The Portfolio's primary objective is growth of capital and to provide an income source for investors. Investments to be acquired will consist of property shares, stock including property loan stock,
debentures, debenture stock and debenture bonds, unsecured notes, property unit trusts and other securities listed on exchanges which is considered consistent with the portfolio's primary objective. The Portfolio may increase liquidity to 50% (percent) if it is deemed necessary by the Manager. The Portfolio’s exposure to fixed interest securities shall be limited to 30% (thirty percent). The Portfolio may also invest in the participatory interests of collective investment schemes.

Fund Review

The fund managed to outperform its benchmark by 0.86% during the quarter, delivering a gross total return of 5.30%. The main contributor to performance was exposure to Accelerate Property Fund, an off-benchmark bet. The fund participated in the R1bn Resilient and R1bn Fortress rights offers. Exposure to cash continues at a minimum.

Market Review

Listed property had a very good quarter (4.4%) with the majority of the total return occurring in the month of June as listed property re-rated relative to bonds. Listed property has been the second best performer year-to-date delivering a total return of 6.3%. Safari Investments (SAR) listed on 7 April 2014 and has an enviable portfolio of dominant shopping centres that are located in high growth township areas. Safari's flagship asset is the 42,000sqm Denlyn Mall in Mamelodi. The overall vacancy rate is negligible and the company has meaningful expansion plans at a number of their shopping centres. The expansions will be driven by tenant demand that is likely to be very strong given the high trading densities across the Safari portfolio of shopping centres. Resilient raised R1bn in May 2014 through a rights issue, stating that they intend using the proceeds to fund acquisitions and reduce debt. Resilient has subsequently announced that they have submitted an offer to acquire Jubilee Mall in Hammanskraal from NAD Property Fund for R975m. The acquisition will be funded via cash and equity. Fortress raised R1bn in June 2014 through a rights issue. The proceeds of the rights issue would be used for acquisitions. Octodec and Premium both surprised to the upside delivering distribution growth of 12.6% and 19.4%. Both were able to squeeze efficiencies as they increased cost recoveries by 300bps. Redefine reported distribution growth of 8% benefiting from its exposure to Cromwell and Redefine International as the ZAR weakened over the reporting period. Vukile reported distribution growth of 5% which was more or less what the market was expecting. It is worth noting that Vukile's office vacancy increased substantially over the last 6 months. This continues to support our negative outlook for the office market as a whole.

Looking ahead

We are expecting income growth of around 8% over the next 12 months. This results in a forward yield of 7.6% which is below 10 year bond yields (8.25%) and considerably ahead of cash (6%). Listed property is expected to deliver a total annualised return in the region of 8% over a 4 year holding period.

Fund Review

The fund managed to outperform its benchmark by 0.07% during the quarter, delivering a gross total return of 1.88%. The listed property sector delivered a total return of 1.8% for the quarter, was a decent outcome considering that the total return was around -7.7% at one point. The total return performance of listed property was ahead of bonds (0.9%) and cash (1.3%) but less than equities (4.3%). The demand and supply dynamics for the retail and industrial sector remain supportive of rental growth and we prefer these sectors over the office sector which remains under pressure.

The economy is growing at too slow a pace to stimulate demand for office space and the supply of office space is increasing. Some of the supply is to cater for corporates such as Discovery, Sasol and Webber Wentzel who are looking to consolidate their physical presence in Sandton but a fairly significant portion of this supply is speculative in nature. This will continue to have a dampening effect on rental growth in the short to medium term. Industry heavyweights such as Growthpoint, Hyprop, Resilient and Capital reported results during the quarter. These heavyweights managed to deliver distribution growth ahead of the market's expectations. Resilient in fact managed to grow their distributions by an impressive 18.3%. What was perhaps even more encouraging was the fact that SA Corporate and Emira, two companies which have disappointed in the recent past, managed to deliver a strong set of results. These two companies grew their distributions by 8.6% (SA Corporate) and 6.5% (Emira). MAS plc and Attacq successfully raised R2.7bn and R1bn respectively during the quarter. The demand for their private placements was incredibly strong and was significantly oversubscribed. The fund participated in the R2.7bn MAS plc private placement. MAS plc invests in property is the UK, Germany and Switzerland and is in the process of moving across to the main board of the JSE.

Looking ahead

We are expecting income growth of around 8% over the next 12 months. This results in a forward yield of 7.8% which is below 10 year bond yields (8.3%) and considerably ahead of cash (6%). Listed property is expected to deliver a total annualised return in the region of 8% over a 4 year holding period. The consolidation phase has already started to take shape in the listed sector with the announcement of numerous proposed transactions such as the Acucap/Sycom merger. We are generally supportive of this trend as it will become increasingly difficult for smaller companies to grow their portfolios through yield enhancing acquisitions in an increasing interest rate environment. Consolidation will lead to fewer but larger companies with stronger balance sheets in general.