The S&P/ASX 200 Index (ASX: XJO) property share Goodman Group (ASX: GMG) could be a leading contender for a recovery in 2023.
Shareholders of the property giant have been through a difficult period with the business going through a significant decline since its peak.
The Goodman Group share price has dropped by around 25% since 31 December 2021.
The business has suffered along with many other ASX property shares as interest rates have climbed higher. In theory, higher interest rates are meant to push down on asset prices. Australia's official interest rate has gone from 0.1% to more than 3% in less than a year.
Goodman is a developer, owner, and manager of industrial properties around the world. It has a presence in Australia, Hong Kong, the US, China, Europe, New Zealand, Japan, and the UK.
While the decline in investor sentiment is hurting Goodman, I think there are a number of factors that can help stabilise and drive Goodman higher.
Strong demand helps rental performance
Goodman is experiencing strong customer demand for its industrial properties, with e-commerce, supply chain optimisation, and ongoing growth in data storage requirements being the key drivers of leasing activity.
A lack of available space in its markets is supporting "positive underlying portfolio activity and fundamentals".
Goodman said that for the three months to 30 September 2022, it recorded a 12-month rolling like-for-like net property income (NPI) growth of 4%. It also had a portfolio occupancy of 99%, with a portfolio of weighted average lease expiry (WALE) of 5.4 years.
The ASX 200 property share also said that the reversion of current passing rents to those achievable in the market has continued to increase, in particular in North America, Australia and New Zealand, the UK and Europe, where reversion now ranges from 20% to 60%.
Goodman suggests that rental growth should continue to support cash flow growth in future periods. It believes that the impact on valuations has been offset by the rental growth that it's seeing.
In FY23, the business forecasts its operating earnings per share (EPS) will grow by 11%, with a full-year distribution of 30 cents per security.
Low debt
Many real estate investment trusts (REITs) on the ASX have a sizeable amount of debt on their balance sheets.
Not only do interest rates naturally hurt the valuations of assets, but higher interest rates can also lead to a much larger increase in the interest expense of businesses with debt.
But that's not the case at Goodman. In FY22, the business said that it had low gearing, which was maintained at 8.5%. This means Goodman's profit could be less affected by higher interest rate costs compared to its ASX property peers.
Large development pipeline
At 30 September 2022, the business saw its assets under management (AUM) increase to $77.8 billion.
One of the things that could assist the business during this period is development. Goodman is expecting to make revaluation gains on developments within its partnerships. The company says this "will continue to be a feature through the year and it is expected that AUM will continue to grow".
Goodman said that demand is supporting work in progress (WIP) of $13.8 billion as at 30 September 2022. The production rate for WIP is approximately $7 billion. The business said that 85% of WIP is either pre-sold or being built for third parties or partnerships.
Interestingly, the yield on the cost of the ASX 200 share's WIP is 6.4%.
Foolish takeaway
When interest rates stop rising, I think that Goodman is well-placed to perform well under these conditions because of continuing strong demand. The steep decline in the Goodman share price certainly gives us the opportunity to invest at a much cheaper price compared to December 2021.
