Hammerson looks a bargain

The reason its shares are cheap is no secret. The bulk of Hammerson's portfolio is shopping centres and retail parks in the UK (73 per cent) and France (27 per cent). That's a tough place to be, as the company's latest trading update showed. Footfall and sales in its UK centres were down 1.9 per cent and 3.8 per cent, respectively, against the prior year – and the fall was even worse in France, which also brings Hammerson exposure to the euro.

There were mitigating factors – last summer's riots disrupted trading in the UK, and the French summer sales were brought forward to June – but few commentators expect these figures to have turned positive in the final quarter.

Yet there's cause to be sanguine: the decline looks cyclical, not structural. True, British shopping habits are changing, with spending moving away from high streets to glitzy shopping centres. Retail chains can therefore comprise fewer shops than they used to – as few as 80 outlets, compared with 220 five years ago, according to one estimate. That's bad for the retail property sector generally, but Hammerson should be insulated from this trend as it owns mega-malls in major cities, such as Cabot Circus in Bristol and the Bullring in Birmingham.

Recent letting statistics suggest retailers are competing to get into its centres. The company signed 18 long-term UK leases in the third quarter at rents 5 per cent above surveyors' estimates and the picture was similar in France. At 2.9 per cent, its portfolio vacancy rate is also very low. All the blue-chip listed property companies claim to own 'prime' assets, but this seems true of Hammerson.

Owning prime assets has been vital to performance since the crash, and will probably continue to be. While mainstream commercial property has failed to recover – and now looks likely to fall again – institutional investors have been eager buyers of top-quality shopping centres, which offer large and reliable income streams. The easy revaluation gains have already been won, and prime property values will probably be flat this year. But, given the competition for reliable income among investors, falls in Hammerson's portfolio should be marginal.

Of course, investors who lived through Hammerson's £584m rescue rights issue in 2009 may bear it a grudge. Like the other big real-estate investment trusts (Reits), Hammerson entered a devastating property crash with a misplaced sense of invincibility, which left shareholders extremely exposed.

Yet the company's risk profile has fallen under new chief executive David Atkins. It makes sense for Reits – which pay no tax on rental income – to be unglamorous, low-risk rent collection vehicles rather than speculative developers. But Hammerson is the Reit that has taken the most steps in that direction. It is whittling away at its management structure and expects administration costs to be £3m lower this year. After some sensible asset sales into the 2010 bounce, its balance sheet is strong with £2.2bn of net debt, giving a loan-to-value ratio of just 37 per cent.

Management has also banned speculative development. Hammerson is currently building just one shopping centre – the Terrasses du Port mall in Marseilles, which is 56 per cent pre-let. That means it is committed to just £305m of development spending – less than 12 per cent of its market capitalisation. True, the company is also likely to start a major new office complex in the City. But it won't press the start button until it has secured the law firm CMS Cameron McKenna as its principal tenant – a cautious approach that has been vindicated by the worsening economic environment.