“In spite of the better performance, the fund outflows from the sector, which began in May, continued during the third quarter, as retail investors continued to be spooked by rising interest rates. The sector has, however, attracted a healthy net inflow of R286-million for the 12 months to end September, ending the third quarter with an asset base of R15,5-billion,” says Craig Hallowes, marketing spokesperson for the Association of Property Unit Trusts.

For the full year to September, these funds returned a gross 18.7%, and 12.8% net of maximum initial fees.

Unlike Property Unit Trusts (PUTs), which are listed on the JSE Limited, these funds are essentially Funds of Funds and they invest in the property entities listed on the JSE Securities Exchange in the Real Estate Sector, which comprise PUTs and Property Loan Stocks (PLSs). PUTs and PLSs in turn consist of various property portfolios that have their own sector and geographical focuses.

The retail Domestic Real Estate General category of collective investment schemes has witnessed considerable activity over the period shown in the graph and a further three funds were added in the past 12 months bringing the total to 20 funds in the sector.

For half a decade, the Marriot Property Equity fund was the lone representative in the retail space, from its inception in September 1996 until the next fund was launched in February 2000 – the Marriott Property Income Fund.

The rush to open new property funds of funds reached a peak in 2004 and 2005 when nine new funds were launched. This has meant that individual investors are having a greater impact on the market than in the past, when there were limited vehicles in which to invest.

In the third quarter in 2006, what the Real Estate funds of funds lost, the Asset Allocation and Domestic Fixed Interest collective investment schemes gained. “There seem to be three basic reasons,” explains an industry analyst. “Firstly, with the advent of the Financial Advisory and Intermediary Services Act (FAIS), brokers are being more conservative; secondly, some clients are aging and are therefore taking a more conservative route for their investments; and finally, there is nervousness about what the markets will do next, so the asset allocation decision is being passed on to the experts – the asset managers.”

“The sell-off in the second quarter was overdone,” comments Hallowes. “Investors should not be overly anxious about the effects of rising interest rates on their listed property investments, such as PUTs. Many of the funds have low borrowings or have fixed their borrowings, or both, and, in any event, these investments are essentially long term.  Unfortunately, as is normally the case, many investors withdrew their funds as unit and share prices were falling creating their own devaluations and perpetuating the correction.

“Much of the bad news has already been discounted by the market. In addition, if one garners the opinions of the pundits on whether or not to fix home-loan rates at this stage in the cycle, the answer is a resounding “No”. Although interest rates only started to rise in June this year, and the total hike so far has been 150 basis points, most economists agree that rates will only increase by a further 100 to 150 basis points. In other words, we have already experienced half of the expected hike,” says Hallowes.

Individual investors should also not be focused on the housing market as a proxy for making investment decisions regarding funds of funds or listed property. While Absa has announced that it is now expecting house prices to fall in real terms for the first time since 1999, the PUTs and PLSs in the listed property sector on the JSE Securities Exchange invest in offices, industrial warehouses and retail shopping centres that pay rental income and  are not highly correlated with the residential property market.

“The fundamentals for listed property, and hence for the funds of funds, remain good,” states Hallowes. “Property rentals remain sound, demand continues to grow for good rental space in all sectors and we expect further earnings growth to come through.”