A three-month figure that stands out in the foreign unit trust section is the Marriott Global Real Estate Fund at 7,2% and an even better 14,1% for the year. These numbers trounce all other funds across the many and varied international sectors.

Fund manager Ian Anderson says that the managers who launched the first listed property unit trust fund on the SA market are currently fairly cautious regarding property funds, expect long-term income generation and are very bullish on equities, including foreign equities.

"We would caution investors that the underlying securities in the fund are trading at premiums of and in excess of 10% to net asset value. This may result in further short-term capital volatility."

It seems that the capital value of foreign – largely US-listed – property shot up by more than 30% last year and over the first quarter of 2004, moving the shares from discounts to NAV to premiums of up to 15%. Anderson warned investors then of the possibility of capital declines – and, sure enough, in April and May share prices came down back in line with NAV.

But since June they’ve been moving up again, to the current level of around 10% better than NAV.

"It’s similar to what’s been happening here," says Anderson, "with property securities benefiting from a low interest rate environment."

He says that capital values began to decline in April and May this year as foreign investors expected interest rates in the US and Britain to begin rising sharply.

Says Anderson: "However, there was a more muted reaction to interest rate increases, which together with some reinsurance from authorities favoured bond and property yields."

Property share prices recovered; but while Anderson sees some justification for the higher prices due to rising retail and industrial rentals in major centres such as London and New York, he still feels the current 10% premium to NAV has run beyond fundamentals.

It’s a view shared by Marriott boss Simon Pearse, who some time ago closed the property funds to new business because he felt valuations were high and that there was not much more in the way of SA-listed property funds that offered value.

The foreign fund was initially closed due to foreign capacity constraints, but it remains closed for similar reasons – valuations are too high. It’s also notable that while Pearse has long argued the long-term income potential of listed property for a particular type of investor, typically retired investors who need high and growing income, he’s not shy to point out that property funds are looking toppish and are not suited to all investors.

About 60% of the portfolio is in offshore equities, spread roughly evenly between Britain, Europe and US. The fund aims to provide income growth and capital appreciation from equities and listed property above US consumer inflation. Shares are chosen on the basis of the relationship between current dividend yields and future dividend growth prospects.

International bonds make up 21% of the portfolio and listed property only 15%.

It seems to me that the fund, in terms of its asset allocation, contains a cautious but realistic view regarding offshore investments – a portfolio that a private investor could put together in similar proportions by choosing three appropriate offshore funds.

Property entering stable phase

EDWIN Schultz, who heads listed property investments at Coronation Fund Managers, is still upbeat regarding the distribution growth potential of South African-listed property but is cautious concerning capital loss.

"If you look at our domestic listed property fund, we have increased the cash component and our exposure to Liberty International, thereby lowering our exposure to SA property."

However, he sees SA’s property market entering a stable phase of "good distribution growth" as rentals remain firm and vacancies, particularly in what was the oversupplied office market, decrease.

"That could continue for the next two years. The longer-term view according to our modelling is a total return from listed property of about 12%. We can’t see it going back to the 20% to 30% of earlier years – but 12% is still good," Schultz says.