Fund Overview

The fund underperformed the benchmark by -0.69% during the quarter, delivering a gross total return of 0.22% versus the benchmark return of 0.91%. The top contributors to fund performance were the overweight positions in MAS plc and Rebosis-A. MAS continues to be a core holding and a strong performer in the portfolio. The top detractors were the underweight position in Rockcastle and the overweight position in Accelerate Property Fund. A poor short term growth outlook and associated costs incurred negatively impacted Accelerate in June 2017 as it pursued a defensive long-term strategy, while the merger of NEPI and Rockcastle resulted in Rockcastle’s share price appreciating more than we anticipated in June 2017.

Market Overview

On a total return basis, listed property delivered 0.91% in the quarter, outperforming local equities (-0.39%) and underperforming cash (+1.85%) and local bonds (+1.49%). While bond yields showed no material shift from 8.9% over the quarter, continued concerns around retail spend, a weakening SA economy and political uncertainty continued to weigh on the sector performance. Year-to-date, listed property was the worst performing asset class (2.29% total return), underperforming equities (3.37%), cash (3.72%) and bonds (3.99%). As would be anticipated in a weakening SA environment, the preference of investors for the quarter were stocks with offshore exposure that offered increased defensiveness to a weakening SA environment. Unsurprisingly, Greenbay, NEPI, Redefine International, Sirius and Rockcastle all recorded double-digit total returns for the quarter, ranging between 13%-26%. The fund does have exposure to many of these names, with exposure having increased in the past six months. Sector heavyweight stocks such as Growthpoint (-5.48%) and Redefine (-0.39%) both posted negative total returns for the quarter.

Results reported during the quarter confirmed that the local economic environment remains challenging. Management discussions close to quarter end highlighted rental growth is increasingly under pressure, with rental negotiations becoming increasingly difficult. We believe the trend will be evident sectorwide and anticipate companies will provide increasingly conservative guidance.
Outlook

Over the next 12 months, we anticipate 8% distribution growth for the sector’s dividend paying companies. A weakening bias has emerged in the ZAR versus EUR and GBP in the past quarter, reflected in those stocks that have outperformed and continue to outperform. We continue to expect some SA companies with significant offshore exposure to exhibit double-digit distribution growth in ZAR, over the next 12 months. We are positioned for this eventuality and have increasingly positioned our SA property exposure towards SA property companies with defensive SA property portfolios and defensive offshore portfolios.

Fund Overview

The fund outperformed the benchmark by 0.78% during the quarter, delivering a gross total return of 2.14% versus the benchmark return of 1.37%. The underweight positions in offshore stocks (i.e. Rockcastle and MAS) and overweight positions in local stocks (i.e. Pivotal, Dipula) contributed positively to performance. The detractors to fund performance were the underweight positions in Redefine and Fortress-B. In the past 12 months, the fund had outperformed the benchmark by 4.43% on a gross basis.

Market Overview

Listed property showed muted performance in the quarter (1.37% total return), underperforming bonds (2.5%) and cash (1.8%), but outperforming equities (1.3%). The sector was on track for a strong first quarter (up 5.8% at its peak), but had pulled back in the last week of March when political uncertainty drove SA 10- year bond yields from 8.3% to 8.9%.

Company results announced during the quarter largely met our expectations and as anticipated, highlighted the continued challenges in the SA landscape. Annual escalations have continued to provide protection against a difficult SA economic environment but some pressure on rental growth is expected in the medium-to-long term if economic growth continues to remain subdued. Companies broadly exposed to the SA property market are achieving like-for-like rental income growth near ±5%, reflecting weak office market dynamics. With funding rates in SA continuing to rise, listed property companies are increasingly venturing offshore in search for growth. Offshore earnings now comprise ±40% of total earnings generated by the sector and expected to increase further. This was evident in that ±90% of the capital raised in the quarter were for offshore acquisitions.

Outlook

Looking ahead, we are expecting income growth of 9% over the next 12 months. This is largely driven by growing offshore earnings as well as a weaker ZAR. Excluding offshore earnings, income growth slows down to 7.5%. Listed property currently offers a forward yield of 7.4% which is below the 10-year bond yield (9.1%) and cash (8.5%). Over the next 12 months, we expect listed property to deliver a total annualised return of ±10% if bond yields remain at current levels (9%). The biggest risk facing the sector is rising bond yields in the event of further credit downgrades. We remain focused on mitigating these risks by selecting stocks that are most defensively positioned to weather the challenging macro environment. We have also increased the fund’s offshore weighting on a selective basis, which should help alleviate further weakening of local bond yields.

Fund Overview

For 2016, the fund delivered 13.02% versus the benchmark’s 10.20%, outperforming the benchmark by 2.82%. The fund also outperformed the benchmark by 0.51% for the quarter, achieving gross total returns of 1.77% versus the benchmark’s 1.26%. Despite the market volatility, the fund continues to remain fully invested in line with our ethos to keep minimal cash only for liquidity purposes and not to engage in market-timing behaviour. For the quarter, our performance was helped by our longer-term positioning and exposure to stocks which did not have a significant offshore earnings component. The largest positive contributors for the quarter to our outperformance was our overweight positions in Delta and Accelerate, while our underweight positioning in Rockcastle, Fortress-B and Attacq also contributed positively to our performance. For 2016, our overweight positioning in SA Corporate and Delta contributed positively to performance, as did our underweight positioning in NEPI, Rockcastle and Attacq.

Market Overview

The quarter was volatile, with the SAPY rebounding 4.2% in the month of December alone. Despite a tough 2016, the listed property sector benefitted from a late rally to return 10.2% for 2016, underperforming bonds (15.5%) but outperforming cash (7.39%) and equities (2.63%) The SA listed property sector continued to deliver positive distribution growth. The South African operating environment remains difficult, with recent ZAR strength negatively impacting distributions for companies with unhedged offshore exposure. Liberty Two Degrees, Spear and Transcend listed in the quarter. There were capital raises undertaken by SA Corporate, Atlantic Leaf, Fairvest, Mara Delta, Accelerate, Equites and Schroders European Real Estate. The acquisition of Pivotal by Redefine was approved by shareholders and Rebosis concluded the Billion transaction. Growthpoint acquired a 27% stake in Globalworth, a Romanian office investor and developer. Arrowhead increased its stake in Rebosis to 20.2%. NEPI and Rockcastle announced a merger.

Outlook

We are forecasting income growth of 8% to 9% in 2017. This reflects increased offshore exposure in the index which has also improved guidance from Redefine and Growthpoint. If we strip out offshore exposure, the income growth slows down to 7% to 8%. Listed property is offering a one-year forward yield of 6.9%. This is below the 10-year bond yield at 8.7%. The risk remains in the volatile bond and currency markets as well as slowing economic growth. We believe 2016 was a difficult year for SA Property from a currency and company outlook perspective. 2017 is expected to be a better year, with total returns above 10% anticipated from the SAPY index.