The global property shares held by the fund have been negatively impacted by the US and increasingly global credit crisis for at least the past year. This is largely because property is closely associated with credit or debt, meaning that most property companies buy or develop commercial property by borrowing money.

Up until the end of September the fund's unit price (in US dollars) had held up pretty well relatively speaking. Yes, it lost 13.7% in dollar terms during the quarter ending September, but this was better than the 16% decline in the MSCI World index. However, since the end of September the fund's unit price, converted into dollars, has lost no less than 24% in the first three weeks of October. This has largely been caused by a big increase in fears about a global recession as economic numbers out of both the US and the UK/Europe have been much worse than expected. All shares, including property shares, have been heavily dumped, in particular by hedge funds deleveraging under pressure from banks and experiencing large withdrawals by investors.

This has left the fund's unit price, converted into dollars, down 54% by September 21st, trading at either 2004 or even 2003 levels. Recessions are bad for commercial property because vacancies rise as tenants falter under the stress of poor business conditions, causing a decline in profits and possibly dividends. Of course, with such an extraordinary collapse in the value of the shares in the fund (Liberty International is down 47% in sterling terms, trading at 2004 levels), one wonders whether the worst has now been seen after the double whammy of the severe credit crisis and massive fear of a global recession. Dividend yields are now over 5% for the fund.

The fund is 41.8% invested in the US (benefiting at least from the stronger dollar), 11% in Hong Kong, 10.7% in Japan, 9.1% in Australia, 5.6% in the UK, 5.5% in France and 4.3% in Canada, apart from various small positions in many other markets.

Property shares globally recovered sharply in April and it appeared the worst may be over. However, relentlessly soaring oil prices (up a phenomenal 35% during the quarter, from $104 to to $141)sadly "turned the lights out" on all shares, including property shares, which then tumbled dramatically by over 17% in dollar terms from May to July. Property shares are now down 32% in dollars from their highs in February 2007 and are trading at early 2006 levels. Higher oil prices may have reached a choke point where global economies begin to fade sharply. So in the second quarter, global listed property shares lost 8.1% in dollar terms (the fund lost 7.9%). European (including the UK) shares did worst, losing 16.4% (similar to our SA market) while the US lost 4.5%. Global property shares were down 15% in the first half of 2008, on the back of soaring oil and food prices, which is pushing inflation and interest rates up in many regions. Global property shares are down 24.6% over the past year. UK property companies are down 38% in the past year.

Interest rates have fallen sharply in the US and are down in the UK and bond yields remain in low territory, which is positive for property shares. However, fears of inflation and of weaker growth are weighing heavily on the sector. The STANLIB fund continues to be well diversified both country-wise and currency-wise. Dividend yields are high relative to interest rates and bond yields. The fund as a whole is yielding around 4%, with Australia yielding 7.4%, the UK 3.7%, France 4.4% and the US 4.8%.

Although good value is apparent in this sector, sentiment is currently very negative. Of course, this implies that opportunity is there, but once again, the big threat remains the oil price. If it stays on its big uptrend, the sector will probably remain under pressure.

After a truly stellar 2006, the year 2007 proved to be a nasty year for global property shares. The fund fell 13% in rands in the last quarter of 2007 (12% in dollars) and fell 15% in rands during the year (13% in dollars). December proved to be one of the worst months as global property shares lost almost 5%.
Of course, offshore listed property shares had performed exceptionally for the past ten years, so it was inevitable that somewhere along the line there would be pain. No-one quite expected the pain to be so severe, especially in a world economy growing so nicely and where interest rates were very reasonable relative to history. However, the sub-prime and ensuing credit crisis tainted everything to do with credit, including property, where credit is used extensively to gain gearing or leverage. In 2007 the much vaunted British property shares fared the worst, falling 36% in sterling terms,including the highly rated shopping mall owner, Liberty International. European shares fell 25%, US shares fell 17% and Australian shares fell 10%. Considering these fairly dramatic falls, the fund's 13% fall was quite reasonable and it waspartly because of an overweight in Asia, which delivered positive returns.
UK and European property shares are now trading at what appear to be juicy dividend yields that are2%higher than the ten year government bond yield. German bond yields are close to 4% so dividend yields of around 6% are veryattractive. UKcompanies are trading at discounts of 35% to net asset value, which is cheap. At the end of December, the fund's biggest country allocation was to the US (39% of fund), followed by Australia (12%),Hong Kong (11.7%) and Japan (11.3%). The UK allocation had fallen to 7.8%. Fairly new allocations included 1% in the Philippines and 0.6% in Russia, neither of which feature in the benchmark.
The fund continued to take a defensive stance regarding property sectors by being overweight in the diversifieds (28%of portfolio), which includes a combination of retail, industrial, offices, hotels and some residential income property.Total residential (income property like blocks of flats) is17%of the portfolio, offices 17.7% and retail 24.8%.Property shares continued to decline in the first two weeks of January (along with all shares) and by January 17th the fund was down 27% in dollars from its peak last February. Just to put this in context, the fund rose by 77% in dollars from its inception in April 2006 (when the first investment into property shares was made) to the peak in February 2007, so is still up 30% in dollar terms from April 2006.