The South African economy is anticipated to deliver superior economic growth during 2011 but does face a challenging environment. The potential negative impacts around the North African & Middle East (5% of SA exports) uprisings and the Japanese (9% of SA exports) crisis could impact our growth expectations, especially our export and consumer related sectors. Rising inflation is a major issue in emerging markets and is starting to come through in South Africa. While the strong Rand has provided a buffer for inflation, the strong rise in food, oil and electricity prices will feed into inflation over the next few months. This together with the high consumer debt levels will constrain household consumption expenditure in the year ahead. While the mining sector is anticipated to provide a meaningful contribution to economic growth, it is largely reliant on robust economic growth being sustained in the likes of China and India. The manufacturing sector has improved with utilisation levels slowly rising but the strong Rand remains a thorn in the side impacting their global competitiveness. With a million job losses during the recession and unemployment at relatively high levels, sustained job creation is required from both the private and public sectors to reduce unemployment meaningfully. This requires a significant increase in labour productivity and incentives to encourage the private sector to start investing and spending on capex in the coming years.

There has been further consolidation in the sector during this quarter with the Hyprop/Attfund and Capital/Pangbourne mergers which contribute to the improvement of scale, efficiency and liquidity of the South African listed property sector. The industry and regulators are also working towards new REIT legislation which will increase transparency and create a more uniform environment. The operating environment for the South African retail and industrial property sectors continue to improve gradually with vacancies and bad debts stabilizing or reducing slightly supported by very low activity levels in new developments. However, there are still a number of the office nodes that are lagging and the demand for office space remains weak. Vacancies will reduce as the economy recovers but the rate of improvement is expected to be slow, especially in the office sector. In addition, landlords and tenants continue to face the pressure from high levels of inflation in electricity costs and municipal charges which reduces the ability of landlords to grow rentals. Average distribution growth of the sector has slowed from above 10% in the period 2006 to 2008 to the current level of 5%-6% but revenue and distributions continue to be supported by healthy annual contractual rental escalations of 7-8% p.a. on current leases. The current listed property sector yields remain slightly lower than 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, high quality tenants, long lease expiry profiles, solid balance sheets and experienced management teams.

The South African economy is on track to deliver positive economic growth for 2010 despite industrial action having impacted negatively during the second and third quarters. Robust mining production due to demand from major emerging markets and rising commodity prices has resulted in mining starting to come through. Rising disposable income, low interest rates and increases in credit extension has contributed to a cyclical uptick in household consumption expenditure. However, the high consumer debt levels will limit its ability to support strong economic growth over the medium to long term. Consumers also face a potential risk in rising inflation, which could happen fairly rapidly should the Rand depreciate against the major currencies. The manufacturing sector is difficult with the continued strengthening of the Rand constraining its growth potential. Despite this, there appears to be some pick up with automotive production starting to normalize and the PMI moving back above the 50 level in November. Government expenditure is anticipated to remain supportive of economic growth in the future with the stable fiscal and monetary position of government allowing for this flexibility. Despite the increased borrowing for infrastructure related projects (public enterprises included), government debt to GDP is forecasted to peak at 43% in 2013, well below levels of its developed market peers. Unemployment however remains a key concern with the difficult economic environment not being very conducive to job creation. The public sector has contributed to some formal job creation in recent months while, the private sector has lagged and is unlikely to make a meaningful impact in the short term. While the economic environment will remain challenging in the year ahead, economic growth should be better than expected due to base effect of industrial action during 2010.


The operating environment for SA Property companies is improving gradually and there were further indications over this quarter that vacancies and bad debts are reducing in the industrial and retail sectors but there are still a number of the major office nodes that are lagging and in this sector the demand for new space remains weak. The result of the increase in vacancies over the past two years is that average distribution growth of the sector has slowed from above 10% in the period 2006 to 2008, to the current level of 5%-6%. Vacancies will reduce as the economy recovers but the rate of improvement is expected to be slow, especially in the office sector, and landlords and tenants continue to face the pressure from very high levels of inflation in electricity costs and municipal charges. However, revenue and distributions continue to be supported by healthy annual contractual rental escalations of 7-8% p.a. on current leases. The corporate activity in the SA listed property sector has continued which is resulting in bigger portfolios and increased cost efficiencies. In addition, the larger SA property companies have also taken advantage of the global recession and strong Rand to invest offshore at attractive valuations which will add value for investors and diversify risk. The current listed property sector yields are below historic levels and 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, high 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 portfolio does contain a substantial exposure to high quality offshore property companies listed in South Africa which does result in the weighted portfolio dividend yield being lower than the South African property loan stock sector but the benefit from this geographic and currency diversification will add value throughout the cycle.