The divergence is expected to become more pronounced over the next six to 12 months, as some subsectors of the property market — most notably hotels, offices and smaller retail centres — continue to be harder hit by a slowing economy than others. That suggests investors will have to become more discerning in their stock selections.

The growth in cash distributions paid out by the property counters announcing June results vary from a high of 38,4% (Fortress Income Fund B) to a low of -33,1% (Hospitality Property Fund B).

Though the sector’s weighted average growth is still an inflation-beating 7%, some funds disappointed on the downside. These include Hyprop Investments and Emira Property Fund Hyprop, whose retail-focused portfolio will swell to R20bn once the Attfund acquisition becomes effective on September 1, delivered growth of a pedestrian 4%. That was below market forecasts of 7%-8%. It was mainly a result of losses made at the fund’s two struggling Johannesburg hotels — The Grace in Rosebank and Southern Sun Hyde Park. Hyprop’s sizeable 34,8% exposure to underperformer Sycom Property Fund didn’t help.

Emira’s 5% growth for the year to June was bogged down by rising vacancies in its office portfolio — from 16,3% to 18,4%. However, it has to be said that most funds are currently struggling with an oversupply of office space.

Sector heavyweight Growthpoint Properties, which reported solid 8,1% distribution growth for the year to June, last week highlighted weak demand for office space as a key worry. “We have to fight to keep our office tenants once leases come up for renewal, as an oversupply of office space means tenants can shop around for cheap deals,” says Growthpoint CEO Norbert Sasse.

Rising operating costs are another concern, with most funds reporting a sharp increase in administered costs. Though property owners recover utilities from tenants, rapidly rising costs make it difficult for landlords to justify rental increases.

Sesfikile Capital director Evan Jankelowitz says the latest round of company results points to the emergence of a two-tier market. “High-quality portfolios in prime areas continue to weather the downturn relatively well but the cracks are starting to show in B- and Cgrade portfolios in secondary areas.’’

Investec Asset Management property portfolio manager Vuyani Bekwa says management acumen and active participation in the running of portfolios have become key performance drivers. “Results will be driven increasingly by management’s ability to sweat their assets, reduce vacancies and contain expenses and arrears.’’

Though Macquarie First South Securities property analyst Leon Allison expects distribution growth to slow somewhat over the next 12 months, he still expects an average total return of 11% for listed property as a whole, provided bond yields stay at current levels around 7,8%.

The trick, of course, is to know which counters are likely to outperform. Jankelowitz likes Capital, which he believes offers strong growth prospects in the medium term and is well-priced relative to its peers, as well as Fortress A. The latter is expected to deliver 10% income growth in 2012 and boasts a strong management team.

Bekwa favours Growthpoint, new kid on the real estate block Rebosis Property Fund and Capital, citing stability of income and a superior growth outlook as key reasons. Allison’s top picks are Capital, Acucap Properties and Hospitality A. “All three stocks offer value at current levels, given their respective income yields versus growth prospects.’’