Investors hoping that prices of JSE-listed property unit trusts (PUTs) and property loan stock (PLS) funds will leap ahead this year, as interest rates drop, may be disappointed.

Some fund managers warn that prices could stagnate - despite certainty that long-term interest rates will fall and a growing appetite for property among institutional and retail investors (see Property October 25 2002).

PUT and PLS yields usually track the yields on government long bonds - the RSA 153, for instance - rising and falling as they do. The prices of linked units rise when yields fall and vice versa. Institutions controlled the sector until the mid-1990s and fund yields ran as much as four percentage points lower than the RSA 153 yield.

But now that private fund managers and investors have become dominant, the funds have become more sensitive to interest rates and, since 1999, have yielded on average about two percentage points more than RSA 153 yields. As interest rates rose with the falling rand early last year, the yield differential between the funds and the long bond rose to four percentage points in anticipation of lower revenues resulting from higher interest charges.

Despite rising long rates, the differential began to shrink around July last year and is now at three percentage points . This means that with the RSA 153 yield at 10,8%, the PUT and PLS sector yields are averaging less than 14%. Blue-chip funds such as retail PLS Hyprop are just one percentage point above the RSA 153.

But Corpcapital's Marc Wainer says yields have been falling, and prices rising, too fast.

'Demand is pushing them ahead of trend,' he says.

Michael Berman, manager of Corpcapital's real estate hedge fund, backs him. 'There is too much money chasing the sector and the market is only anticipating the good news,' warns Berman. 'It is discounting a further one percentage point cut in rates and ignoring that fact that inflation is 12,5%.

Barnard Jacobs Mellet property analyst James Templeton is more positive. 'The yield is expected to return to its historic average - between 1,5 and two percentage points above the RSA 153 - once dividend growth from the sector returns to its historic norm of between 3% and 5%,' he says. 'This would imply a sector yield of 12,6%, or less, based on current bond yields.'

Perhaps, responds Berman, but he also expects the RSA 153 yield to rise in the short term - back as high as 12%. Then, if Templeton is right, property sector yields will remain at 14%.