It was in the mid-1600s that Britain first began trading with China. Silk, porcelain and tea were shipped back to London to satisfy the tastes of high society, and, in time, opium became the main export to the Chinese. Indeed, two wars were fought to establish and protect Britain’s right to sell opium, with the colony of Hong Kong among the victor’s spoils.
Fast forward a couple of hundred years and there’s no need for a war to force trade – the UK is a willing seller and the Chinese are certainly willing buyers. What has changed is the commodity being traded – opium is out; real estate and infrastructure are in.
London real estate is, of course, one of the world’s most attractive markets for investors. A stable political environment, strong and diverse economy, enforceable property rights and an openness to overseas investors are all among the reasons why the Mori Foundation ranked London first in its 2014 Global Power
City Index.
But the scale of Chinese investment here – virtually non-existent five years ago – has ratcheted up hugely since 2011, when China’s government announced an acceleration of its ‘going abroad’ strategy. The Chinese are now the largest foreign buyers of property in London, New York and Australia.
It is a trend that Pinsent Masons, through its Chinese and UK offices, has experienced first-hand, having advised, among others, ABP Holdings on its £1bn investment in the Royal Albert Dock in east London and Zhongrong on its proposed development of the Crystal Palace in south London. From the firm’s perspective, it is clear that there are three key drivers behind Chinese investment in UK real estate and infrastructure:
1. Economic opportunity
During 2012 and 2013, Chinese clients placed a significant emphasis on taking advantage of depressed western economies and the favourable currency position. Now, as the UK’s recovery becomes more stable, the emphasis has shifted to the potential for higher residential and office yields in major western cities than are generally available in China.
Office yields in the UK can be as much as two percentage points higher, while residential property benefits from a more stable environment, which contrasts with the Chinese housing slowdown.
2. Chinese regulatory policy
The Chinese government has been pursuing a “twin-track” approach, encouraging acceleration of its ‘going abroad’ strategy – including, in 2012, allowing insurance companies to invest directly in international real estate – while simultaneously directing a slowdown in residential price inflation in first-tier Chinese cities.
3. Prestige
Internationalisation for a major Chinese developer or investor adds significant cultural, as well as economic, prestige in China. The UK (in particular London), with its cultural heritage and internationally renowned university sector, is undoubtedly benefiting from being a cultural and family choice, as well as a business decision.
The scale of China’s appetite for international real estate will be a hot topic for conversations at MIPIM UK. This week, Pinsent Masons will host a Chinese
Inward Investment breakfast looking at the issues and possibilities, and the end of October will see the publication of a comprehensive report into the market, co-authored with the Centre for Economics and Business Research.
The story of Chinese investment in UK real estate and infrastructure could prove to be a key trend of this property cycle, in much the same way as Japanese purchases were in the 1980s. China’s attraction to the UK represents a vote of confidence in UK regulatory stability and economic recovery, but the onus remains on local authorities, the GLA, central government and property professionals to smooth the path and facilitate potential investment.
Richard Ford is partner and head of planning at Pinsent Masons
