The sector has 10 counters with market caps in excess of R1 billion and in 2003 the average monthly value traded in the sector was R640 million.

The protracted period of strong total return performance has highlighted the importance of considering property allocation as a component in overall investment strategy.

The past year's performance alone represents exceptional property returns, although this should not be considered in isolation

Property unit trusts, for example, have shown growth of almost 40 percent. Property unit trusts are highly regulated, as they are listed on the JSE Securities Exchange and also fall under the ambit of the Collective Investment Schemes Control Act, and therefore carry low governance risk.

Property loan stocks listed on the JSE have delivered a return of 39 percent.

The improved flexibility of securitised property offers investors the opportunity to take short-term bets on property. But the real benefit is the longer-term stability that the asset class offers.

Research shows that listed property was significantly overvalued in the early 1990s, resulting in a prolonged period of capital value decline.

A valuation correction started in mid-1995, culminating in a dramatic undervaluation in 1998 because of the interest rate crisis.

Since 2000 property has outperformed bond returns consistently.

Due to the relatively high income return component of total return (78 percent over the past nine years), property is often considered relative to bonds and other fixed-income investments.

This is a misnomer.

While this high-income return component reduces the volatility of returns over the longer term, the asset class behaves differently.
 
In fact, research indicates that the correlation of five-year mean returns of listed property relative to bonds is below 0.6.

Property does not have a fixed term structure and can therefore be held in perpetuity, which eliminates capital reinvestment risk.

While property benefits in terms of capital pricing during periods of interest rate decline, its income return benefits in times of improved economic fundamentals.

Due in part to a protracted period of poor property economic fundamentals (low earnings growth), the five-year mean yield differential to long bonds has increased to 2 percent, as opposed to a discount of 3.3 percent at the end of 1995.

The current historic rolled yield of the sector, at 11.7 percent, represents a premium of 2.3 percent to long bonds.

The key to performance of investments in the listed property sector will be distribution growth.

This distribution growth will in turn be driven by the lower cost of borrowings and improvement in income return growth, from the underlying property portfolios.

There is an anticipation of a return to distribution growth in the listed property sector.

Retail assets are demonstrating improvements in net income growth, resulting from improvement in consumer demand.

The industrial market is coming off a very low base and starting to show signs of improvement in asking rents, with limited good quality stock available.

The office market remains under pressure, but appears to have stabilised after the significant overbuild and contraction in user demand from information technology and financial services.

Bear in mind that property investment performance is not just about yield; over the longer term it is the growth in income stream that differentiates performance.

Our view, on the basis of the current yield, plus expectations for distribution growth, is that the sector is reasonably priced on a risk-adjusted basis.

Andre Stadler is the managing director of Catalyst Securities