After an exceptionally strong performance last year, the listed propertysector is expected to continue to outperform long bonds and cash in termsof total return for the next 12 months, some commentators say.

One of the main reasons is that the underlying fundamentals of listedproperty funds are good.

This has been confirmed by the latest commercial property figures releasedby the Investment Property Databank (IPD) and the South African PropertyIndex (Sapix), which show that the total returns of all direct commercialproperty investments held by institutional and listed investors improvedto 8,8% in real terms last year. This is their best performance since 1995when the IPD started operating in SA and Sapix was formed.

Colin Young, fund manager of the Old Mutual SA Quoted Property Funds,says there are two factors at play in the listed property sector, the firstbeing the positive property fundamentals and the fact that interest ratesare at 10-year lows.

However, the second dynamic is negative in that there should be short-termpressure on yields, pushing them up. This pressure will probably come frombond weakness and a small interest rate hike in the first quarter of nextyear.

On the positive side, Young says property rentals are improving, thatthere are signs of vacancies dropping and the office supply is low whichmeans demand for existing space is higher.

On the negative side, Young says bond yields take their cue from theUS ten-year bond rate which has "picked up quite substantially".

This pressure on bond-market yields may have a knock-on effect, causingproperty yields to rise and unit prices to drop.

He says it will be interesting to see which one of these two dynamicsis the stronger over the coming year.

Young says that given the fairly positive inflationary data that cameout last week, it seems that these two influences may balance each otherout, so investors can continue to enjoy the income yield from listed property,which is currently at 11,5%.

Andisa Securities property analyst Len Van Niekerk says listed propertyhad been rerated relative to long bonds and that investors are gettinga much higher yield on property than on cash.

Listed property tends to track long bonds because they are both income-generatinginvestments.

Excluding the impact of tax, Van Niekerk says he is expecting the totalreturn on cash investments over the next 12 months to be about 8,5%, with12,5% for long-bonds and 16,5% for listed property.

Angelique de Rauville, MD of listed asset management company Provest,which is part of Investec Property Group, says they are expecting the listedproperty sector, particularly the property unit trusts and property loanstocks, to outperform cash and bonds .

As far as cash investments are concerned, Investec Bank believes thatprime lending rates will be maintained, and because of this, there willbe no growth in income in from cash management investments, De Rauvillesays.

"We are starting to see a strong rental market translate into earningsgrowth from many of the property unit trusts and property loan stocks whichwill imply a rerating in the share price and a total return of between14% and 16% for 2004".

Business Day