National security law is unlikely to spark a surge in UK property investment among Hongkongers

Hong Kong investors’ appetite for deals will be determined by how Britain’s property market adjusts to the Covid-19 shock rather than political developments
While there are signs UK property, in particular the London market, has been attracting more interest, expectations of a sudden surge in investment are overblown

Nicholas Spiro

Published: 1:00am, 7 Jul 2020

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Beijing’s imposition of a draconian national security law, which prompted the British government to introduce a new path to citizenship for some 3 million Hong Kong residents who either hold a British National (Overseas) passport or are eligible for one, could boost demand for residential property in London.

Camilla Dell senses an opportunity. Dell, the managing partner of estate agency Black Brick, noted that, “over the past 18 months or so, we’ve already seen growing interest in London as wealthy Hong Kong residents make contingency plans. We now expect that trend to accelerate.”

The combination of a cheaper pound, a fall in capital values since the market peaked in 2014 and the new residency offer is likely to provide a boost to demand. Some Hong Kong buyers’ requirements are changing from a pure investment focus to properties that would also suit them to live in.

In a sign of the extent to which many residential agents and developers believe the security law and newly proposed citizenship scheme will spur demand for property in Britain, even some housebuilders in regional cities have started receiving more offers from Hong Kong buyers.

“Over the past few weeks, local agents [in Hong Kong] have been calling us non-stop to find out if we’re ready to launch a new UK product. We just sold five units [to Hong Kong buyers] but could have easily sold 50 or 60 over a weekend,” one Manchester-based developer said.

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However, while there are signs UK property, in particular the highly prized London market, has been attracting more interest from Hong Kong buyers since the national security law was first mooted in May, expectations of a sudden surge in investment are overdone. There is little evidence that the law itself or the citizenship scheme is a catalyst for increased buying activity.

First, the narrative around the law and the scope for emigration and capital flight are misleading. In financial media, the portrayal of the legislation tends to reflect the concerns of Western governments and investors. Yet, in Hong Kong’s business community, fears about further civil unrest are at least as important as worries over the erosion of the city’s autonomy, if not more so.

Talk of a massive influx of Hongkongers to Britain is overblown. Not only is Beijing likely to take measures to discourage large-scale emigration, the debate over immigration in the UK remains deeply politicised.

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Prime Minister Boris Johnson, whose popularity has plummeted over his botched response to the Covid-19 pandemic, also has a habit of unveiling bold plans only to follow up with policies that underwhelm.

Second, the UK’s appeal as an investment destination has suffered in the past several years. The cumulative impact of the political and economic fallout from Brexit, the mishandling of the pandemic – which has left the UK with the highest number of confirmed cases in Europe and the third-highest death toll globally – and a brutal recession expected to cause output to contract by more than 10 per cent of GDP in 2020, has caused significant damage to Britain’s reputation.

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While the Central London office market continued to attract high levels of investment following the Brexit vote in June 2016, the market proved more vulnerable to the pandemic-induced lockdown because of its heavy reliance on overseas investment, particularly Asian money.

In the first five months of this year, cross-border acquisitions in London’s office market tumbled to their lowest level since 2009, according to data from property consultant RCA.

Yet, despite the shock of Covid-19, rental yields have not risen significantly. Data from Savills shows average prime yields for offices in the City of London stood at 4 per cent in May, slightly lower than a year ago. While this is higher than in Paris and Frankfurt, it is not high enough to compensate investors for the increased risks.

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“Investors should not be paying the same price post-Covid,” said Oliver Watt, a director in Savills’ London-based cross-border investment team who deals with Asian clients.

Third, unlike other Asian commercial property investors, notably those from Singapore and South Korea who have deployed significant amounts of capital across continental Europe, Hong Kong buyers have focused almost exclusively on the UK. According to data from Colliers, almost 85 per cent of Hong Kong investment in Europe since 2010 has been in London.

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While this partly explains why Hong Kong investors are more knowledgeable about the London market, it also accounts for their greater sensitivity to pricing and underlying fundamentals.

Given the more challenging real estate landscape since the virus struck and the stronger competition from domestic buyers who have not had to contend with travel curbs and quarantine measures, Hong Kong investors are likely to be even more discerning.

Some private and institutional investors see more opportunities in UK regional cities, where yields on residential and commercial properties are significantly higher and the competition is not as intense.

Since 2015, Hong Kong investors have put more money into commercial schemes in Birmingham and Manchester than in Paris or Madrid, data from Colliers shows. Yet, in comparison to London, regional markets are still highly illiquid, limiting the scope for sizeable transactions.

The UK capital will remain the favoured hunting ground for Hong Kong investors. Yet, their appetite for deals will be determined not by political developments in Hong Kong but by how Britain’s property market adjusts to the shock of Covid-19.

Nicholas Spiro is a partner at Lauressa Advisory

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