New big spender in UK property market: Chinese sovereignty funds

PUBLISHED : Tuesday, 06 November, 2012, 6:34pm
UPDATED : Tuesday, 06 November, 2012, 6:34pm

Britain's property market is bracing itself for more investment by Chinese sovereign wealth funds following two big deals initiated earlier this autumn. China Investment Corporation (CIC) is in talks to buy Deutsche Bank's headquarters in the City of London for £250 million from a German investment fund. If sealed, the deal would give CIC a foothold in both of the British capital's key financial districts, because the sovereign wealth fund owns a stake in Songbird Estates, which owns Canary Wharf, home to HSBC's international headquarters.

In September, Ginko Tree Investment, a British offshoot of the Chinese government's State Administration of Foreign Exchange, bought Barclays Bank's 40 per cent stake in Britain's largest student housing developer, University Partnerships Programme, for a reported £550 million.

This could be just the start because Chinese institutions have motive and opportunity to invest more money in Britain's property sector.

The motive is provided by China's sovereign wealth funds deciding to shift some of their international investments away from government bonds and into property and other private sector investments.

The opportunity is provided by Britain's Infrastructure (Financial Assistance) Act 2012, which received royal assent on October 31. It allows the British government to guarantee £10 billion of loans to support house building. Three quarters of this fund will support institutions build homes for rent, a sector that analysts consider massively under-supplied, and the remaining quarter will support construction of low cost homes for sale. The law also provides £40 billion of loan guarantees for infrastructure initiatives.

Sources of private funding within Britain are limited with banks continuing to lend little. A Royal Institute of British Architects report suggested in October that local government pension funds finance house building, but the idea looks shaky because trade unions are against it. Against this backdrop of funding scarcity, the opportunity for Chinese institutions to finance building projects looks all the bigger.