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Tuesday 12 December 2017

Lego family fund eyes real estate in London

Kirkbi A/S, the $12bn fund managing the wealth of the family behind Lego, sees value in London real estate
Kirkbi A/S, the $12bn fund managing the wealth of the family behind Lego, sees value in London real estate

Christian Wienberg

The $12bn fund that manages the wealth of the billionaire family behind Lego A/S wants to add more UK real estate to its portfolio, reflecting a bet that Britain's departure from the European Union might make the London property market more accessible.

"We need to keep finding targets for investments and we feel that Brexit can give some opportunities at attractive prices," Soren Thorup Sorensen, the chief executive officer of Kirkbi A/S, said in an interview. "For example, London's property market." The fund has almost $1bn in its real estate portfolio.

UK Prime Minister Theresa May formally notified the EU last week of Britain's intention to leave the EU, starting two years of official Brexit talks. The pound has lost about 12pc against the euro since Britain voted in favour of Brexit last June, amid concerns businesses will face trade barriers if talks hit hurdles. Britain's property market has also been affected, with owners of prime real estate in London struggling to find buyers.

"There is uncertainty as it's not clear which agreements will be in place once the UK leaves the EU," Sorensen said.

"Uncertainty is always bad for investments, but on the other hand, we have the financial strength which allows us to dare to take advantage of the opportunities that arise."

Other institutional investors in Scandinavia have also taken an opportunistic approach toward London's property market following Brexit. Norway's sovereign wealth fund, the world's biggest of its kind, pounced on an Oxford Street asset about two weeks after Britain voted to leave the EU, spending Stg£124m (€144m) on a retail and office property it bought from the Aberdeen UK Property Fund.

Kirkbi, based in the western Danish city of Billund, had total assets of 85.7 billion kroner (€11.5bn) at the end of 2016 and made a net profit of 13.3 billion kroner, slightly down from a year earlier. Its property portfolio, which besides London includes real estate in Denmark, Switzerland and Germany, was worth about 6.4 billion kroner at the end of 2016, according to its annual report published last week.

"We have no plans to sell the real estate we have and we are looking at new possibilities in London," Sorensen said. "We feel relatively secure about the investments we have made and we also dare to look at more investments."

Kirkbi Chairman Kjeld Kirk Kristiansen, the grandson of Lego founder Ole Kirk Kristiansen, is Denmark's richest man, worth about $10.4bn, according to the Bloomberg Billionaires Index. Kirkbi's main assets are a 75pc stake in closely held Lego as well as the toymaker's trademarks. It also has a 30pc stake in Merlin Entertainments Plc (which operates the Legoland parks), stakes in Danish firms ISS A/S and Falck A/S as well as other stocks and bonds, including some from the UK.

"Brexit impacts our investments in more than just one way," Sorensen said. "Looking at Merlin, if the pound falls, it will drag down the profits we get, but on the other hand, a cheaper pound may draw in more visitors to the UK, where Merlin has a lot of attractions. It's complex."

The UK's biggest real estate investment trusts, meanwhile, are so well prepared for a rough Brexit, they could suffer if it doesn't turn out to be all that bad.

The six largest London-focused Reits, including Land Securities Group Plc, British Land Co. and Great Portland Estates Plc, have hoarded cash equal to about a third of the total spent annually on central London office buildings, Bloomberg Intelligence senior industry analyst Susan Munden wrote in a note last week. Spending it wisely will be a challenge if Brexit doesn't cause prices to drop as much as expected, she wrote.

"The outlook for London offices remains a challenge, but losses of about 50,000 workers phased over several years could be absorbed with modest rent and value declines," Munden said, adding that: "Some UK Reits are so well positioned for the downside that they face re-engagement risks if a crash doesn't materialise."

Land Securities, the UK's largest Reit, announced in 2014 it would not start any new London offices without securing tenants in advance. Like many of its rivals, including British Land and Great Portland Estates, it has also been selling large buildings to reduce debt and raise cash for purchases when prices fall.

Brexit's impact on the London office market has been exaggerated, with deals and rents gradually declining from a 2015 peak, according to a recent note published by fund manager Fidelity International.

Banks haven't been a significant source of demand for new office space for several years and the loss of some jobs will therefore have less impact than cyclical factors such as the rising supply of new buildings in the City of London financial district, the fund manager said in an email.

Offices in the city will generate total returns, value increases combined with rent revenue, of 5.3pc a year from 2017 through 2021, Fidelity head of research Matthew Richardson said in an email.

"Medium-term performance will be driven largely by property market fundamentals rather than fallout from Brexit," he wrote.

Developers such as Shaftesbury Plc, Derwent London Plc and Workspace Group Plc will find it easier to navigate the uncertainty caused by Brexit as they typically focus on small or medium developments, which are lower risk, according to Munden.


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