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Investor Banks on ‘Googles, Facebooks' to Aid London Office Bets

  • Kempen fund manager positive on Derwent London, Great Portland
  • Tech, media companies seen continuing to thrive in London

A fund manager who piled into battered London office property landlords after the Brexit vote is looking for his wagers to continue their bounce back.

Egbert Nijmeijer, who helps run the 375 million-euro ($442 million) Kempen European Property Fund, sees shares of Derwent London Plc climbing by another 10 to 15 percent relative to its U.K. peers. The real-estate investment trust (REIT) is set to benefit from an exposure to London’s technology and media companies as Brexit-related job losses hit the financial sector, according to Nijmeijer. Tech and media are among fields that will continue to thrive in the capital after the U.K.’s exit from the European Union, he says.

Derwent dubs itself “London’s creative office specialist” -- it owns properties in the West End as well as in East London’s tech district. It was the worst-hit British REIT in the two days after the Brexit vote, plunging 34 percent, and isn’t yet back to where it was despite having advanced 23 percent since.

“The Googles, Facebooks and LinkedIns of this world will not leave London,” Nijmeijer said by phone. “We don’t think the London office market will collapse -- although we underwrite the risk of job losses as a result of Brexit, those job losses will be mostly in the financial and insurance industry. The positive story about London is and will continue to be tech and media.”

Analysts and investors have been divided in their outlooks for London office properties in the aftermath of the referendum. Green Street Advisors LLC has said values may fall by as much as 20 percent within three years of the country leaving the EU, while Citigroup Inc. has argued the sector is pricing in an “elusive” crash. Credit Suisse Group AG this week upgraded its ratings on Derwent and Great Portland Estates Plc to outperform, saying both operate in markets with robust occupier demand.

Nijmeijer, who recently added to his position in Derwent, also owns Great Portland, whose shares are up about 12 percent since their post-Brexit plunge. The Central London property specialist said in a recent trading statement that tenant interest remains healthy across its portfolio despite macroeconomic and political uncertainties. Earlier this year, it sold Rathbone Square, an office and retail development in the West End, for 435 million pounds.

Attracted by an abundance of skilled young workers in London, some of the largest global technology companies including Apple Inc. and Inc. have leased new offices in the city. Facebook Inc. is in negotiations to occupy a new office close to the planned headquarters of Google, people with knowledge of the matter said last month, as the firm prepares to ramp up its U.K. workforce by almost 50 percent.

But while tech firms’ interest in London may be rising, so is demand for flexible office space. Office-sharing giant WeWork Cos. is already challenging the city’s property establishment and boosting competition: British Land Co., the U.K.’s second-largest REIT, has started a new flexible workspace brand called Storey. WeWork currently operates 17 London locations, with two more opening soon and a further 10 announced.

Still, Nijmeijer is sticking to his bets for now. While the “mispricing” in Derwent London and Great Portland shares has somewhat abated over the past year, he said, the stocks likely have more to go.

“It’s important to understand that certain REITs in London still look very decent and at the same time share prices are heavily discounted and offer an attractive valuation point at this point in time,” the investor said.

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