The JSE's property sector is headed for broad capital growth now that Reserve Bank governor Tito Mboweni expects to hit his inflation sweet spot of 3%-6% by the end of 2003. So, despite a worldwide bear market, SA analysts predict 30% total returns next year - or even more, if Mboweni is right.

This means there are opportunities for ordinary investors in listed property funds. But a lack of quality information makes it hard to pick the best ones.

Long bond rates drop when inflation looks as though it will fall. And property unit trust (PUT) and property loan stock (PLS) capitalisation rates drop with them . Prices rise when rates fall.

This relationship is not entirely rational. Big investors use listed property as a crude replacement for long bonds, buying property when rates drop and selling when they rise.

Long bonds are government debt and provide a regular income stream to institutions over 10 or more years. Similarly, property gives an income stream, but from rents.

From late last year, as interest rates rose, the cap rates of PLSs - the funds that can borrow from banks - lifted faster than PUTs. But the funds have taken 50%-80% cover against interest-rate rises. This was ignored by the market. It will be ignored again as the rates drop, so there could be greater capital growth in PLSs than PUTs.

This oversimplified approach by investors cost blue chips Grayprop, Sycom and Hyprop 30%, 25% and 20% of their value respectively, despite the quality of their management and their portfolios (see graph). This means fresh investors in the sector may benefit as values improve again.

Corovest director Mike Aitken hopes the benchmark long bond, the RSA 153, will be down to 10% by December next year and Sycom's cap rate will be down from its current forward yield of 13,2% to 11,5%. That means a capital gain of about 15% and a total return of 28%.

'I think the current one-size-fits-all approach of investors could be abandoned as the sector turns up,' says Aitken. 'And investors could get good returns from high-yield PLSs such as ApexHi, Redefine and Pangbourne.'

This gives astute investors an opportunity. But stock-picking is difficult: detailed information on all but the biggest individual counters is not easily available. James Templeton of Barnard Jacobs Mellet is the lone stockbroking property analyst. And you can no longer tell from the JSE listing whether a fund is a PUT or a PLS.

Take Redefine, a hybrid PLS, with 45% of its R1,8bn invested directly in property and 55% in other listed funds. Its cap rate rose from 12,3% in mid-2001 to 17,4% in February. Now it has dropped, against the trend, to 15%.

Redefine CEO Peter Penhall says recent changes have nothing to do with rates. They come instead from corporate activity as it grows to a projected R2,2bn by the end of this year.

He says long rates at 10% next December would bring the cap rate down to at least 14%, a capital gain of less than 10%.

'I hope more corporate activity will reduce that further,' he says.

Financial Mail