Why London can’t take Chinese investors for granted
At the end of last year, the UK has hosted two of the most influential leaders of the global economy, Chinese President Xi Jinping and Indian Prime Minister Narendra Modi. Several billions of dollars have been agreed in investment deals, with Indian and Chinese capital boosting a number of British industries.
President Xi’s visit in 2015 had been accompanied by landmark business deals and rhetoric at the highest level hailing a ‘golden era’ for relations between the two countries. As part of this, real estate and infrastructure are clearly a key focus for Chinese investment but what will this mean in practice over the coming years? What do investors need to consider in order to maximise opportunities on the ground?
The future certainly looks bright as Anglo-Chinese deals and joint ventures continue to roll in. By way of example, Chinese investment group SinoFortone is putting £100 million into the £3.2 billion London Paramount Entertainment Resort theme park, opening in 2021. It was also announced recently that Citic Construction would build the first phase of ABP’s £1.7 billion Royal Albert Docks development in London.
Some have questioned the outlook for investment in light of the slowdown of the Chinese economy. However, macroeconomic headwinds can actually work in favour of the property industry. Already, Chinese investment into UK real estate has proved something of a lifeline for both parties. Chinese players have provided welcome investment to the UK-built environment sector during hard times for the British economy.
For Chinese capital on the other hand, UK cities have been a much-valued safe haven, particularly given the recent stock market volatility and devaluation of the yuan. As a result, even with UK commercial property yields back down to 2007 levels, the country remains well placed to attract renminbi from those in search of a safe and liquid investment.
However, Chinese investors will also be looking for a more diverse range of assets. Traditionally, investors have focused heavily on ‘trophy’ assets, often prime London office blocks, but research indicates that leisure and industrial investments are increasingly on the agenda.
London remains by far the most popular destination for all foreign investment into the UK, real estate included. However, the UK government has been vocal about its desire to drive growth in the north of England. This ‘Northern powerhouse’ project is still in its infancy but could stimulate interest in the area as property investors start to consider opportunities in higher-yielding regional centres.
The momentum is seemingly well under way, with Manchester becoming the gateway for investment to the north. Beijing Construction Engineering Group’s investment into the £800 million Airport City expansion project in 2013 started the process. In September this year, a commitment of £730 million was made by the Chinese, to build 2,000 homes on a brownfield site in Salford, while Hong Kong-based Peterson Group is set to invest £300 million into the Great Northern development.
Right now, however, London’s real competitors are other major gateway cities from New York to Sydney. Investors are keen to diversify their portfolios and these locations all play their part in the equation for reliable returns. Few doubt that Chinese investment is part and parcel of the UK’s property market, and increasingly Europe, too. Markets closer home, notably Tokyo and Seoul, remain very much on the radar, too. The bottom line is that each region must be at the top of their game to retain their piece of the pie. London cannot take its share of Chinese cash for granted.
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For some time, London’s pull has been strengthened by the English legal framework. For instance, long leases are common in Britain which offers greater security of income. Market dynamics are somewhat different in the Asia-Pacific region, where comparatively short leases of between two to five years are more widespread.
The prospect of steady income is particularly appealing at a time when Chinese growth prospects are looking less certain.
However, London is not unique in offering an attractive legal system. China’s savvy investors will certainly be doing their research on other European jurisdictions to find the best deal and could find much to their liking in Germany, for example
In many ways, China and the West are undergoing a role reversal. For years, China was the undisputed powerhouse of global growth. Yet more recently, China has been slowing, while countries like the UK have recovered relatively quickly from the impact of the financial crisis.
In 2016, the smart investor will look for diversity across different asset types and geographies in the face of global economic and political uncertainty. Real estate, and particularly UK real estate, has long been a core part of global investment portfolios and this is unlikely to change in the foreseeable future.
Deal after deal proves that Chinese state-owned and private companies see the UK as a hugely attractive place to invest. So long as investors have a level of certainty about the scale, cost and timings of any project, Chinese capital will continue flowing into Britain’s capital.
James Knox is partner, real estate, at Berwin Leighton Paisner