Play the European recovery with Unibail-Rodamco

Dividends are the key attraction of Europe's largest and most profitable real-estate investment trust (Reit). Its shares yield 4.9 per cent - meaningfully more than shares in British Land, the highest-yielding blue-chip UK Reit. And Unibail's dividends have better growth prospects. This year management expects to grow earnings per share by at least 5 per cent (stripping out property revaluations), which looks achievable in light of the 5.5 per cent first-half growth rate.

How does Unibail do it? Chiefly, its opportunistic attitude both to borrowing money and managing its malls. Take the latter. The British Reits sign up tenants for as long as they can and then bask in the security of legal contracts. Unibail keeps retailers on shorter leases, exploiting turnover to capture rental growth and adapt to changing consumer tastes.

The success of this strategy is demonstrated by its track record of growing rental income through the recession - a period when short leases might have seemed risky. In 2010, the trough of the European slump, like-for-like net rental income in Unibail's shopping centres increased 1.4 per cent. In each subsequent year it has risen by over 4 per cent, accelerating to 4.7 per cent in the first half of 2013. This is the motor behind the group's earnings growth.

Such figures are helped by the French custom of anchoring leases to inflation. Yet indexation has accounted for less than half the growth. The rest has been created by tenant churn. The group signed 634 leases at rates 13.7 per cent above previous levels in the first half. Despite the churn, just 2.4 per cent of the portfolio was vacant in June.

How Unibail has achieved such growth through the sovereign debt crisis remains mysterious; none of its rivals has come close. It probably has to do with having very large malls in top locations - a lot are around Paris - and acting as a one-stop shop for international retailers looking to expand into Europe. Its shares are hardly a proxy for eurozone domestic consumption, yet Unibail can only benefit from the recovery apparent in last week's official growth figures.

Flexibility has also been the watchword for managing Unibail's debt, which consists mainly of bonds. Unibail has a fairly short-dated book - its average debt maturity is 5.4 years, and it used to be shorter. In theory, this is risky; in practice, it has allowed Unibail to take advantage of falling interest rates. Its average cost of debt plumbed a new low of 2.9 per cent in the first half. By comparison, British Land paid 4.6 per cent for its borrowings (average maturity: 9.9 years) in the year to 31 March - and that's low by local standards. Cheap debt is probably the single biggest reason for Unibail's superior dividend-paying ability.

Unibail also owns offices in Paris and La Défense (France's answer to Canary Wharf) and a conventions business. These are performing much more poorly, with negative like-for-like growth in rents and no improvement in sight. Fortunately, however, they account for less than a fifth of the portfolio.

A bigger headache for Unibail's shareholders is the impact of so-called tapering in the US and, eventually, Europe. When Unibail's cost of debt starts to rise, it will act as a brake on earnings growth. Rising rates may also force a correction in prime real-estate valuations. Yet this concern still seems distant and monetary tightening, when it arrives, should also reflect a consumer-led recovery that should reward mall owners.