That means investors will have to become far more discerning in their stock choices.
Mariette Warner, MD of Corovest Property Fund Managers, who previously headed Stanlib's listed property division, says in a raging bull market you can buy anything and earn impressive returns but when the market's down that no longer applies. Warner expects the earnings gap between the sector's 24 counters to widen noticeably over the next six to 12 months. In fact, the market is already pricing in a wider differentiation in sustainable earnings growth.

That's clearly illustrated by Warner's calculations, which show how the yield spread of a basket of the highest and lowest yielding property stocks has widened since the beginning of November 2007. Warner's figures show the yield differentiation rose from 280 basis points in November to 415 basis points on 24 July this year. She expects the yield spread to widen further over the coming months as investors start becoming increasingly selective.

Warner says although growth prospects for listed property remain positive there's no doubt the sector's earnings momentum has slowed. She expects earnings growth to remain at current levels for the more defensive portfolios. Low vacancies and high barriers to new developments will support earnings as long as GDP growth remains in positive territory.

But Warner says the exceptional level of growth seen last year isn't expected to continue, as the current trading and interest rate environments are now very different. "Over the past few years the highest returns were generated from favourable trading conditions. In future the highest returns will be generated by solid portfolio fundamentals and astute property asset management."

Warner says the question isn't so much which stocks to pick but rather which ones to avoid. In her opinion the latter include those funds that pay out trading profits as part of their distribution. She maintains that practice is too risky in a high interest rate environment and doesn't serve to protect wealth.

Funds with a high exposure to older retail portfolios in less than prime locations are also vulnerable. Warner says dominant regional shopping centres are more resilient when consumer spending slows than their smaller, second-tier counterparts.

Figures from Investec Property Investments show earnings growth reported by listed property funds so far this year has ranged from a low of 8,3% to a high of 20,6%. The average distribution growth for first half 2008 (on a market cap weighted basis) is 13,6%.

Investec Property Investments CEO Angelique de Rauville's distribution growth forecasts show that the top five performers for 2008 include Hospitality B (+17,9%), Premium Properties (+16,6%), Acucap Properties (+16,2%), Resilient Property Income Fund (+16%) and Octodec Investments (+15,3%).

The five worst performers in terms of growth in income payouts are expected to be SA Corporate Real Estate Fund (-4,5%), Hospitality A (5%), ApexHi A & B (5%), iFour Properties (8,3%) and Sycom Property Fund (8,3%). The market will no doubt keep a close watch on how distribution growth levels are holding up when listed property funds declare earnings over the next few weeks for the June reporting period.