The property sector is only 3% of the JSE's market cap with 24 listed funds, yet six of them are among the first 12 in this year's Top Companies survey. This is partly well-deserved from a sector that has given a total income and capital growth return to investors of 30% in 12 months and whose market capitalisation has grown from R8bn in 2001 to R100bn today.

But it also reflects how different property is from general equities. The six have been selected on earnings per share over five years, for which all got a top score of 40 out of 40. What differentiates them from each other in the scoring is return on equity over one year and internal rate of return over five years - for which they got between 1,5 and 2,5 out of 20 and between 2,5 and 4 out of 40 respectively.

Octodec, run by Pretoria's Wapnick family, has earned its premier property and 3rd place general ranking (see story, page 90). So have 9th ranked Hyprop, managed by Madison, and 10th ranked Resilient, internally managed by Des de Beer and his partners. But don't rush to buy the rest. The 5th-placed iFour is considered a mediocre fund by property analysts. CBS (12th) is even more lowly and Atlas (6th) has had a fair run but is small and illiquid. Both CBS and Atlas are about to disappear, swallowed by the Public Investment Corporation and Acucap, respectively.

"These ratings are bizarre," says head of Investec listed fund managers Angelique de Rauville. "iFour is a big shock to me. The top-performing funds should be Octodec, Premium, Hyprop, Resilient and ApexHi B."

Catalyst fund managers analyst Paul Duncan is a little more polite about the inclusion of iFour, CBS and Atlas, describing iFour as "a perennial underperformer" and arguing the criteria are not suited to property funds.

The high score for five-year EPS reflects the long-term nature of the investments as their steady income streams compound, also that property funds are best measured over a number of years, though analysts and big fund managers still concentrate on short-term performance,

For the longer term, Duncan points out that industrial vacancies have dropped to critical levels and office vacancies are also on the decline. Demand is exceeding supply, which puts upward pressure on rentals, and double-digit building and land cost rises are pushing rentals for new developments much higher. "This, together with debt restructuring, has resulted in most funds delivering double-digit distribution growth," he adds. Instead of rents dropping on reversion to new leases, as in the past, they will be rising. "We expect this period of strong income growth to continue. The key question will be how long before it reverts to normal levels of growth. Key factors at play will be the quantum of new supply created and the length of this sustained period of economic growth."

There is something more important than the shortage of accommodation and rocketing income growth. Observers were mystified by the sector yields last year breaking away from their attachment to the long bond, currently best represented by the R157. Institutions have used the predictable income of property funds as a proxy for long bonds for decades. They have been trading at a premium to the long bonds (of about 120 basis points) to reflect their higher risk. But at 6,09%, Catalyst's historic rolled yield for the sector in May is trading at a 158-point premium to the R157 at 7,67%. Even at a sector forward yield of 6,7% it is trading at a discount of 1%.

Traditionally when interest rates rise, so do the long bond and the property sector yields, and their values fall. But when rates started going up last year, the property yields continued falling and values rose. This is partly explained by the fast rising property income. It's worth buying into a fund at a 6% yield if you are certain payout will rise by a minimum of 12%/year over the next five years, pushing the yield to 10,6%.

Falling yields are also partly explained by the globalisation of listed property that has foreign fund managers investing in SA funds. Yields on the US$375bn market cap US listed property sector are 3,6% and in Britain 2,5% compared with SA's 6,09%. But more dramatic is the SA sector's 19,7% return for the year to April measured in euros compared with the Asian markets' 10%, North America's 0,9% and global real estate's 3,6% (see table). These yields have strong allure for global property fund managers.

But they have a problem. Large funds like to invest in dollops of $100m (R700m) or more. SA's big fund, Growthpoint, has a market cap of $2,4bn (R17bn) and the average size is $340m (R2,4bn). It would be impossible to move funds in and out of even Growthpoint without affecting its share. But foreigners are slowly moving in and as the flow of funds gathers momentum it will push the yield down further. Nedbank corporate finance CEO Frank Barclay predicted at the latest Sapoa conference at Sun City that historic yields would fall to 4%.

Global hunger for SA property shares will be satisfied partly by the growth of the most successful funds' market caps to over R20bn in the near future. This will happen mainly through corporate activity. It looks like Grayprop, probably to be controlled by Madison soon, will absorb Hyprop. Hyprop has also been buying Resilient shares. Is this a precursor to taking it over? The three will create a R20bn retail fund.

ApexHi will merge with Redefine to get close to R20bn, also in the Madison stable.

SA Corporate Property is determined to be among the top three, in which case it will have to swallow quite a few minnows to get to R20bn.

Growthpoint at R16bn is close to the R20bn mark. It will also continue buying and developing new stock. The sector owns about 35% of private commercial property, far less than Australia.

But this will provide short-term respite. The demand will continue to outpace supply. This provides a simpler, more powerful and potentially dangerous explanation for these phenomena; there are more buyers than sellers.

Local institutions and private investors are also hot for listed property. Demand far exceeds supply. The result, says Duncan, is that the sector price is "quite full". "The price is justified by the strong fundamentals," says De Rauville.

What Duncan, De Rauville and other analysts are gingerly skirting around is that the market is to some extent being driven by its own momentum and not just fundamentals. Investors are buying, convinced that yields will continue to fall and prices rise. They are flirting with archetypal bubble conditions.

De Rauville warns that they can get hurt. "This sector is not the place for short-term or risk-averse investors," she says. They could be caught off guard by a dramatic reaction to some surprise. "But the long-term investor will be well rewarded."

The shortage of scrip is also encouraging property firms that don't own portfolios - mainly property developers - to list in the hope of becoming a preferred vehicle for frustrated property investors. Developers Acc-Ross, IFA and Quantum are already announced and operating. More will appear. Investors should research them carefully before diving in. Some will be excellent, others dogs.

But there is little doubt that prudent investors with a five-year horizon or longer, unfazed by the drama and tears in between, will earn themselves exceptional rewards in the sector.