The SIM Property Index Fund will change it's name to Satrix Property Index Fund, effective from 04 April 2014

Market Review

The SA Listed Property Index (SAPY) slipped 0.4% during the second quarter of the year, finally curtailing the strong absolute performance since the beginning of 2012 when it delivered a total return of more than45%. Year to date, listed property's total return is 8.8%. Despite the weak absolute return for the quarter, this Index still managed to outperform the equity market by more than 6% year to date.

What the sideways move in the sector doesn't show is the high degree of volatility experienced during the quarter. From its peak during April, listed property sold off by 20% before recovering somewhat towards quarter end. Alternatively, in terms of yields, the sector de-rated during the quarter from an average yield of less than 6% back to more than 7% at one point, eroding one year's gain in the space of a month.

The volatility was driven by large moves in local government long bond yields. This is in line with our previous commentaries where we highlighted the strong positive correlation between local bonds and local listed property. At the start of the quarter, we saw a further initial drop in bond yields of 80 basis points (bps), which drove the listed property sector to its peak. But, thereafter, bond yields spiked 160bps in the space of one month from these depressed yields, prompting the selloff in listed property. We highlighted this scenario as a short-term risk in our previous commentaries.

What SIM did

During the second quarter, two companies, New Europe (NEP) and Sycom (SYC), embarked on rights issues and, with the June index rebalancing, there were many free float and shares in issue changes, but no constituent additions or deletions, to the SAPY Index. The Fund underperformed its benchmark marginally - mainly due to cash flows and corporate actions.

Outlook

In the near term, investors may experience continued short-term volatility in listed property levels on the back of local bond yield movements, which are heavily influenced by foreign investor flows. However long-term investors should be less concerned with short -term movements in capital values and more concerned with their income yield, defensiveness and potential growth in that income.

We highlight that: 1) Following the fall from its peak, the sector is again offering investors an average forward yield of about.7%, which is, in itself, a real yield (dividend yield alone exceeds inflation expectations). 2) Property is a good inflation hedge due to contractual rental escalations in the inflation range, sometimes higher, which translate into inflation-like growth in income.

Thus long-term investors, with a multi-year investment horizon, should have a very high probability of achieving real total returns. However, the short term could still be marred by a high degree of volatility.