This follows a three percentage point increase in interest rates this year, resulting in a slump in the rate of acquisitions and new listings recorded by the property unit trust and property loan stock sectors.

Corporate activity has been on the increase in the past few years and reached record highs last year. The two sectors are estimated to have recorded transactions to the value of R7,5bn last year, boosting their joint market capitalisation to about R12bn.

Higher interest rates lead to higher yields in the sector, which in turn widens the yield gap between directly held property and listed property. This differentiation of yields slows the process of converting directly held property into listed property, as it means that vendors will have to take a capital knock in handing their property portfolios to listed property funds.

The sector has seen only one major transaction this year with the unbundling of property services company iProp. It produced a new listed property loan stock company called iFour. The transaction had to be furnished with major adjustments to go through. In the total issue of 31,1-million linked iFour units to iProp shareholders, 6-million were deferred to mitigate loss of value caused by interest rates volatility, he says.

With the firming of the rand there are hopes that the higher interest rate environment might be short lived, Nelson says.

'Firming of bond and listed property yields over the last few weeks appear to confirm the sentiment. Given reasonable economic stability and possible easing of interest rates in the not too distant future, this should add momentum to the conversion of directly held property to listed property.'

Nelson says property unit trusts continue to offer secure and predictable long-term value at a low risk.

They yielded 13,3% last year compared to 12,9% of long dated bonds. However, property unit trusts were outperformed in total returns. They posted total returns of 7,9% last year compared to 29,1% from equities, 18,4% from bonds and 10,5% from property.

Nelson says over long periods property unit trusts continued to outperform other asset classes with an annualised total return of 29,1% over three years in comparison to 27,7% of equities, 22,6% bonds and 11,8% property.

Over seven years, property unit trusts show total returns of 15,2%, equities 11,7%, bonds 19,5% and property 12,4%.

'Muted economic growth and business confidence will result in a relatively slow take-up of surplus space and a slowing of consumer spending which could lead to continued pressure on rentals and escalation rates,' says Nelson.

Business Day