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Why the Goodman Group is my preferred REIT for growth

Real Estate Investment Trust

Goodman Group (ASX: GMG) is a global property group with ownership and developments in industrial real estate in 17 countries including logistics and industrial facilities, warehouses and business parks. The company focuses on high-quality properties in key locations to deliver sustainable returns for investors.

Goodman has been a standout performer in the REIT space. It has typically delivered better returns than retail-orientated REITs such as the Scentre Group (ASX: SCG) and Vicinity Centres (ASX: VCX) and other diversified REITs such as GPT Group (ASX: GPT) and Dexus Property Group (ASX: DXS).

I believe Goodman will continue to be a standout performer, driven by its focus on high-quality properties.

Industrial headwinds

There has been a strong land take up in highly desirable industrial areas as supply chain efficiency becomes increasingly important. Choosing a location that best suits occupiers’ requirements is key to reducing supply chain expenses. This demonstrates the importance of locating an industrial and logistics asset in an optimum location with good access to suppliers and customers.

For example, land in Melbourne and Sydney that is located in close proximity to ports and the city centre is becoming increasingly scarce with multiple competing uses including residential and large format retail development.  

Goodman operates some 3.3 million sqm of properties that focus on areas of competing demand from e-commerce, data centres and urban renewal products to put pressure on land use. This is reflected in its strong occupancy rate of 98% and like-for-like net property income growth of 3.3%.

Goodman Group’s Q1 update

Goodman provided a Q1 FY20 operational update that highlighted its strong performance as it continues to deploy capital through development in key urban locations. The update reaffirmed its FY20 forecast operating earnings per security of 56.3 cents, up 9% on FY19.

Greg Goodman, Group CEO has said that “structural changes continue to positively impact the industrial property sector” and that the focus of many customers was to “create more efficient logistics networks”. The company anticipates that these structural trends should continue to attract capital investment to the sector, and the underlying strength of the asset class in its locations is likely to drive capital values, strong rental growth and high occupancy.

Trading dividends for growth 

Goodman pay a 2.1% dividend yield while its REIT peers typically pay at least 4% or more. While its yield is lower, its growth and industrial orientated portfolio has allowed investors to enjoy significantly higher capital gains. Goodman returned more than 25% in 2019 compared to peers such as Dexus, GPT, and Scentre Group that returned 10%, 6% and -2% respectively. 

Foolish Takeaway

Goodman Group is strongly positioned to capitalise on the industrial property sector that is expected to grow more strongly than office, residential and retail orientated properties.

The company is expected to grow its EPS by 9% on FY19 which is typically a higher growth rate than its peers. A lower interest rate could further boost the Goodman Group share price and the price of those that are classified as bond proxies and REITs.

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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