Results from the property sector for the year or half-year to June confirm the strength of SA's listed property funds and the underlying fundamentals.

The largest listed property fund, Growthpoint, with assets valued at R22bn, reported an annual 14,5% increase in distribution per linked unit to 93,1c. Hyprop, the retail-focused property fund with assets of R8,5bn, reported an 18% improved interim distribution of 130c. Results from SA Corp, Emira and iFour backed the trend.

But the property numbers seem to have been overshadowed by the jitters in global markets. This prompts the question: how good a defensive position do the listed property funds offer?

The performance of the listed sector against the general equities market in the past few weeks sheds some light.

Taking a cue from global markets, the JSE's all share index has taken a beating recently. Having breached 30 000 points in July, the Alsi retreated by more than 10% early this month. This week it was around the 28 000 mark.

"The sell-off and volatility in global equities since mid-July, due to sub prime loan fears in the US, have affected SA's listed property sector," says Macquarie First South Securities analyst Leon Allison, in a report released last week.

But the impact so far has been smaller than on the general market, says Allison. The JSE's property sector returns have been better and volatility has been lower. The overall market has lost 11,4% since July 13, while the property sector has lost 5%.

Allison also points out that the listed property sector, having gained 30%, has outperformed the overall market (24%) over the past 12 months.

"This makes sense, given SA listed property's relatively high and defensive income yield," says Allison. "We are bullish about property fundamentals for the next three years."

Listed property funds, underpinned as they are by rental income, are viewed by investors as an income play. They come with an added bonus in the form of capital gains, which have been phenomenal over the years.

Rentals are set to increase in the medium term, largely as a result of constraints in the supply of new space. This is especially so for the office property sector.

"Building costs are rising sharply and therefore we expect to see an upward squeeze on rentals," says Emira Property Fund CEO James Templeton. Land costs have been accelerating and there are power supply issues in certain areas, meaning they have limited development potential. "We estimate 15%-30% [rental increases] in some areas over the past 12 months," says Templeton.

In the year to end-June, Growthpoint generated from its R22bn portfolio (offices, retail and industrial) rental income of R2,1bn, and distributed R967m to investors. Put together with the group's market capitalisation appreciation, Growthpoint produced a total return of 47,5% during the year. Its trading price per linked unit was around R15,35 earlier this week, which adds to total market cap of R16,4bn. It has retreated from a high of R17,05, reached in May this year.

Growthpoint CEO Norbert Sasse says the group expects distribution growth significantly above inflation. He says the group's mission is to be a point of reference for listed property investment in SA, offering liquid investment, consistently growing income returns and long-term capital appreciation.

With market capitalisation of more than R6bn, Hyprop reflects gains of about 30% over 12 months. Its price per linked unit was quoted at around R43 early this week, having touched a high of R50 in May. The group's portfolio of retail properties produced R326m in revenue in the six months to June, and paid R166m to shareholders. The portfolio has assets like Canal Walk in Cape Town and Hyde Park in Johannesburg.

"It is difficult to predict whether the sector's relatively defensive performance of the past month will continue in the short term," says Allison. "We have seen with previous equity market sell-offs that listed property can also be as volatile and weak as the market in the short run."

Key to the pricing of the sector is the long bond yield, which has firmed somewhat in line with global bond yields in the past few weeks, he says.