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Property stocks listed on the JSE Securities Exchange SA are returning about 12%.

Analysts say property may finally have shrugged off its low-key profile and could become one of the best-performing SA investment classes in the medium to long term. For investors looking for sanctuary from bleeding equity markets, the JSE's property stocks, led by Grayprop, Sycom, Martprop and Hyprop could represent one of the bourse's more promising niches.

According to Marriot's asset management division, unit trusts in property outperformed even the strong returns of SA bonds, which have shown average returns of 15,81% over five years.

Figures compiled by researchers Micropal show cash investments generated a 13,63% return while SA equity returns were almost flat, with losses of 0,1% in the five years.

Economists are widely expecting two interest rates cuts this year in June and December, which could favour property investments. "We expect interest rate reductions in the second half of this year, so the better returns are likely to come from the stable investments in property and bonds," said Marriot's Simon Pearse.

Property economist Erwin Rode said that if inflation moved within the Reserve Bank's 3%-6% target range it could set the stage for listed property to become one of the better-performing investment classes. "Property's day has come. In a declining-inflation environment, equities typically don't do well. So bonds and listed property are likely to offer the best returns," he said.

But some brokers are less convinced. Sanlam financial adviser Kevin Asbury said that if inflation was brought within the 3%-6% band it could hit rental earnings.

"Rentals are being increased at 10% a year. If inflation moves below the 6% mark, this could spark a higher number of defaults on rentals," he said. There were more vacant commercial properties coming on to the market than in the past few years, which could put pressure on rentals.

But Rode disputed this, saying that leases were typically only for relatively short cycles of three to five years. "It is in the interests of tenants and landlords that it doesn't go belly up. We expect annual market rental increases to stay below 10% and drop towards the lower inflation figure we are expecting," he said.

Asbury warned that property stocks may have reached the top of the cycle and could be overvalued. "There is the danger that property may have peaked, while equities are considered undervalued and may be in for a comeback," he said.

Either way, asset managers are falling over themselves to invest in listed property. According to John Rainer, MD of Allan Gray's property trust management division, investors have had little choice but to embrace high-flying property stocks due to the dismal performance of other equities.

"In the last year, property has been a very good defensive play so investors can't really afford to be out of property," he said. The property trust sector had shown returns of 42% over the past year, against the all share index's -27% return.

Busisa Jiya, director of Stanlib Wealth Management's multimanager property fund, said this renewed focus on property stemmed largely from the perception that it was a "port in the storm" of volatile equity markets. "This investment is bound to grow because of the physical attempt to recognise the unique risk-return characteristics of listed property," he said.

The image of listed property, once seen as illiquid, was changing, said Rode. Consolidation was imminent, with a number of smaller funds being swallowed up by larger ones, boosting the liquidity of property stocks.

Business Day