Real Estate Values Just Got Another Big Reality Check
(Bloomberg Opinion) -- The stock market’s longstanding skepticism about official real-estate valuations just got fresh support from a jumbo writedown at one of Britain’s biggest mall and office operators. Hammerson Plc’s results are yet again catching up with its depressed share price. The company resisted a takeover bid in 2018 by pointing out that its reported net asset value was higher than the offer. That defense tactic looks increasingly weak for property firms.
Hammerson ended 2019 with a 19% annual drop in its NAV, to 4.6 billion pounds ($6 billion) — or 601 pence per share — by the standard European definition. Even that reduced level is much higher than the current share price of 224.6 pence.
NAV is struck based partly on recent property sales. It’s not completely arbitrary, but it’s an imperfect measure of what an entire property portfolio might fetch. The difficulty is that it may provide too rosy a view. Hammerson resisted a tentative takeover approach from French rival Klepierre SA in early 2018, worth 615 pence a share and later sweetened to 635 pence a share. Its initial rejection went big on the fact that the proposal was a sharp discount to its then NAV. Klepierre gave up. How investors must weep with hindsight.
True, it’s not certain that a binding offer could have been agreed. Klepierre looked somewhat hesitant. Even so, a less theoretical response from Hammerson, giving more weight to the takeover’s premium to the value of its shares rather than the offer’s discount to book value, may have helped. The bidder’s final pitch was 45% above the target’s undisturbed share price. Half of the offer — some 2.5 billion pounds — would have been in cash. Hammerson’s current market capitalization is 1.7 billion pounds.
Investors should applaud management that demands bidders pay full value. No one should be better placed to put a number on the instrinsic worth of a business than its own board. That’s why shareholders tend to take their cue from the insiders when it comes to accepting or snubbing an offer. But clearly real estate is one sector where the stock market’s assessment of worth is generally highly relevant.
In fairness to Hammerson, stock markets can sometimes overdo the gloom. The share-price discount to reported NAV has been rising at the company, even though it’s been doing a good job of cutting net debt though disposals. If Hammerson gets another bid, it may struggle to build a robust defense based its NAV again. But that would be no grounds for caving in to an opportunistic offer just above the current battered share price.
To contact the author of this story: Chris Hughes at chughes89@bloomberg.net
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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