After three quarters of negative returns, the SA Listed Property sector finally posted a positive return, a superb 23.08%. The All Share Index delivered a negative return of 20.56% on the back of weaker resource markets. It is interesting to note that over the last year there is virtually no correlation between listed property and equities - a very compelling case for listed property in a balanced fund.

The sector's positive return compares well against other interest rate sensitives such as bonds, banks and retailers. The reason for the sharp uptick was the market belief that inflation and interest rates have peaked. However, the last month of the quarter was rather volatile as a result of the collapse of US banks and local political uncertainty. However, listed property exhibited its bond/equity hybrid characteristics - was relatively cushioned by strong bond yields which ignored a volatile rand and global markets volatility. Flight to safety and increased demand from underweight institutions were the major drivers for the bond market.

August was a major reporting season for the sector. Distribution growth, which averaged about 12%, was in line or better than our expectations - Growthpoint 15%, Capital 12%, Hyprop 15%, Pangbourne 6%, Hospitality B 18%, Resilient 17%, Hospitality A 5%, Monyetla 17%, Madison 8% and ApexHi 18%. All these companies have a stable to positive outlook. SA Corporate was the only property company that delivered negative distribution growth of 1% as a result of a tougher retail market.

The sector is currently trading at a forward yield of 9.8% (a 0.9% discount to bonds' 8.9%) assuming 10.4% income growth forecast for the next year. Listed property is looking attractive relative to bonds. The fund remains fully invested. We believe that volatility will moderate given the improved inflation and interest rate outlook but global markets remain a major concern. We still like the industrial and office story but we remain cautious on the retail sector.

The SA Listed Property Index posted a massive negative total return of 19.65% for the quarter. Other interest rate sensitives such as banks and retailers suffered as well. Bond yields shot up from 9.2% to 10.7% due to the continued local and global inflation and interest rate fears.

The quarter witnessed two interest rate hikes of 50bps each. The last rate hike of 50bps, widely expected to be 100bps, failed to rescue the sector.

Companies that reported during the quarter delivered 14% average growth in distributions. Three counters were delisted during the quarter namely Siyathenga, IFour and Diversified. These were acquired by either Pangbourne or Resilient. This has brought down the number of listed property counters to 23. The proposed mega-merger of Madison, Hyprop, ApexHi and Redefine failed to go ahead due to volatile unit prices and opposition from major unitholders. Still on the cards is the acquisition of Monyetla probably by Pangbourne, Sycom by either Hyprop or Acucap and possibly a merger between Octodec and Premium.

Property companies continue to fetch double digit growth in rentals particularly in the office and industrial space. The retail market is showing signs of weakness. Arrears are increasing in some property companies particularly in line shops, neighbourhood and community shopping centres. Costs are rising across the board due to inflationary pressures - municipal, security, cleaning, electricity, repairs and maintenance. However, stronger rental renewals in the office and industrial markets plus lower asset management fees due to the massive fall in unit prices are a relief to cost inflation.

There were no major changes in the portfolio apart from cutting our holding in ApexHi Bs mainly to fund outflows. ApexHi is one of the most liquid property counters. Capital, an industrial and office market focused stock, is our biggest overweight position. This is where the fundamentals are and it's a market that they understand.

Assuming our distribution growth forecast of 10.8% in the next year, the sector is trading at a forward yield of 11.8%. This yield is not far off from cash and is certainly better than bonds at 10.5%. Other signs of value: several directors bought their companies' units during the quarter, serious talks around share buybacks, the cost of building far exceeds current physical property valuations, huge discounts to Net Asset Value and listed property yields exceed physical property yields by over 2%.

After falling 37% from its peak in November 2007, the sector is looking attractive but rising bond yields due to inflation and interest rates uncertainty remain a major risk for the sector.

Despite property sector reaching an all-time high at the end of October, it delivered a negative total return of 0.44% forthe quarter. This, however, compares well with the All-Share's loss of 2.97% over the same period. The propertysector's return is entirely explained by the derating of long bonds by over 50bps after the quarter witnessed two interestrate hikes. The property fundamentals continue to remain strong especially in the office and industrial sectors. Given therising interest rates, some companies are starting to see signs of a slowdown in the retail market. However, companieswith heavy weighting towards dominant regional malls are likely to continue to stand tall. The sector has over 80% of their debt fixed for an average of three years. This makes it rather immune to rate hikes. Companies that reported duringthe quarter all delivered double digit growth in distributions. In line with the strategy of increasing the property allocation,the PIC substantially increased its stake in the sector. The quarter saw increased corporate activity signaling a lot moreto come in 2008. Listed property counters could fall from over 25 to less than 20 by the end of 2008. The National Treasury finally came up with the REIT discussion paper. This was well received by the industry. Conversion to REITs isanticipated in 2009. This will make the SA listed property market to be in line with the rest of the world making it easy to attract international investors.