Hammerson: in a prime position

The deal with Intu is an added advantage.

Hammerson is a retail-focused real estate investment trust (Reit) listed on both the London Stock Exchange and the JSE Securities Exchange. Headquartered in London, the business owns and operates prime shopping centres in the UK and diverse retail assets across Europe.

Hammerson’s diverse portfolio

The UK portfolio consists of prime shopping centres in densely populated metropolitan areas, and convenience-led retail parks located in outer-city suburbs. In Europe, it owns a few prime shopping centres in selected metropolitan areas in France and has exposure to high growth assets such as prime retail properties in Ireland, one of the fastest growing economies in Europe, and premium outlet villages.

Premium outlet villages are located near major European cities with a wealthy catchment area and large tourist customer base. This is where premium fashion brands such as Gucci, Tom Ford and G-Star sell excess, out of season stock at material discounts to inner-city in-store prices. These villages are some of the most productive retail spaces in Europe, producing double the amount of sales per square foot than that of shopping centres in Europe.

Despite having such a diversified portfolio, market concerns seem to be primarily focused on the UK retail portfolio exposure, which comprises 57% of assets. These concerns centre on weak consumer confidence following the Brexit vote and fears about the impact of the move to online retailing.

The online threat

Increasing US online retail penetration has resulted in multiple major department store closures in 2017 – including well-known stores such as Macy’s, Sears and Kohls – raising concerns for similar closures in the UK and other European markets.

We believe that fears of a repeat of the US experience in the UK are overdone. At 15% of total retail sales, the UK already has one of the highest online sales penetration rates in the world – nearly double that of the global average (8%) and higher than that of the US. This means that the UK is further along in weathering the threat of the move to online shopping than other markets. Additionally, the UK market is fundamentally different to that of the US. The UK has less retail space per capita, decreasing its risk of needing to downscale capacity. Also, UK shopping centres have a much higher space allocation for food, beverage and entertainment offerings which attract customers to activities other than shopping. See the charts below that elaborate on these issues.

Hammerson’s results are not rewarded

Significant share price weakness (graph below) amid these market concerns has seen Hammerson’s share price fall to 30% less than the current net asset value (market value of assets less liabilities) despite its consistent operational track record, strong management expertise and geographically diversified portfolio. We believe this market reaction is overdone. It implies that investors expect a significant drop in demand for retail space resulting in reduced future rental income and, consequently, a substantial devaluation of its property portfolio.

Hammerson’s historic leasing performance tells a different story, however. The business has consistently renewed leases at rentals above comparable market levels, demonstrating strong demand for space despite the growth of online retail and declines in both footfall and store sales. This may be due to how retailers are using premium stores, as set out below.

The multi-channel retail evolution

Retailers are adopting an increasingly multi-channel approach, which combines both online and physical strategies. Physical stores are becoming part of a broader sales and communication strategy rather than merely the means to reach customers. Along with in-store sales, store productivity measures now include:

o In-store originated sales, where a customer sees an item in the store and buys it online.

o The ‘halo effect’, where a physical store presence provides strong brand awareness leading to more online sales.

o Click and collect kiosks – a convenience service where customers can collect and return online merchandise from a kiosk, at times outside of normal operating hours and without the hassle of waiting in long queues.

Stores are increasingly designed for more than purely merchandise sales, becoming showrooms for brand image and customer experience. This shift has drawn new tenants to shopping centres – car brands such as VW, Tesla, Mercedez Benz and Volvo have all opened stores in Hammerson centres. They are sometimes willing to pay more than comparable market rental levels to secure space to showcase their latest models and in-car technology.

Retailers have also become more strategic in rationalising store space, choosing to keep physical stores mainly in prime destination shopping centres where footfall and dwell time are strongest. Therefore, while retailers require less total space, there is higher demand for prime, high profile space.

These dynamics result in a retail polarisation: prime, customer experience-led shopping centres thrive, while second tier shopping centres become less desirable. Prime malls are therefore best positioned to cope with – and even benefit from – these changes in the sector.

Hammerson’s premium strategy

Hammerson invests significantly to ensure its shopping centres remain desirable and keep customers coming back. Its investment efforts have focused on:

o Dining and entertainment: Adding a wide range of restaurants and coffee shops, cinemas and kids’ activities and hosting various music, dance and art events.

o Improving look and feel by focusing on: modern interior and exterior aesthetic designs, plentiful seating space, free Wi-Fi, lots of parking, access to public transport and convenience offerings such as hands free shopping concierge services and click and collect kiosks.

o Tech innovation: Hammerson has developed two successful phone apps to enhance the shopping experience

– Find Similar; an app that allows customers to search for desired garments in Hammerson shopping centres by uploading a photo or image.

– Plus App; an app that offers customers tailored discounts at retailers in Hammerson shopping centres. With over

300 000 users, this is one of the most downloaded retail apps in the UK.

Investment opportunity

We believe that the current market price ignores key attributes which make Hammerson a good investment opportunity.

o Its UK shopping centres are prime assets with a solid performance track record.

o Its portfolio offers significant diversity, with 43% of its assets outside of the UK, including exposure to high growth markets such as Ireland and premium outlet villages.

o Shareholders have received strong dividend growth (7% per annum over the last five years), which seems likely to continue.

Another reason to back Hammerson’s prospects is the recently announced proposed acquisition of rival UK shopping centre owner, Intu. The deal is attractively priced and will be settled in Hammerson shares. Potential deal benefits include:

• Superior Hammerson management capabilities should extract better rental growth from underperforming Intu UK shopping centres.

• Operational cost savings through head office cost reduction and stream-lining supply chain management.

• Financial cost savings from Hammerson refinancing Intu debt at lower interest rates.
Rewarding outlook

The Hammerson investment case is very compelling for the patient investor. In time, the negative market sentiment should change as economic conditions improve and Hammerson should emerge bigger and better than before. While waiting, investors receive an attractive dividend yield of 5%, and dividend growth expected to exceed historical guidance of 7% to 8%, boosted by the potential upside from the Intu deal. We believe Hammerson will be a rewarding source of long-term returns for our clients.■



You must be signed in and an Insider Gold subscriber to comment.




The Budget Speech explained
Moneyweb’s 2020 national budget offering, including infographics and audio ratings, as well as past budget coverage....

The Investor Issue 48
Separating out the noise from useful information in the markets is not easy. The trick to staying the course is to keep an eye on ...

The Investor Issue 47
Some people intuitively understand that investing for future gain is a long-term process that cannot be rushed. The management of ...

The Investor Issue 46
While US innovation soars and its tech listings continue at a ferocious pace, SA has no real plan for how to embrace the 4th Indus...

The Investor Issue 45
As the investment world falls more and more in love with the simplicity that ETF investing offers, index providers are realising t...

The Investor Issue 44
Company financial statements are the last line of defence for investors wanting to protect their investments. But these cannot alw...

The Investor Issue 43
What makes one CEO great and another mediocre? The Moneyweb Investor ponders this and other leadership questions in the latest iss...

The Investor Issue 42
Stagnant economic growth and questionable economic policy is hampering the development of mid-sized - and investible - businesses ...

The Investor Issue 41
If you are one of those people who invests more energy into your credit card or medical aid rewards programme than you do your ret...

The Investor Issue 40
Volatility in global markets is higher than it has been in years, giving investors the jitters. Some 'experts' are suggesting a re...

The Investor Issue 39
From lessons from Buffet to building your own crypto-portfolio (a risky endeavour by anyone's standards), this issue of The Moneyw...

The Investor Issue 38
They say the art of investing is to ignore the short-term noise and focus on attaining long-term goals. That's true, but that does...

The Investor Issue 37
Getting the economy on the correct footing requires that everyone pulls their weight. Our writers this month have gone above and b...

The Investor Issue 36
The past year is littered with train wrecks like Steinhoff, SAA and Eskom. But there is real sense of ‘back to business’ in So...

The Investor Issue 35
Stock markets are soaring, but productivity is not. Innovation continues, but leads to fewer new jobs. And the great and the good ...

The Investor Issue 34
South Africans are fed up with corruption, or anything that has even a whiff thereof, as JSE rockstar Naspers is currently experie...

The Investor Issue 33
As the year races towards its close, investors will be forgiven for feeling a little breathless. The British WWII propaganda phras...

The Investor Issue 32
Anyone would think that getting an economy moving is rocket science. It's actually not. It requires single-minded commitment. Whil...

The Investor Issue 31
We examine the opportunities of forex trading, the best unit trusts, e-commerce at Richemont and more. ...

The Investor Issue 30
Despite what the astrologers say, there are no shortcuts when it comes to successful stock picking. Fundamental analysis counts. T...


Follow us:

Search Articles:
Click a Company: