'Our overriding belief is that the fundamentals for the sector have not changed since our report in March this year,' says Templeton in a research report covering the property unit trust and property loan stock companies of the JSE Securities Exchange SA.

These property investing companies came under pressure as their rental income tumbled. Vacancies have risen across the country, according to commercial property industry association Sapoa.

'Oversupply is still very much in evidence,' says Templeton referring to the office vacancies reported by Sapoa in March.

Vacancies in Melrose and Waverly in Johannesburg stood at 26%, he says. There were also vacancies in Illovo, Houghton area north of Johannesburg, Claremont in Cape Town and Menlyn in Pretoria.

Templeton says the healthy financial results reported by listed retailers boded well for the retail property market. The results supported the view that the retail property market was likely to continue outperforming the industrial and office market this year, he says. Templeton expresses concern about the rapid increase of convenience retail space over the past few months.

He says the overall retail market is not growing significantly and the rapidly increasing number of smaller convenience centres is likely to take business from community and neighbourhood shopping centres.

Pockets of industrial space have started to show improved occupancies over the past few months. He attributes this to the stronger export market boosted by the rand's weakness against hard currencies.

'With growth for the sector over the next two years likely to be fractional at best, we believe the only potential upside is a rerating relative to bonds,' says Templeton.

He says the yield differential between listed property funds and the R153 is 3,85% double the average differential of 1,83% over the past five years. 'We believe that this gap is currently too wide. In our opinion the gap should narrow to between 2% and 2,5%.'

Templeton agrees with the consensus that the prime lending rate has peaked at 16%.

'Although recent CPI (consumer inflation) numbers came out worse than expected, we are holding to our forecast of a 100 basis point decline in prime within 12 months,' he says.

This was expected to result in interest-rate declines, which was positive for the property sector.

Business Day