The South African economy realized economic growth of 3.2% during the 2nd quarter driven largely on the back of a recovery in mining output and some acceleration in agricultural output. If the primary sector was excluded, the rest of the economy growth rate slowed during this period. Manufacturing was under pressure due to slowing domestic demand and weak global economies, particularly Europe. Inventory levels to GDP is still at low levels in relation to history at around 12.5% to GDP and manufacturing utilization levels are unlikely to recover strongly in the short term. However, South Africa remains well positioned relative to the developed markets due to a strong balance sheet and its exposure to growth on the African continent. The mining sector has faced significant challenges this year and more so in the 3rd quarter. Lower commodity prices together with the impact of lower production due to strikes will impact its contribution to economic growth during this year. If this industrial action goes on for a prolonged period, the impact on economic growth will be significant. Pressure on exports due to the mining & manufacturing sectors and continued increase in imports is having an impact with our current account deficit widening during the past quarter to -6.4%. Our terms of trade continue to weaken and should trend downwards during the 2nd half. Despite the worsening of the current account deficit and negative news around the mining sector, the South African currency has remained fairly resilient which can be attributed to the net flows of close to R90bn into South African bonds by foreigners year to date. Should these flows turn negative, the currency could weaken substantially from the current levels. Inflationary pressures are expected to rise on the back of the increase in liquid and soft commodity prices and together with slower credit extension consumer spend growth is expected to moderate.

The South African listed property market has delivered solid returns for the first three quarters of 2012 as investors continue to search for income yield. On the operational front we continue to see outperformance of premium grade properties, especially in the office market. Demand for Retail space from national food and fashion tenants remain strong and the new supply of shopping centres is low in the major cities and nodes. Industrial demand is solid for larger warehouse and logistics space while demand for manufacturing space is lagging. The current Property Unit Trust yield is 7% and the Property Loan Stock yield is 6.8% relative to the SA 10yr bond yield of 7.0% and we expect distribution growth of 5-6% per annum.

The South African economy remains resilient but economic growth expectations are being lowered for the current year. The services sector and domestic SA was positive but growth in retail starting to slow as noted in recent months. Credit extension contracted in April, largest decline since 2008, with bank impairments also rising. This could point to slowing consumer spending for the remainder of this year. The mining sector has been mixed with production under pressure in precious metals while remaining robust in iron ore, coal and manganese. Commodity prices remain below their peak levels with significant declines noted in oil and thermal coal in recent weeks. At current Rand spot commodity prices, the mining sector should deliver decent earnings but at lower levels than 2011. The manufacturing sector realized positive growth during the first quarter but the weak global environment has seen softening starting to come through. South Africa's terms of trade has started to fall from its recent peak in 2011 as weakness in mining has impacted. Any substantial decline to terms of trade in the coming months will weaken the Rand further and impact economic growth. The fall in both liquid (oil, etc) and soft commodities (maize, etc) has eased inflation concerns with inflation anticipated to peak at a lower level this year. A Rand blowout will however drive inflation risks to the upside. Employment remains weak with some net job losses reported in recent months. Public sector remains the major driver of new employment as the likes of Eskom and Transnet spending continue to rise. Our inflexible labour regulations are unlikely to encourage the private sector to invest and hire new employees for future growth with corporate cash balances continuing to rise.

There are early indications that the A Grade office market is starting to recover with demand for A Grade space starting to improve but this appears to be at the cost of B Grade space where demand remains weak. Demand for South African Retail space from national food and fashion tenants remain strong and on average the rental reversions on lease renewals remain positive. Industrial rental growth is recovering and there is a clear trend in favour of larger warehouse and logistics space while demand for manufacturing space is lagging.

The SA listed property sector is fully priced with the current PUT yield at 7.8% and the PLS yield at 6.7% relative to the SA 10yr bond yield of 7.8%. The DPS growth over the next five years will remain lower than the past ten years due to lower rental growth on lease renewals, higher administered prices and limited opportunity to make income enhancing acquisitions due to funding costs being in line with or higher than acquisition yields for good quality properties. The Oasis Property Equity Fund is well diversified and appropriately positioned to take advantage of opportunities when they arise.

South Africa has evolved over the past 20 years with the economy becoming more diversified and being less reliant on historically major sectors such as mining. Importantly major service related sectors such as financial services, real estate and tourism have developed and become meaningful contributors to the economy. Financial services and tourism should continue to realize decent growth over the long term with South Africa's positioning as a financial hub to Africa becoming increasingly more relevant. Shortage of skilled labour in these areas could however hamper our pace of growth in the services sector over the next decade. Effective execution on transport infrastructure projects could help to unlock meaningful economic contributions from both the mining and manufacturing sectors. In the short term, weak demand from our developed world trading partners will impact our economy. Any significant slowdown in China (not anticipated at this stage) will also impact our mining sector and overall exports. The engine of South African economic growth over the past decade, household consumption expenditure, is expected to face some pressure in the short term due to declining real disposable income, high debt levels and high unemployment. Some reprieve will come through increased capital investment from government and public enterprises. South Africa's relatively stable financial situation could allow for more flexibility, both fiscally and through monetary policy should the need arise.

The level of supply and potential pipeline of commercial property has declined substantially from the peak in 2008 with building plans approved down by 47% and current development activity being more focused on additions and alterations to existing properties. The average debt funding cost of 9.2% for the SA listed property sector is a limiting factor for development or acquisition activity over the medium term because it is a challenge to find good quality developments or properties that would deliver a yield in excess of the debt funding cost. In the retail sector we continue to see a demand for space in good locations from the supermarkets and national clothing retailers supporting rentals. However, office supply and vacancies remain high and we expect rental reversion on renewals in the office sector to remain negative for 2012. Within the industrial sector, the demand for warehousing and logistic space is strong while demand for manufacturing facilities remain weak.

The current listed South African property sector yields are lower than the 10 yr bond yield, which increases the risk of capital loss, especially if the 10 yr bond yield moves up due to higher inflation. However, this risk of capital loss is mitigated by the current growth of 3%-6% in SA listed property distributions. The yield on the South African component of the Oasis Property Equity Fund is currently 8.0% which is higher than the average of the PLS and PUT sector at 7.6% which does reduce the risk of capital loss. In addition there is 21% of the fund that is invested in foreign REITS that are listed in South Africa which provides geographic diversification.

South Africa is relatively well placed when compared to its major developed economy peers, with our debt levels and budget deficits looking much healthier. This does provide the government with some financial flexibility as noted with the infrastructure expenditure announced in the budget. While government debt levels will rise, they are not anticipated to go above 40% of GDP over the next 2-3 years. The tough global economic environment will however, constrain economic growth in the short term with our export related sectors anticipated to bear the brunt of this. The mining sector is mixed with production growth in commodities such as iron ore, manganese & coal expected to deliver some volume growth while precious metals appear to be facing production pressures. However, recent weakness in the Chinese economy could put pressure on commodity prices, impacting the mining sectors contribution to GDP negatively. Weakness in the Rand may assist in reducing the impact. The South African consumer appears financially stable with debt levels having declined slightly during the last quarter while debt services costs are close to historical lows and unlikely to increase significantly in the short term. Taking the above factors into account, economic growth for 2012F is therefore anticipated to be lower than last year at around 2.7%.

Demand for South African Retail space from national food and fashion tenants remain strong and on average the rental reversions on lease renewals remain positive. Supply of new shopping centres is close to the trough established in 2009 with the majority of new supply in outlying regions. Office rental growth continues to moderate with the decline being more significant in the lower quality categories and rental reversions are expected to remain negative for some time. Industrial rental growth is recovering and there is a clear trend in favour of larger warehouse and logistics space while demand for manufacturing space is lagging. The SA listed property sector is fully priced with the current PUT yield at 7.6% and the PLS yield at 6.8% relative to the SA 10yr bond yield of 8.2%. The DPS growth over the next five years will remain lower than the past 10 years due to lower rental growth on lease renewals, higher administered prices and limited opportunity to make income enhancing acquisitions due to funding costs being in line with or higher than acquisition yields for good quality properties. The Oasis Property Equity Fund is well diversified and appropriately positioned to take advantage of opportunities when they arise.

The South African economy grew faster than expected during the first quarter of 2011, growing at an annualised rate of around 4.8%. This was largely attributed to the rise in manufacturing output, the increase in non-gold mining contribution from rising prices and increased consumer spending on durable and non-durable goods. While the growth was better than expected, the South African economy does face several challenges in the year ahead. Excluding the motor vehicles and the chemicals segments of the manufacturing sector, the broad part of the manufacturing sector remains under pressure. The continued strength of the Rand and muted global demand does make export related growth challenging while increasing imports have placed pressure on domestic profitability. The mining sector has benefitted significantly from the meteoric rise in China with high commodity prices and rising volumes driving non-gold mining growth over the past year. In the short term, with China aggressively raising interest rates to combat inflation, there is a risk that commodity prices could decline from current levels in the year ahead. After declining significantly over the past 2 years, real fixed capital formation grew this year as public corporations in particular increased capital investment. Consumers spending remained robust with the increase in real disposable income experienced during the past year having been the major driver. High debt levels, particularly among the higher LSM groups, together with increased inflation, will however constain the level of consumption expenditure in the short to medium term.

The operating environment for the South African commercial property market continues to improve gradually with vacancies stabilizing or starting to reduce, supported by very low activity levels in new developments. Based on the reduction in commercial property financing activity by the major banks due to the cycle and regulatory changes with regards to capital and liquidity, we do not expect an uptick in supply for some time. Tenant bad debts have also started to reduce and on average we are still seeing positive rental reversion on renewals in the retail sector but the rental growth potential has been reduced by the pressure of the impact of the increase in energy cost on the occupation cost of tenants. A driver that will impact positively on retail tenant occupancy cost to turnover ratios over the next 12 months is the upward pressure on sales inflation. We are starting to see some growth in office rentals but there are areas like CBD office where rental rates are lagging while industrial rentals are not yet showing growth but they also did not decline to the extent that office rentals did. The current listed South African property sector yields are lower than the 10 yr gov bond yield, which increases the risk of capital loss, especially if the 10 yr gov bond yield moves up due to higher inflation over the next 12 months. However, this risk of capital loss is mitigated by the current growth of 5% - 6% in listed property distributions which is expected to return to the 7% - 8% p.a. growth in distributions from 2012 onwards. The weighted average portfolio dividend yield of the Oasis Property Equity Fund, excluding the exposure to high quality offshore property companies listed in South Africa, is 7.8% and 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 Fund is well postioned.