Why I'm not a fan of property - Piet Viljoen

SA property has held up relatively well; Viljoen's not the only fund manager to think it's over-priced.

Regarding Capital Management founder Piet Vijoen does not think the listed property sector is offering good value at the moment. Viljoen is not alone in this view; last month Moneyweb noted that Prescient’s Herman Steyn was not a big fan or property, bonds or preference shares.

South African property shares have held up pretty well, not falling as much as other listed counters. According to Equinox, the best-performing unit trust over a five-year period is the Stanlib Property Income Fund.

Viljoen says that property's yield of eight-odd percent is not particularly attractive. For one thing, this return is a "backward looking" number, notes Viljoen. Thus, the rental income reflects a period which has been very good for property.

"Now if you own a property and the income yield you're getting is 8% and remember that's a backward looking number so it probably refers to almost the best of times in the property market and going forward we're probably bound to see more vacancies and less take-up and that sort of thing," said Viljoen on Tuesday's Market Commentator Podcast.

"So you're looking at a 8% yield and you need to pay tax on that, so a third of that goes away and then you need to maintain that property which probably costs you anywhere in the region of 2 to 4% a year, so it's almost half your yield gone to maintenance.

"That means your net return, after tax and maintenance, is, if not zero, it's very close to that. So you're relying on price increases for your returns and at current low yields of 8%, it's hard to see significant price increases going forward. So, you know, just on that simplistic view, we don't think property holds value."

Nor does Vijoen think there is opportunity in Liberty International (JSE:LBT), which is exposed to international property and whose share price has come tremendous pressure.

Viljoen notes that Liberty International is more highly geared than local property stocks. "It's got a lot of debt against the property it owns, so any decline in the underlying value of the properties, is magnified by the debt and therefore you're seeing a large decline in the share price," notes Viljoen.

However, he says that even after the price decline, he does not think Liberty "fully reflects the realities of the UK property market yet". He agrees, though, that "it sure looks a lot better at these sorts of prices than it did a year ago".

Viljoen is finding the most value within the industrial sector of the JSE. He notes that the sector is very broad. "So it's dangerous to say the sector overall is great, but we think within the sector there are definitely pockets of value."

Article from: www.moneyweb.co.za