Hammerson (LON: HMSO) shares are falling slowly in London this morning as the market digests the announced annual results. The results are, among the things that management can control of have influence over, good enough. Rent collections have increased, finance costs have gone down, earnings are thus recovering from the lockdown-induced lows.
So, we might think that this is a good result then, Hammerson should start to be worth what it used to be as a property powerhouse. Hammerson shares have also been influenced by announcements of possible bigs for parts of the portfolio. But unfortunately, that’s not all there is to the company. There’s something else which leads to the £429 million loss.
What does tip Hammerson over into that loss is the “deficit” of £470 million on the portfolio revaluation. That portfolio is now rated at £5.4 billion and as we can see losing 10% (OK, roughly) of the portfolio value each year is not a good look. This is not something really under management control and so is a different problem.
That problem is that the way we all shop has changed. This is going to be something of a problem for a company that is based upon owning commercial retail properties. The problem is, as should be obvious, the internet. Before lockdown, online shopping was eating 1 and 2% per year of total retail spending. Moving, not in lockstep but in parallel, alongside this was a rise in vacant retail space. When online had 10% of sales then around 10% of retail space was empty, this shouldn’t be a great surprise.
The Hammerson defence against this is that of course, it’s the marginal retail that becomes empty. Second rate high streets, third rate shopping centres. Hammerson’s business is in prime retail so shouldn’t be equally affected.
Lockdown accelerated this, at one point online was 28% of retail sales. It’s since dropped back a bit but no one is really sure how much further it will. How much will shopping habits return to pre-covid?
That’s the existential problem for Hammerson. Have shopping habits changed so much that the value of even prime commercial retail space is now in an inevitable continued decline? Or is there enough social habit in physical shopping that prime retail will survive? Even if it does are we going to see a continual decline in that value of the portfolio?
This is why Hammerson shares are trading as if they’re option value on that British retail sector. Because that’s roughly what we might consider them as. We don’t know about how permanent the changes in British retail habits are going to be. So, we don’t know what the future value of British retail property is going to be.
On the long term that’s also the one big question which is going to determine Hammerson’s share price. It’s possible to take either side of that trade but that’s what the trade is.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.