Property unit trusts proved again last year that they can be a stabilising factor in a generic investment portfolio even in periods of market turbulence, providing above-average performance.

The property unit trust sector of the JSE Securities Exchange SA outperformed equities with a pretax return of about 20,9% last year. The all share index ended the year in a negative territory with a loss of 7,9%.

The property unit trusts recorded an average dividend yield of 13,9% and capital appreciation of 7% last year.

The trusts posted this performance during a period seen to be harsh for property investment companies. Vacancies had reached high levels in the commercial sector, interest rates climbed four times and earnings were flat.

The explanation for the performance of property unit trusts in such conditions is in the fact that they are rated as interest-bearing instruments, says Gerald Nelson, MD of property unit trust Sycom.

Property unit trusts' yields track the longbond yields, which in turn follow the interest rates. So when bond yields go up after interest rates property unit trusts yields follow, making them higher income yielding instruments.

'Many investors in the sector rely on the income stream generated and distributed by the funds,' says John Rainier chairman Association of Property Unit Trusts.

Rainier says the performance of property unit trusts over the past year has further accentuated their performance over three and five years.

They have posted a total return of 40,7% (13,6% a year) over three years and 81% (16,2% a year) over five years.

The all share index produced a total return of 17,1% (5,7% a year) over three years and 63,4% (12,9% a year) over five years.

Rainier says that the two most important factors influencing the sector this year will be the performance of the world markets, and the growth prospects for the domestic property sector.

He believes the sector is well positioned to outperform the all share index again this year due to the relative uncertainty of future global economic conditions, and the anticipated decrease in short- and long-term interest rates in the near future.

Barnard Jacobs Mellet (BJM) expects improved global economic growth and a weakening of the rand this year, which should result in a good performance by the local equity market, especially by resources stocks.

'If our expectations prove correct, then property unit trusts should deliver healthy, but less than market total returns this year,' says BJM property analyst, James Templeton.

According to Templeton, if global growth prospects recover later this year, this will assist the local economy, which would then flow through to the property market in the form of reduced vacancies and eventually strengthening rentals.

However, he says that if the global markets do not recover, and war in the Middle East starts and continues for some time, then it is likely that safe-haven assets such as property will be outperforming other asset classes for a long time.

Rainier says that even if growth prospects are muted, the expected decreases in short- and long-term interest rates will further strengthen property unit trusts.