By Ian Fife

UK listed property funds are offering investment yields that nobody would have believed possible a few months ago. For instance, Mapeley (market cap £440m or R6bn), can be bought on a forward yield of 13,4%. Its price of 1 400p is less than half its 52-week high of 4 030p in April.

You can buy Eurocastle (€1 286m or R13bn), listed on the LSE and Euronext at €20 with a forward yield of 12,2%. Yet the best historic yield you're getting, from even the non blue-chip funds like ApexHi B and Hospitality A, are around 7,5%. The blue chips are below 6% and many SA investors have become frustrated with the local market.

So shouldn't South Africans start moving their money into the UK - or is there something wrong with their funds? "Nothing at all," says Gavin Rabinowitz, the SA head of property at private client managers Credo. "But there's a sense of paralysis with the global sub prime crisis that has hit UK banks. The banks are just not lending, and big investors like Barclays Capital and Prudential are sitting out of the market, so there's a bit of panic here. The prices of even the biggest funds - British Land, for instance - are down to prices they were in 1994."

Mike Watters, CEO of SA-owned London-listed fund Ciref, says: "The UK's economic fundamentals are sound. Yet the British have not seen a financial wobble in many years and they're behaving like rabbits caught in the headlights of a car."

Both Ciref and Liberty International, South Africans' main entry into offshore property, released their results last week, showing steady growth and good future prospects.

"I wouldn't say there's panic," Watters adds. "But it is a wonderful buying opportunity." He, Rabinowitz and other fund managers point out that South Africans are uniquely positioned. They've been through these sudden collapses in the market a number of times in the 1980s, 1990s and early 2000s.

Where the British see threats, battle- hardened South Africans see opportunity. Recent international research shows that South Africans are the most willing to take risk, while the British are most risk-averse. "Its a brilliant time for South Africans to buy," says Fortress Asset Management director Craig Hallowes. "The rand is strong and the offshore property returns are around SA fund returns." He, Rabinowitz and Watters see the market remaining stunned for at least three to six months.

But shouldn't investors wait a little longer and get even better yields next year? "You can't tell when prices will reach the bottom," concedes Watters. "But you can look at relative value and tell that even the blue-chip funds like Liberty and British Land are 25% to 30% below their peak. On a pure investment strategy, you buy on weakness."

He says listed property yields are trading up to 0,75% higher than the underlying directly held properties. Listed yields have also moved 1,5% from below 10-year gilt yields to above them. SA-listed property yields are now comparable with the British funds, which were well below them six months before.

"Don't underestimate the gravity of the subprime problem," adds Rabinowitz. "But the property fundamentals in Britain and Europe are sound over the medium term."

UK property economists Capital Economics agrees. The company expects direct property prices to fall 5% this year and 10% in 2008.

"Total returns will then recover to around 6,5% in each of the subsequent three years," says Capital Economics' Manjit Mora.

"Of course, with the market hyper sensitive to the flow of news and investor sentiment, there is a risk that the downturn could be longer and deeper.

"Even with this more pessimistic short-term forecast, the risks remain predominantly to the downside. Volatile sentiment and capital flows could mean momentum effects push capital values down by 20% before the market settles."

But despite the gloom, Capital Economics remains confident that the UK property market will continue to grow. Says Mora: "We expect GDP growth to slow from 3% this year to 2% in 2008, a little weaker than previously forecast. This revision will not be enough, however, to undermine the occupier markets, and in any case, we expect sustained economic expansion up to 2011.

"We have lowered our rental growth forecasts for West End and City office markets. We have also lowered our retail rental growth forecasts to reflect the impact of a weak housing market on consumer spending.

"The impact on DIY and big-ticket spending suggests rents in the retail warehouse sector are the most exposed. Fundamentally, however, we believe long-term investor demand for commercial property remains healthy at the right price."

That all sounds familiar. South Africans have been through such dramatic troughs and bounce-backs. Apex in 1999 could be bought at 50% below net asset value. It is now trading at about 50% above NAV.

South Africans have a wide choice of offshore vehicles - and they don't have to use up their offshore investment allowance. Liberty International (historic yield 3%) is listed on the JSE, Ciref (4,5%) can be accessed through Redefine's 20% share or listed asset manager Madison's 40% interest in Ciref's management company.

Fortress has an offshore Reit income fund (around 8%), or a real estate opportunity fund that invests in listed companies with development pipelines and longer-term rewards (about 2,3%) with some UK weighting.

More property-savvy investors can use their investment allowances to invest directly into UK listed funds. Credo, Ciref and other SA players are rapidly putting together private equity funds for the bigger investors.

Financial Mail