The property sector's total return, at 50,04%, easily outperformed the rest of the JSE-listed companies in 2005. But property's top performing funds are bunched among the also-rans when measured by internal rate of return over five years.

Premium and Octodec, the Pretoria-based funds run by Alec Wapnick and his son Jeffrey, headed the sector. Premium came in 57th with a five-year IRR of 50,12% (see table). The Wapnick family, which has been a major property developer and investor in Pretoria for decades, listed Premium in 1995, five years after listed associate company Octodec.

Though there is considerable overlap in the two companies' activities, Premium has a much higher residential component and, in particular, has converted a number of office blocks into higher-yielding residential accommodation.

The 10th-best performing property fund, Allan Gray property fund, Grayprop, came in 124th overall with an IRR of 30,66%. The second-largest listed property company and largest property unit trust, it recorded a total return of 42,8% for the year. The sector fared worse mainly because of the rampant performance of general equities (Premium was 32 places further up the top companies scale at 25th last year, with an IRR slightly higher than this year at 51,73%).

But the sector saves face, moving near the top of the yield performers over five years. Octodec comes in third (with a five-year yield of about 15%) and the fifth-best property fund, ApexHi (12%) is 11th overall.

Strictly speaking, our top companies should be compared by turnover and profit, as most of the other sectors are. This would place Liberty International, the UK retail fund with a large SA shareholding, on top with a turnover of R4,4bn and net assets of R80bn. Next would be Growthpoint with turnover of R1,2bn and net assets of R9,6bn. Both are excellent investments but in this sector it's returns that count.

"It's the nature of the asset class," says fund manager Catalyst's Andre Stadler. "Income has averaged 60% of total return over the past 10 years, with 40% coming from growth in share price. Last year the ratio was 70% income to 40% share price growth."

He says income should continue to rise sharply over the medium to long term, and with capitalisation rates staying steady, share values will continue to rise.

"The key underpin is what happens to building costs," Stadler says. "The cost of new supply of offices will push up rents in existing offices as well."

Louis van der Watt, CEO of SA's largest developer, Atterbury, says current A-grade office building costs are about R10 000/m², which translate to a minimum net rental of R95/m² after costs. He says building costs are rising by at least 20%/year.

Investors can expect double-digit increases in rents over the next five years at least. But because of fixed leases the trend may not initially result in double-digit payouts. Despite the relatively better performance of general equities, Investec property fund manager MD Angelique de Rauville believes the sector continues to be a top-performing asset class, with high and steady incomes, while the general equities tend to be more volatile.

"Without doubt, large investors and fund managers globally are coming to realise that they are underweight in property," De Rauville says. She says global property weightings are about 4%-5% of total investment. But large institutions are moving up to 8%-10%.

Private investors should invest between 10% and 22% of their capital in property other than their homes, depending on their risk profiles.

The performance of the funds also shows that the experienced property entrepreneurs with newer funds are increasingly dominating the sector. The Wapnicks (with Premium and Octodec); Madison (Hyprop, ApexHi and Redefine) headed by Wolf Cesman and Marc Wainer; and Investec Property Group (Growthpoint and Metboard) run by Sam Hackner and Sam Leon make up seven of the top 10 performers (out of 30 funds). Mike Flax, CEO of Spearhead (number three performer), also falls into that category.

Closer to the streets where their properties are located and able to get the maximum out of them, these managers are likely to sustain their record of outperforming the market.

The property unit trust (Put) and property loan stock (PLS) sectors have grown in one year from 25 entities with a market capitalisation of R30bn to 30 with a market cap of R63bn. Add Liberty International, listed on the LSE and the JSE at a market cap of R40bn, and you have a sector worth more than R100bn. And it has more room to grow. To be comparable with the Australian and American listed funds, the sector would have to grow to well over R250bn - and there is little doubt it will in time.

Listed property funds are called income funds because they pay out almost all their income each year; normal listed companies retain anything up to 80% of their profits.

The steady income of property funds is similar to the income from government long bond debt such as the R157. Lately, listed yields have fallen below the R157. It's a sign of the growing confidence in the performance of the Puts and PLSs - and of expectations that incomes are going to rise by double-digit percentages.

The difference in yield at which units are bought reflects the market's view of the quality of the properties and effectiveness of management. Some portfolios, ApexHi, for instance, are built from properties outside the higher prime areas and their shares are divided into low-risk and high-risk portions. Last year you could earn more than 13% on these funds, but at the time of going to press there were only five funds offering more than 7,5% - nearly half of that. Others such as Hyprop and Sycom concentrate on the higher prime areas and give yields of less than 5,5% - nearly 2% below the R157.

Details of all the funds are available daily in Business Day under the real estate sector of the JSE reports. These include the current price, the yield and the rise or fall on the day and the year. The FM provides weekly tables that include market capitalisation.

There are 24 PLSs - funds based on companies listed on the JSE. Each ordinary share in a PLS is linked to a debenture that pays a variable interest rate, depending on the performance of the fund. Shareholders get interest plus a small dividend and are taxed accordingly. The six Puts can borrow only 32% of property value and have other controls to limit their risk.