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Is Hammerson Just Option Value On British Commercial Property?

Tim Worstall
Tim Worstall trader
Updated 27 Jan 2022

Trade Hammerson Shares Your Capital Is At Risk

Key points:

  • The retail space has been hard hit by lockdown but also by that move to online shopping
  • The question becomes are we in a cycle here or a structural shift?
  • Hammerson shares can be looked at as options on the outcome here
  • Hammerson Stock Forecast

Hammerson PLC (LON: HMSO) shares have hardly reacted to the trading update concerning rent recoveries. Largely, it seems, because Hammerson’s numbers on the rent they’re collecting are about what the market expected anyway. We expected better and we got better, those results are largely already in the share price.

The big question though for Hammerson, as with other retail property companies, is what the heck’s going to happen in the medium term? There’s a combination of a possible change in the basic market plus a detail of how property companies work to be considered. Lockdown has exposed this issue but not either caused it nor resolved it.

Also Read: The Best Monthly Dividend Stocks Under $10

It’s not exactly a surprise that online shopping is increasing as a percentage of the market. It’s also not a surprise that as it does then retail property prices go down. It’s been possible to see that as online becomes 10% of retail sales then 10% or so of retail property is empty, as it rises to 12 or 14% then so too voids do to 12 or 14%. It’s not exact lockstep but it’s pretty clear that the more retail moves online then the less physical retail space we need. This just isn’t good news for companies, like Hammerson, that exist to own retail property.

Lockdown then made that online share soar – one ONS report had it as 27% of total sales at one point. We’re pretty sure that’s going to come off and it is, in part. But how much will it come off? Back down to 15% or so, to then continue its eating of 1% or so of the market per year? Or will it stick at 20 or 24%? The answer to that will determine the value of that retail property Hammerson owns.

Losing the market at a percentage point a year can be dealt with, much faster than that causes real problems. For there’s that financing of property companies to deal with. Hammerson, as with all others, has some debt. So, if retail property values crash the equity value heads below zero. This is, after all, what happened to Intu (the property company, not the American software one).

The issue being dealt with in this trading update is how much of rent owed from the lockdown period is being collected? That’s interesting and useful in this short term. However, in any longer-term evaluation of the Hammerson share price what we want to know is what’s that online share of retail going to be? For that will determine retail property values. How that interacts with Hammerson’s debt burden then determines the Hammerson equity value.

Of course, we don’t actually know what that online retail share is going to be. Some people actually like physical shopping, it’s an event, a social happening. Others don’t – it’s the mix of those that will determine that long term.

At current prices Hammerson’s shares might be viewed as an option on that outcome. They’re down near 90% from a few years ago before this issue rose to such prominence, after all, that is about options cost. Further, just like options, once the answer is known we might expect significant price movements either way, depending upon what the answer is.

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.