While the South African economy realized robust annualized growth during the first half of this year, some momentum appears to have been lost in recent months. The strong Rand has been very beneficial for consumers with lower inflation, but it is making it increasingly difficult for our manufacturers and exporters to compete effectively. While utilization levels are unlikely to increase substantially from current levels in the near term, they should be maintained considering inventory levels are still at very low levels in relation to history. The consumer appears to be on an improving trend with positive changes in net household wealth and rises in real disposable income helping to spur growth in consumer expenditure. With above inflationary wage increases continuing and inflation remaining low, household consumption expenditure should provide support to economic growth in the short term. The South African government appears to be in a relatively stable financial and fiscal position and the potential for cheap funding should help the infrastructure program gain momentum in the year ahead. However, the industrial action experienced in the public sector in recent weeks will impact economic growth negatively in the short term. In summary, economic growth will face some headwinds in the short term. In order to ensure sustained economic growth in the coming years, South Africa is reliant on the manufacturing, mining and government related sectors coming through.

The operating fundamentals for SA property companies remain unchanged since the beginning of 2010, with pressures from lower rentals on new leases and higher electricity costs making it difficult for landlords to increase rentals over the medium term. However, these pressures are largely offset by healthy annual contractual rental escalations of 7-8% p.a. on current leases. The operating environment is expected to improve gradually and there are already indications that vacancies have started reducing in the industrial and retail sectors while there are some office nodes that are lagging where vacancies are only expected to start improving during 2011. Unlike the Global REIT sector, cash distribution growth for the SA property sector has remained intact and there have been no covenant breaches, distressed assets sales or deeply discounted rights issues. This can be attributed to the discipline with regards to property development and prudent debt levels which will ensure stability in distributions going forward, albeit lower than the historic double digit growth.

There has been a high level of corporate activity in the SA listed property sector over the past two years which has resulted in bigger portfolios and increased cost efficiencies. In addition, the larger SA property companies have also taken advantage of the recent global recession and invested offshore at attractive valuations and with a strong Rand which is adding value for investors and diversifying risk. There has also been an increase in the pipeline of potential new SA property listings with up to 3 relatively large and high quality portfolios expected to come to the market over the next 12 months. The current listed property sector yields are below historic levels and are trading in line with government bond yields, which increases the risk of downside but this also creates an opportunity for Oasis to add value through our detailed in house research and stock selection skills. In line with our philosophy, we continue to focus on property companies with good quality assets, top quality tenants, long lease expiry profiles, solid balance sheets and experienced management teams and combined with our focus on value, the Oasis Property Equity Fund is well positioned.

The South African economy appears to have lost some momentum in its recovery in recent months after robust annualized growth being realized during the first quarter of this year. Manufacturing capacity utilization remained relatively low highlighting the cautious stance from manufacturers around sustainability of demand and the impact of the strong Rand. Post the World Cup and extended school holidays, we could expect a pick up in restocking from the current low inventory levels. Sustainable growth in manufacturing is important to overall economic growth and a pick up in global and domestic demand together with a weaker currency will assist in meeting this objective. Household consumption expenditure came through strongly as the benefit of the rise in real disposable income encouraged consumer spending in both semi-durables and durable goods. Despite household debt levels declining somewhat during the year, debt levels by historical standards remain very high. Having been a key driver of economic growth in South Africa over the past decade as consumers ratcheted up debt from low levels, consumer spending is unlikely to be as a significant driver of economic growth over the next few years. The South African government is in a relatively better position than its developed market peers with lower budget deficits and debt levels to contend with. This should allow for financial flexibility and hence support the fixed investment related program over the next few years. Sustained economic growth over the next few years will have to come through the manufacturing, mining and government related sectors as the high debt levels of consumers is likely to constrain the rate of growth in consumer spending. SA property companies continue to experience rental pressure on new leases but this is being offset by reasonable escalations on rental renewals with existing tenants. The increase in electricity cost which increases the total occupation cost and affordability for tenants is also impacting the ability of landlords to increase rentals and this will remain a negative factor for the next three years. However, there are signs of an improving operating environment with vacancies and arrears having peaked towards the end of 2009 and starting to reduce but the letting market remains tough and we do not expect to see a rapid reduction in vacancies during 2010. Therefore, distribution growth for SA Property companies will be lower than over the past five years but it is expected to remain positive which is a very credible performance through the global recession and relative to the listed global property sector. This outperformance in distribution growth relative to the Global REIT sector has been supported by very prudent debt levels and a low exposure to property development. The SA listed property sector is also benefiting from significant consolidation with the average sizes of the companies and portfolios increasing substantially which does provide scope for reduction in direct property expenses as well as property management cost as a result of buying power and economies of scale. The current listed property sector yields are below historic levels and the five year government bond which increases the risk of downside but also creates an opportunity for Oasis to add value through its stock selection. In line with our philosophy we continue to focus on property companies with good quality assets, top quality tenants, long lease expiry profiles, solid balance sheets and experienced management teams and combined with our focus on value, the Oasis Property Fund is well positioned to create wealth for its investors.

Although SA property companies have been impacted operationally due to rental pressures and increasing vacancies, the impact has not been as severe as experienced globally, with single digit growth in distributions continuing to be maintained. In the last quarter of 2009, vacancies appear to have peaked and while negative rental reversions are being noted in certain areas, the bulk of rental renewals have been at higher rates. The SA listed property sector is benefitting from significant consolidation with the average sizes of the companies and portfolios increasing substantially which does provide scope for reduction in direct property expenses as well as property management cost as a result of buying power and economies of scale. The increase in electricity does not have a direct impact on the profitability of property companies because electricity costs are recovered from tenants, but it does increase total occupancy cost for tenants which will reduce the landlords' potential to escalate rentals over the next 3 years. The year ahead will continue to be subdued, but a slow recovery is under way and growth prospects are expected to improve in 2011.

The current average property yields are below historic levels and the five year government bond which increases the opportunity for Oasis to add value through its stock selection. In line with our philosophy we continue to focus on property companies with good quality assets, top quality tenants, long lease expiry profiles, solid balance sheets and experienced management teams and combined with our focus on value, the Oasis Property Fund is well positioned to create wealth for its investors.

During the current global credit crises the balance sheets of SA property companies have been stable compared to their global counterparts due to more solid NAV values and less gearing. However, the impact of weaker global fundamentals has been felt on the operational side, with SA retail trading conditions facing the same pressures experienced globally and the office sector being impacted by increasing vacancies. While office and smaller retail spaces have borne the brunt of negative rental reversions, the industrial sector has held up well due to historic low rental levels and a relatively short development pipeline. The year ahead may be tough as a result of rental pressures but the balance sheet structures are strong and this will provide resilience to the SA listed property portfolio. In line with our philosophy we continue to focus on property companies with good quality assets, top quality tenants, long lease expiry profiles, solid balance sheets and experienced management teams and combined with our focus on value, the Oasis Property Fund is well positioned to create wealth for its investors.