Analysts are bullish on shopping centre and retail park developer Hammerson (HMSO), with Liberum describing the Real Estate Investment Trust (Reit) as the perfect play on the UK’s economic recovery.

Indeed, the £4 billion cap’s earnings, EPRA net asset value (NAV) and dividend were all ahead of forecasts in 2013 as Britain pulled clear of the double-dip recession in the wake of 2007/08’s financial crisis. At 566p the firm is trading at a slight 1.2% discount to its 573p EPRA NAV per share, when the majority of Reits trade at a premium (see below). As the UK economic recovery gathers pace this NAV discount should close, while the value of the firm’s £5.9 billion estate grows, creating a double-whammy for investors.

Pipeline power

Another factor in the group’s favour is its pipeline. The company has started new shopping centre developments in Leeds and France along with its ongoing projects, and as these developments come to fruition they should boost the value of the Reit’s estate.

While the £2.2 billion of net debt could be a concern for some, compared to shareholders funds of £4.1 billion, and equivalent to gearing of 54%, the firm should be able to carry these borrowings without too much fuss.

Compelled by their Reit status to distribute 90% of earnings as dividends, in order to avoid corporation tax, it is possible to get the size of these firms’ valuations by comparing their prospective yields to that of others in the sector.

Certainly Hammerson’s development plans underpin forecasts for a respectable growth in the payout this year, with a prospective dividend per share of 20.5p, up 7.3% on 2013’s 19.1p The company’s ongoing projects are forecast to generate £172 million a year in rent when completed.

Capital decision

With 2014’s 20.5p payout equivalent to a yield of 3.6%, Hammerson ranks about mid table of the big Reits in terms of its dividend attractions (see above), just ahead of the 3.1% yield being promised by Land Securities (LAND), but short of the 4.1% that British Land (BLND) is expected to yield.

While both NAV and yield are equally useful measures of a Reit’s valuation, at this point in the economic cycle any additional capital gains achieved as a NAV discount closes should more than make up for the yield relinquished. This is especially true when you consider that British Land is trading at a premium to its NAV approaching 18%.

At 566p Hammerson’s discount to NAV make it an interesting proposition when many names in the sector are trading at a premium.