The Investment Column: Hammerson's promotion marks high point

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The Independent Online

Go the Hammers! Guess who won promotion to the stock market Premiership yesterday. It was Hammerson, the property company behind shopping centres including the Bull Ring in Birmingham and WestQuay in Southampton and the redevelopment of the old London Stock Exchange tower.

It has been a fantastic few seasons for property companies. Just three or four years ago, their shares were valued at typically two-thirds of the value of their assets. Now, the discount is much less or the shares even trade higher, as in Hammerson's case.

As the Bull Ring shows, it is willing to plough its cash into a new project to increase property values, rather than just sit back and hope rents and valuations will rise with the overall market.

Happily, in recent years, the market has also soared, with institutional investors choosing property, with its strong yield from rents, as an attractive alternative to shares or bonds.

This has chased the asset value of property companies higher, and the same time as stock market investors have been willing to pay higher prices for property company shares. Hammerson's entry to the FTSE 100, confirmed yesterday and to be effected a week on Monday, comes after its shares doubled in two years.

Hammerson is unusual among the four FTSE 100 property companies in having significant assets in France, where it benefits from a more tax-efficient "real estate investment trust" company structure. The expectation that this "reit" structure could be introduced soon in the UK, too, has been driving interest in the stock.

The risk is that entry to the FTSE 100 marks a high point rather than a new era. Property investment is less attractive at these high valuations, although equities and bonds are arguable still poor alternatives. More worrying, a prolonged consumer downturn could put pressure on the rental value of Hammerson's retail sites.

At the risk of spoiling a party, we would recommend shareholders take this opportunity to lock in profits from the recent share price surge.

Northumbrian Water's confidence and dividend pledge makes it a buy

Northumbrian Water is back up with the pack. After having the lowest dividend in the water sector, it has made a bold promise: a dividend increase of at least 3 per cent on top of inflation each year for the next five. That should take its yield up to the average.

It is not just the size of the promised divi that propelled Northumbrian's shares 7p higher to 204p yesterday. It is what the promise says about the management's confidence in the business and its finances. The City has long been worried Northumbrian has higher debts than its rivals and worried about its ability to finance them if there are any hiccups in the main water business. The dividend pledge, made after some innovative refinancing of the debt over the past year, is about as strong a signal as the management could make that the City is wrong to fret too hard.

Although Northumbrian, in common with most water companies, set up its related services businesses as separate entities, these businesses - which include environmental consultancies and water testing - are only small contributors to profits and to the growth potential of the group. So Northumbrian stands or falls by the efficiency with which it is able to implement the £1bn infrastructure investment that it has promised the regulator for the next five years.

Happily, the industry has been allowed to raise water bills upfront to pay for the investment, and Northumbrian has also been given extra leeway to allow it to pay extra contributions to its pension fund.

Although the shares are higher risk than most in this solid sector, they represent a good all-round investment. Buy.

Wincanton believes it is insulated from consumer spending slowdown

A dividend yield of 4.5 per cent ought to underpin Wincanton, the warehousing and haulage business, as its core UK market enters a more difficult economic patch.

The company believes that because a good half of its business is moving stuff around for supermarkets and food producers, it ought to be insulated from any slowdown in consumer spending on more expensive luxuries. In the UK, which accounts for about 84 per cent of operating profits, it also tends to have long-term fixed-price contracts with its customers, which will be unaffected by reduced volumes of goods going through the system.

In continental Europe, where economies are already depressed, Wincanton does have volume-sensitive contracts and could benefit if there is an upturn. But the real test in Europe is strategic: can the company build critical mass and persuade its multinational clients to use it across several countries. It has had only limited success so far and it needs more acquisitions to make progress.

The pipeline of new business is growing, the company said yesterday, but the next financial year might show no operating profit growth at all because one client has said it wants out of a major contract. The shares look fairly valued and, at 250.5p, are a hold.