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JOHANNESBURG (Reuters) - A blistering surge by South Africa's listed property funds may be starting to stall, as a stagnating economy and rising vacancies bite into what was one of Johannesburg's top performing sectors last year.
The funds, some of which have become members of South Africa's Top-40 index of blue-chips, have been popular with investors looking for exposure to real estate in Africa's top economy.
But with a glut of available property and weakening economic growth outlook, the funds are starting to feel the squeeze.
To attract tenants, landlords are lowering rents or offering some rent-free months for long-term leases. And to maintain current tenants, more owners are agreeing to keep rents flat.
Investors, therefore, cannot expect the same blockbuster returns from property in the next decade, reckons Erwin Rode, CEO of property consultancy Rode & Associates.
"It is unrealistic to expect such vigorous growth in total returns over the next 10 years," he said.
"There's a general acceptance out there, realisation, that total returns will come down dramatically over the next 10 years or so."
Johannesburg's index of listed property funds jumped 19 percent last year, outpacing a near-15 percent rise in the Top-40 index.
That performance is even more impressive on a total return basis, which includes "distributions", or regular cash payments to investors from the rental income.
The property index's total return last year was a whopping 30 percent -- double the performance of the stock index.
So far this year, the total return has been 5 percent, although that is better than the roughly flat Top-40.
Most South African property firms use linked units, which consist of a share and a loan. The loan earns interest on rental income and, as rental income falls, investors will see smaller distributions.
This year, the sector's top performer is Orion Real Estate, up 19 percent before distributions, while the worst performer, Hospitality Property Fund, is down 52 percent before distributions.
"The sector has been quite defensive in a volatile equity environment and, I believe as long as low returns for equities and volatility continue, there could be continued support for this sector given the defensive nature and relatively high yield," said Leon Allison, a research analyst at Macquarie First South Securities.
With a forward yield -- returns that investors can expect in the next 12 months -- of 8.6 percent, listed property remains an attractive proposition for investors, according to Sesfikile Capital's director Kundayi Munzara.
He and his fellow directors took pay cuts to set up their boutique property fund manager just months ago, confident the sector will improve.
Sesfikile Capital manages 2.7 billion rand in institutional money and is raising funds now for a 1 billion rand unit trust.
"Don't look at past performance, look at the valuation. Today it offers better value than bonds in the medium term, it's an inflation hedge as well," Munzara said, referring to the yearly rent rises that in the past exceeded inflation.
Some analysts caution bond yields will rise once the global economy stabilises, meaning investors will likely shift out of property and into fixed income.
"We are quite pessimistic," said Naeem Tilly, an analyst at Avior Research. "We have a very negative view on property but it is very much a function of bond yields."