Fund review
The fund's recovery continued with a 22%-plus dollar return (including dividend) over the past quarter to end September, which translated into a total rand return of over 19%. The fund is now up over 90% in dollar terms from its 9th March low, although it is merely trading at early October 2008 levels. Global property shares are in fact still some 33% down over the past three years and are still below levels of five years ago. During the quarter Europe produced the best returns of 39%, followed by 33% in the US, 30% in Australia, 16% in China, 14% in Hong Kong. Only Japanese shares showed a negative return of 6%. The average dividend yield of global shares is now around 5.5% (Australia is one of the highest at 7.7%). These dividend yields are attractive in a low interest-rate environment.

Looking ahead
The general view, however, on global property shares is that they may have run ahead of the fundamentals in the short-term, but remain good investments over the next few years for patient investors. The 'low hanging fruit' has been picked, but there are still opportunities for the astute investor. Many of the companies raised capital during the quarter to pay down debt. Much of the capital was raised via rights issues, which dilutes earnings and dividends per share. The capital-raising is indicative of the sector de-risking, so if the global markets pull back once again, one would think that the risk of corporate failures would be less. The global economy is recovering, which is good and credit conditions have improved, although the loss of jobs continues in most economies. Also, corporate bond yields have declined quite sharply, making it easier for companies to borrow money. The medium-rated BAA corporate bond in the US is now yielding 6.2%, down from 8.5% in March.

Finally the extraordinary, unprecedented collapse in global listed property shares came to an end on the 9th of March. At that stage the fund had declined by 72% in dollar terms from its record high in February 2007, the biggest collapse in history in listed property shares in the developed markets.

From the 9th of March low to the high to-date on 2nd June, the fund jumped by 60% in dollar terms. The return during the quarter was 41 % in dollar terms and 13.6% in rand terms, with the rand appreciating against the dollar by a whopping 24% during the quarter. Since the high on 2nd June, the fund has pulled back by about 12%, but appears to be turning again as investors return to risk-oriented investments in mid-July. At this stage, the fund is trading at November 2008 levels, still 60% below its record high in dollar terms.

The "great recession" that hit the world has hurt property companies quite badly, although there is some hope that this recession is close to ending. Many shares had big rights issues to raise cash in order to pay down debt. These rights issues have therefore diluted shareholder interests. The one big positive for listed property shares offshore is the fading of the credit crisis, as is evident from the rapidly declining spreads on corporate bonds relative to government bonds. The credit crisis hit property shares very badly because commercial property is so heavily dependent on credit/debt. Other positives include record low interest rates in many regions. One challenge awaiting a number of companies later in 2009 is the need to re-finance maturing loans. Many of the lending banks will be unable to continue with these loans, so companies will need to find alternative sources.

The biggest change during the quarter was a big increase in the Residential portion of the portfolio to 22% of fund (18.7% for the index). The increase was partly due to relative appreciation but also to increased exposure to Chinese residential developers because of their strong growth prospects. These developers are typically more focused on for-sale housing development than apartment development (but do both) and most are listed in Hong Kong and develop in both Hong Kong and in China. Of the 22% residential exposure, 15% is in property developers (index 11 %) and the rest is in income property (apartment complexes), mostly in the US, yielding 5-8%. Most of the developers in the portfolio are based in Hong Kong. They typically have low yields of 1-2% but their total returns have been attractive.

International Property shares again underperformed regular offshore shares during the first quarter of 2009. The fund was down 24.7% in dollar terms during the quarter (more than double the 11.8% decline of global equities), much the same in rand terms as the rand was only down 0.5% during the quarter.

The deepening recession, coupled with the ongoing credit and banking crisis, has played havoc with vacancies. In the US, shopping centre shares fell 78% before bouncing as vacancies at malls and shopping centres approached 10-year highs. In general, rental rates have been in decline in most countries of the developed world. Net asset values have been declining and are on average down 35-40% from their peaks, but may be at or close to the bottom.

Property share returns offshore have, with the benefit of hindsight, shown a high correlation with credit spreads (the gap between government bond yields and corporate bond yields) and financial shares. So the collapse in banking shares has almost been mirrored by the collapse in property shares, which fell 71% in dollar terms by the time they bottomed on March 10th. This is unprecedented and shocking, to say the least and by far the biggest knock ever suffered. Since then bank shares have bounced sharply and property shares are up 26% in dollar terms (as of 9th April). Credit spreads have not improved at all and this remains the one big bugbear so far in 2009. It means that companies are paying high rates of interest to borrow money.

One of the 60 or so shares in the fund is Liberty International, owner of nine of the top thirty shopping centres in the UK. Commercial property has declined by 42% in value from its 2007 peak in the UK. As yet there are no signs that a bottom has been reached. Liberty International's share price declined by a phenomenal 80% in pound terms to a record low (37% below its 1999 listing price). Vacancies in UK shopping centres jumped to 6.4% from just 2.1% in September. Many other global property shares are trading at prices of around 15 years ago. Liberty's situation is quite common where their debt to asset ratio has jumped from 40% at end 2007 to 58% now purely because of the decline in property values. Although dividend yields generally are now high (around 7%), many dividends will be cut (Liberty paid no final dividend) and in some cases property companies are issuing scrip dividends instead of cash dividends.

At this stage, after such a mighty collapse in values, barring a depression, this fund appears finally to be offering tremendous value for patient, resilient investors, especially now with the rand being stronger. Gradual accumulation may still be the best bet, however, until the banking crisis is more clearly resolved.

The 4th quarter was an absolute bloodbath for global listed property shares. The fund was down a whopping 33% in dollar terms (23% in rand terms), contributing to the 49% dollar decline for the year. During the year the worst performance came from Australia (down 62% in dollars), then Europe (53%) - on top of their 30% decline in 2007 - then Asia (43%) and the US (38%). By comparison, the top 3 South African listed property shares were down 25% in dollar terms, the best in the world (up 1.5% in rand terms). Recessions are the worst environment for listed property shares because of tenant bankruptcies, rising vacancies etc. The lack of credit has made it worse. For example, in the US the huge electronic retailer, Circuit City, recently declared bankruptcy, following Mervyn's department store chain earlier in 2008. US REITS (Real Estate Investment Trusts) suffered their worst loss on record in 2008 (38%), far eclipsing the previous record of a 21% decline way back in 1974, which is only the eighth time over the past 37 years that REITS posted a negative return for the calendar year. The 2009 year has started badly too, with US REITS down over 10% in the first two weeks. The latest IPD UK monthly property index shows commercial property values down 35% from their highs in mid-2007. For the year capital value falls in Offices and Retail were -27.2% and -28.0% respectively. Falls in 2009 are forecast to be 15-27%. Globally, hotel shares did worst in 2008 (-77% in dollars), followed by retail (-43%), offices (-47%) and residential (-30%). Investors are hoping that a meaningful recovery will start by the second half of 2009. REIT valuations in the US (40% of the portfolio) are more compelling today than in recent years and dividend yields average 8% (the long-term average is 6.3%) at a time when money market yields are the lowest in history. At end 2008, the portfolio had 28% in retail properties, 26% in office properties, 15% in residential apartment complexes, 22% in a combination (diversified) and 9% in other. Apart from the 40% invested in the US, the second biggest country allocation was to Japan (14%), followed by Hong Kong/China (10.6%), then Australia (8%), the UK (6.7%) and France (5%).