ decisive with a focus on cashflow generation and strengthening of balance sheets. The past quarter has seen working capital being driven down substantially with a key focus on inventory. Despite the challenging environment in the short term, signs of stabilization and recovery are emerging with expectations that the South African economy should bottom early next year. Interest rates have been cut by 500bps over the past year with the impact of this expected to come through in the year ahead. Inflation has continued its downward spiral with the August (PI of 6.2% being very close to the South African Reserve Bank target range of 3-6%. W~h lower inflation, lower finance service costs and improving access to credit, consumers face a substantially improved environment with rising disposable income in the near future. SA property balance sheets have not been affected that considerably by the global financial crisis. The reason for their strength has been more solid NAV values, a better match of asset and liability durations, less gearing and therefore lower loan to value ratios and debt was acquired mostly from SA banks, who have not faced as much pressure as global banks. The impact of weaker global fundamentals has been felt on the operational side, with SA retail trading conditions facing the same pressures experienced by their global counterparts. In addition, the office sector has been impacted by increasing vacancies, which are expected to continue for at least the next 6 months. While the year ahead may be tough as a result of rental pressures and increasing vacancies, the balance sheet structures are strong and this will provide resilience to our SA listed property portfolio. Over the medium term, rental growth will be supported by very low levels of development and new supply during this recessionary period

The macro environment indicates that the global economy continues to face serious headwinds in the form of banks and households de-leveraging, so demand for consumer durables amongst individuals will remain subdued for some time. In addition, the industrial capacity built up over the past few years to service an ever expanding demand now seems far too much, but government bailout efforts are preventing the closure of excess capacity, which means that competitors to the government-supported companies do not have pricing power. There also remains the problem of how to exit from the monetary and fiscal stimulus with a legacy of higher taxes, increased regulation and higher cost of capital the net result of the current survival efforts. The South African economy seems to be lagging the downturn in the rest of the world as the 2010 Soccer World Cup-related infrastructure spending had already started in 2008, so it was the export-orientated mining and manufacturing sectors that took the brunt of the downturn due to the global trade collapse and recent stronger rand. Higher union wage demands, alleged price collusion and administered prices pose inflation threat, which is why the South African Reserve Bank kept interest rates steady in June. The monetary transmission mechanism seems broken with companies repaying a record R27.3bn in loans to banks in May, while households are not being extended credit due to their high debt to income ratio, so the interest rate cuts between December 2008 and May 2009 have not boosted consumer demand. Over the next few quarters, we can expect some pressure on rentals and a rise in operating costs due in part to municipal and electricity tariff increases. However, due to the downturn in the economy, development projects have halted or slowed, thus reducing potential supply. As the downturn begins to reverse and demand for space increases, the reduction in supply will create positive fundamentals for property owners. Although compared to the global property market SA property is not offering as much value, it has not been affected that considerably by the global financial crisis. The reason for their strength has been more solid NAV values, a better match of asset and liability durations, less gearing and therefore lower loan to value ratios and debt was acquired mostly from SA banks, who have not faced as much pressure as global banks. While the year ahead may be tough as a result of rental pressures, the balance sheet structures are strong and this will provide resilience to our SA listed property portfolio. Liberty International is an example of a high quality company in our portfolio with a scarcity quality of retail assets being the largest owners of prime UK shopping centres. Despite current economic conditions, footfalls have remained stable and occupancies have not declined materially. Management has proven itself through good operational performance and as an internally managed REIT, conflicts of interest do not pose a threat. Post a successful equity issue of £620 million debt refinancing risk is low, with the nearest material maturity in 2011. Following significant write-downs to NAV the current NAV is robust which will result in substantial upside as the current cycle unwinds.

The South African economy experienced a substantial easing in economic growth during the second half of 2008 with slowing consumer spending and a sharp fall in the export driven mining and manufacturing sectors. The result was that the non-farm economy suffered two successive quarters of contraction on a quarter-on-quarter seasonally adjusted basis, but growth momentum was sufficiently strong so that the annual average was a still robust 3.1 % despite the sudden withdrawal of foreign capital from the South African equity and bond markets. Foreign capital returned in the first quarter of 2009, but concerns remain about its volatility. The slowdown in the domestic economy in the second half of 2008 is one of the reasons why the government enhanced its fiscal stimulus, while the South African Reserve Bank has cut interest rates three times in the past four months. Commodity prices declined rapidly from their mid-2008 highs as the global economy slowed. We therefore anticipate earnings for the mining and resources related companies to decline significantly during the first half 2009, on a year on year basis. Lower commodity prices will however provide some relief on the input costs side. Private sector capital expenditure growth slowed down in the second half of last year with the real value of building plans down 52% year-on-year in January 2009. With credit conditions tightening as shown in the sharp decline in the narrow M1 money supply measure, as well as the slowing global and domestic economies, private sector capital expenditure growth will continue to decline in 2009. Government and parastatal related fixed investment remained robust with momentum expected to be maintained in the year ahead based on the current pipeline of projects as government acts in a countercyclical manner to support growth. After a stress-full 2008 which saw consumer spending decline, the South African consumer can look forward to a brighter 2009 on the back of lower inflation and interest rates. With inflation trending downward and the economy slowing, we anticipate aggressive interest rate cuts during the year. This expectation is reflected in the change of the frequency of the South African Reserve Bank's Monetary Policy Committee meetings from every two months to monthly except for July this year. Consumers' disposable income is expected to increase substantially; hence we anticipate further debt repayments as well as an increase in spending. Already the household debt to disposable income ratio has declined to 76.4% in the fourth quarter 2008 after peaking at 78.2% in the first quarter 2008. The Property Unit Trust (PUT) sector continues to offer value trading at a 10% discount to its Net Asset Value (NAV), while average gearing at 11 % for the sector is very low by global standards. The Property Listed Sector (PLS), with higher average gearing at 37%, rallied during the first quarter 2009 on the back of the interest rate cuts. The sector is currently trading at a 10% premium to its NAV. Relative to bonds, the listed property sector appears attractive offering yields in excess of 9%, with some growth going forward.

The South African economy experienced a substantial decline in economic growth during the second half of 2008 with slowing consumer spending and a sharp fall in the export driven mining and manufacturing sectors being the major drivers. Commodity prices declined rapid~ during the last quarter as the global economy slowed with prices expected to remain under pressure over the next few months. We therefore anticipate earnings for the mining and resources related companies to decline significantly during the first half 2009, on a year on year basis. Private sector capital expenditure growth has slowed down in the second half of last year, particularly on the mining front. With credit conditions tightening and the slowing global and domestic economies, private sector capital expenditure growth will continue to decline in 2009. Government and parastatal related fixed investment has remained robust with momentum expected to be maintained in the year ahead based on the current pipeline of projects committed to. However, credit conditions are unlikely to ease significantly over the short term highlighting a significant risk for the funding of this capital phase. In light of South Africa's budget deficit widening over the next 2 years, the funding of public sector fixed investment will need to be closely monitored. After a severe 2008 which saw consumer spending decline, the South African consumer can look forward to a brighter 2009 on the back of lower inflation and interest rates. The fuel price was cut by 1 34c in January 2009, which translated into a 20% decline in fuel costs, year on year. With a bumper harvest for maize and wheat, prices of soft commodities (food, etc) have declined in recent months and will contribute to lower inflation during 2009. The impact of lower food and fuel inflation together with the reweighting of the South African consumer inflation basket, effective 1 January 2009, could see inflation moving below the South African Reserve Bank target of 6% by the end of 2009. With inflation trending downward and the economy slowing, we anticipate aggressive interest rate cuts during the year.

The South African real estate index has declined by -27% during the past year while the Property Unit Trust (PUT) and Property Loan Stock (PLS) indices provided total returns of -18% and -10%, respectively. The PUT sector continues to offer value trading at a 10% discount to its NAV, while average gearing at 11 % for the sector is very low by global standards. The PLS sector, with higher average gearing at 37%, rallied during December on the back of the interest rate cut. The sector is currently trading at a 10% premium to its NA\I. Relative to bonds, the listed property sector appears attractive offering yields of around 8%, with some growth going forward.