Get income from the retail recovery with Hammerson

Commercial property values have turned a corner and are now growing at their fastest rate since 2010, according to index-provider IPD. There's no reason to think Hammerson - which owns 20 shopping centres, 22 retail parks and a share of discount-luxury landlord Value Retail - shouldn't also benefit.

Rising property valuations will boost the company's book value and underpin its share price. This is particularly true as the shares already trade at a 9 per cent discount to expected year-end book value and a 15 per cent discount to 2014 forecasts. True, this is not wide by the (unusual) standards of the past five years - when Hammerson featured as our 2012 Value Tip of the Year (Buy, 362p, 5 Jan 2012), the equivalent discount was 31 per cent. But in a normalising economic world such a discount does signal value, particularly when the other blue-chip Reits (Land Securities and British Land) trade at a premium.

The prospect of a recovery in property valuations leaves investors in a position to enjoy Hammerson's dividends - the main attraction of most property companies - without worrying about the value of their capital. Admittedly, these dividends are less generous than some in the sector. For example, British Land is currently yielding 4.3 per cent even though its shares trade at a tighter discount to book value. But Hammerson's payout has greater scope to grow.

That's because the company currently generates less cash than it could. David Atkins, who took over as chief executive after the 2007-09 crash, wants to shift Hammerson's focus away from making super-profits (and occasionally super-losses) from development towards delivering regular income returns. This has involved reducing the company's cost base, which has historically been among the highest in the sector. It has also involved reducing its average borrowing rate.

Both these initiatives have further to run. At 5 per cent, the company's average interest rate is still above today's marginal cost of debt for prime property owners. It will fall as old, expensive debt packages mature. Efforts to reduce operating costs as a share of rental income was hampered last year by the sale of the London office portfolio, which shrunk the income base. But progress on this front should be easier now that rental income is due to increase.

Unusually for a property executive, Mr Atkins has set out a formal forecast for Hammerson's growth. He announced alongside annual results in March that net rental income would rise from £259m in 2012 to £320m in 2015. He expects just under half the growth from developments and extensions - above all the company's huge Terrasses du Port mall in Marseilles - with the balance coming from last year's acquisitions and organic rental growth. Combined with cost savings, this underpins expectations that earnings growth will average about 8 per cent a year out to 2015, which should feed directly through to dividend growth.

There are risks to Mr Atkins' vision. Rising swap rates may hamper the finance department's efforts to reduce borrowing costs. And with real incomes still falling, the economic recovery has yet to put extra spending money into consumers' pockets. Hammerson's third-quarter update was bullish in tone, but contained few hard signs of recovery: tenant sales were flat during the period and new leases are being signed at a discount to valuers' estimates.

Yet while the volatility of large-cap property shares since May reflects valid fears about 'tapering' and rising interest rates, we're inclined to think it represents a good long-term buying opportunity. In the case of Hammerson, the shares are down from a 557p May high. Any negative pressures should be offset by improving investor confidence and, eventually, a recovery in shop rents. Hammerson's valuations sagged in 2012 and in the first half of the current year despite ever cheapening debt rates. They could equally rise even as debt rates climb.