On the back of a strong run over the last three years, South Africa's listed property sector is expected to produce a total return of 16% over the next year - made up of 10% growth in distributions and 6% growth in capital, according to Metropolitan Asset Managers (MetAM), a division of listed financial services group Metropolitan (MET).

Commenting on the outlook for the local property market on Friday, Chris Naidoo, portfolio manager at MetAM, said the market had already run hard so far this year, having gained 5.9% in January and 6.7% in February. This was a good indication that the demand for listed property is still robust, he pointed out.

"Overall, we can expect a reasonable return for the sector this year, but definitely not as spectacular as in the previous years," he predicted. "Returns are likely to be driven largely by lower interest rates."

The JSE's listed property index delivered total returns of 50% in 2005 compared with 41% in both 2003 and 2004.

On fundamental valuations, the sector appeared fully priced, Naidoo said. He based this on the fact that the sector's average historical yield looks expensive at just over 6.5%. In addition, fundamental discounts to the net asset value of shares were trading at around a 50% premium to the sector.

Naidoo also pointed out that the sector had totally discounted possible interest rate cuts.

"Any surprises could therefore be negative going forward," he added. MetAM has pencilled in an interest rate cut of 50 basis points for the second half of this year.

The market capitalisation of the local listed property sector is currently over 50 billion rand, a level that is expected to be significantly boosted by the latest acquisitions made by Growthpoint and Apexhi. Other listed property companies aside from these that Naidoo finds particularly attractive include Grayprop, Sycom, and Emira.

"With regards to Emira, which is in the RMB stable, there's still room for substantial growth as this company could buy properties from RMB, which would have a positive impact on its portfolio and returns."

Of the various listed property sub-sectors, Naidoo expected commercial property to be the star performer. Although industrial property had re-rated strongly over the last 18 months on the back of increased demand and limited supply of space, commercial property was expected to steam ahead due to the increased demand for 'A' grade offices. 

He believed growth in building activity in the commercial sector would be driven by the upgrading of existing property rather than by new developments. Lack of supply in the commercial property sector due to high building costs and constraints on zoning had also resulted in increased rentals for the sector.

On residential property, Naidoo explained that increased building costs and the oversupply of residential space had resulted in lower building activity growth.

Commenting on the Property Charter, which is due to be finalised this year, Naidoo said financing empowerment transactions could prove to be difficult because the sector had seen strong recent share price rises, making such deals expensive. However, the overall effect of empowerment transactions on the sector should not be a cause for concern.

"Once the transactions take place, we will probably see some dilution in earnings of specific companies, but in the long-term it will be positive," he concluded.