The probability of a real estate crash is increasing. Some property groups are fortifying their balance sheets, unfortunately Goodman Group isn’t one of them.
Stockland recently announced that capitalisation rates have increased by half a percent in 2009 and Dexus, a relatively conservatively geared diversified property trust, has announced a $749m capital raising. The sector is under seige and we have become less comfortable with Goodman Group and its Goodman PLUS securities.
Goodman Group’s balance sheet groans under $4bn of debt, and there’s billions more in its vast array of managed funds. Property prices are crumbling and a genuine real estate crisis is developing. General Growth Properties, the second-largest retail property group in the US, recently filed for bankruptcy. General Growth had become mired in debt following massive acquisitions made during the boom - sound familiar?
Goodman Group needs capital, and plenty of it. The downtrodden security price has severely impaired the effectiveness of any potential capital raising but the longer it waits, the more dire the situation becomes. That’s particularly so if recent capitalisation rate increases prove the tip of the iceberg. Ordinarily Goodman’s enormous size affords various layers of protection, but not against extreme leverage wrapped in a credit crisis, wrapped in a recession. Goodman’s size has become its Achilles heel.
Commercial property collapse
Quickly selling assets on a scale that would put a significant dent in Goodman’s debt pile isn’t an option. Banks across the globe are reducing their commercial property exposure and investors are circling like vultures, waiting to feast on the carcasses of failed property groups. Dexus’s capital raising indicates it too is preparing for the worst. That the federal government wants to partner Australia’s major banks to create a lender of last resort for commercial property groups speaks volumes for the sector’s waning health, and current expectations, but it could prove Goodman’s saving grace.
If Goodman PLUS securities occupy a large position in your portfolio, or you are a conservative investor, we recommend considering exchanging part of your upside for the relative safety of Dexus RENTS, or another income security outside of the property sector currently on our Buy list.
If chief executive Greg Goodman can pull a rabbit out of the hat and make it through the recession, or credit markets thaw, the potential gains from here are huge - albeit significantly less for securityholders that bought at much higher prices. We’re ratcheting the fundamental and share price risk ratings up a notch, both to 4.5.
With the security price little changed since 26 Feb 09 (Hold – $28.50) and a current ‘running yield’ of almost 18% (190 basis points over 90-day bank bill rate), we’re sticking with HOLD. But, if you’re a conservative investor, the substantial risks should be placed at the very front of your mind.
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$32.67 |
Change
-0.400(1.21%) |
Mkt cap ! $62.45B |
Open | High | Low | Value | Volume |
$32.10 | $32.70 | $32.10 | $91.03M | 2.796M |
Buyers (Bids)
No. | Vol. | Price($) |
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1 | 2664 | $32.64 |
Sellers (Offers)
Price($) | Vol. | No. |
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$32.67 | 4551 | 1 |
View Market Depth
No. | Vol. | Price($) |
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1 | 2664 | 32.640 |
1 | 10051 | 32.630 |
1 | 11491 | 32.550 |
1 | 3329 | 32.540 |
2 | 683 | 32.520 |
Price($) | Vol. | No. |
---|---|---|
32.670 | 4551 | 1 |
32.680 | 5750 | 2 |
32.690 | 4541 | 1 |
32.700 | 4602 | 1 |
32.710 | 4602 | 1 |
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