Hammerson, a £7 billion ($14.2 billion) UK-based property company, has sold 50% of its single largest holding as part of its capital recycling strategy. In July, GIC Real Estate, an arm of the Government of Singapore Investment Corporation, paid Hammerson £300 million for a stake in Westquay, a retail property in Southampton.
Hammerson became a real estate investment trust in January and hopes that it will be able to raise its dividend by cashing in part of its interest in Westquay and deploying the freed-up cash into higher-yielding assets.
"Against the environment of the Reit we’re trying to improve our dividend yield in two ways," explains David Atkins, managing director UK retail at Hammerson. "By selling down our interest in Westquay and reinvesting in higher-yielding assets and receiving management fees we are broadening the scope to increase our dividend yield."
This deal comes at a time when real estate stocks have taken a beating. Hammerson had been trading at a premium but the whole sector has fallen from grace over the past two months. Negative sentiment has developed mainly because of an increase in debt rates, prompting investors to price in a forward reduction in capital values.
With the reduction in its Westquay stake, Hammerson is taking money out of an asset yielding a cash on cash return of 4% and reinvesting in its development pipeline. The company is developing three retail assets in the UK in Aberdeen, Bristol, and Leicester as well as two offices in the City of London. Upon completion those assets will have an estimated cash yield of 7%.
"Another area where we’re recycling the capital is into France, where we just acquired two retail park investments," says Atkins. "Those will be yielding over 6% and the cost of funds in France is more attractive to us than it is in the UK. It gives us a significant immediate uplift from an income perspective over where the money was invested."
Hammerson developed Westquay with Barclays Capital on a 50:50 basis in 2000. It bought out Barclays in 2004 for £200 million. Westquay was Hammerson’s largest holding – roughly 10% of its portfolio. It was the only shopping centre held by Hammerson in single ownership, all others being held in joint venture with other parties. So the sale brings the asset into line with the group’s overall diversification strategy.