Hammerson: in a prime position

The deal with Intu is an added advantage

Rahgib Davids

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.

Hammerson owns prime retail space in the UK

Source: Shutterstock

Retail therapy remains big in France

Source: Shutterstock

Ireland is a fast growing economy

Source: Shutterstock

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.

Macy's is encouraging online shopping

Source: Shutterstock

Sears recently posted a small profit

Source: Bloomberg

Kohls is shrinking store sizes

Source: Bloomberg

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.

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.

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.

A pedestrian passes the entrance to the Centrale shopping mall, operated by Hammerson in Croydon, south London

Source: Bloomberg

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.■

Rahgib Davids is an Associate Analyst at Kagiso Asset Management