Chinese conglomerate Hualing’s link-up with UK developer Scarborough Group to build projects in the northern powerhouse made them a posterchild for the new ‘golden era’ of Sino-British relations. Jack Sidders met the duo behind the £1.2bn deal
Shortly after Chinese president Xi Jinping boarded his flight home to Beijing at Manchester airport last Friday afternoon, the UK government released a list of deals that had been secured during his much-trumpeted state visit.
The £40bn roster was quietly published by Downing Street just after 6pm, a move that prompted political commentators to speculate that the government was hoping no one would scrutinise the fruits of their diplomatic labours too intently.
Among the deals was a joint venture between developer Scarborough Group International and Chinese conglomerate Xinjiang HuaLing Industry & Trade Group. The partners, the statement said, would “unlock three regeneration projects in Leeds, Manchester and Sheffield with a combined gross development value of £1.2bn”.
The deal, which was first announced during chancellor George Osborne’s visit to
China in September, was clearly seen as a great example of how global investors have been attracted by the government’s northern powerhouse agenda and will look beyond London to help unlock huge developments in regional cities.
But just how much did the deal owe to the “golden era” of bilateral relations being proclaimed by UK and Chinese officials and what does it say about the outlook for Chinese investment into UK real estate at a time when many are fearing the impacts of China’s slowdown?
In their first joint UK interview at Scarborough’s Mayfair, W1, offices, Scarborough founder Kevin McCabe and Hualing chairman Mi Enhua explain how they came together and why there really is reason to be positive about Chinese inward investment.
Political window dressing?
A detailed look at the £40bn list of Sino-UK deals heralded by prime minster David Cameron prompted newspapers to accuse the government of distortions, discrepancies and double accounting.
Examples it cited included a claimed £6bn investment to help fund regenerative medicine and tissue engineering research with Oxford University, which appeared to be the same deal announced by Oxford earlier in the week as being valued at £1.5m.
And McCabe hints that there may have been a degree of political window dressing even in the Scarborough-Hualing jv, at least in terms of the government’s actual involvement in it.
“We set up Chinese offices in 2003, in Hong Kong and Shenzhen,” he says.
“Being a UK company was quite novel in Shenzhen and that’s the way we built up contacts. We were there before the government. We’ve been there for a long time.”
In fact, Scarborough and Hualing first met via another mutual joint venture partner, Singapore-based Metro Group, with which both companies have previously worked in separate projects.
In March this year, when Hualing told Metro it was keen to access UK deals, the company was introduced to Scarborough as a potential partner, adds McCabe.
So the coming together of the two firms owed little to the current government’s active courting of the Chinese. And the £1.2bn figure highlighted by the government refers not to the commitment being made by Hualing – the specifics of which both parties declined to comment on – but to the gross development values of the three projects once they are completed.
But McCabe is nevertheless enthusiastic about the support both governments are now providing.
“Attending this week’s MIPIM UK and the China business summit was an eye opener,” he says.
“At a lot of what I’m hearing, I’m nodding my head, thinking, ‘Gosh, we could have done this years ago’.”
The event included a presentation to a delegation of Chinese investors and contractors by Deloitte Real Estate highlighting opportunities to invest in the UK. “But it is fantastic news,” McCabe adds.
“For the government to have got the bit between their teeth and sought to have this close relationship with China is great. It is exactly what our nation needs.”
Equity stakes and debt
Hualing’s commitment involves taking equity stakes in three mixed-use schemes and providing some additional debt finance that will help deliver 1.1m sq ft of business space
and up to 10,000 new homes (see box).
If the benefits to Scarborough and the UK economy are obvious, what about for Hualing? How did a company that is headquartered in Urumqi, Xinjang province – a 36-hour train ride from Beijing in the far north-west corner of China – end up picking mixed-use schemes in Sheffield, Leeds and Manchester as the best option for its debut UK investment? What about the trophy London offices that are the usual investment by first-time Chinese buyers?
“Why the northern powerhouse?” says Mi, speaking through an interpreter. “Because it is like One Belt, One Road.”
This is the modern Silk Road initiative that was launched by president Xi in 2013 to help export China’s production capacity and increase its influence in the world.
“London is already expensive and congested. And we want to do something more. We want to provide jobs and already see potential in [the North].”
The northern powerhouse brand, which the government has used to describe its efforts to devolve power locally in a bid to rebalance the UK economy and make it less London centric – appears to have caught Chinese imaginations, says McCabe.
He jokes that the way many overseas investors refer to it, like an official entity, suggests they are expecting to see signposts as they travel up the M1. But the confidence that comes with the government backing is nevertheless important, says Mi.
“I think [diplomatic efforts] are very important because if our politicians have good relationships, they give us confidence and support.
“That’s very important.
You cannot imagine two countries that have a relationship that’s not going well, with investors sitting in the middle. That would be a terrible thing.”
Such confidence is crucial, given the nature of the schemes in which Hualing is investing.
Each involves significant development risk in markets where Chinese investors have very little experience. But Hualing also draws confidence from its track record of plunging into other relatively untested locations, Enhua says.
In 2012 Hualing became the first private Chinese company to buy an overseas bank, acquiring Georgia’s Basisbank for around $100m (£65m).
It was part of a $580m investment drive into the post-Soviet state started by Hualing in 2008. The deal included a major mixed-use development scheme.
Taking on development in a trio of relatively affluent northern UK cities seems fairly vanilla by comparison.
Mi says it is the next step in the firm’s diversification, which he describes as a long-term commitment. Asked about the impact of the domestic slowdown on the company’s outbound ambitions, he suggests that volatility at home will only encourage it to go further.
Clearly, both Chinese and UK officials can provide some justification for their claims about the new era of co-operation. Whether it is McCabe’s imagined signs pointing the way to the northern powerhouse, or those marking the route along Xi’s new Silk Road, somehow a distribution company from near the Kazakh and Mongolian borders has found its way to Sheffield, Leeds and Manchester.
What is Hualing?
Established in 1988, privately owned Hualing is based in Urumqi, Xinjiang province in the far north-west of China.
It is Xinjiang’s second-largest private company and its largest developer. The group’s activities include construction, distribution, livestock and mining. It has total gross assets of around $3bn (£2bn) and a net asset value of $1bn.
Hualing’s hat trick in the North
Hualing has backed three Scarborough schemes with varying commitments.
The largest of the three is the £730m Middlewood Locks project in Salford, Greater Manchester, which will comprise 2,000 homes and 750,000 sq ft of commercial, retail and leisure accommodation including a hotel. Hualing will take an equity stake in the project and may provide a mezzanine facility, according to McCabe.
Construction of the first 560-home phase is due to start next year and work on finding a prelet for the offices is already underway.
In Leeds Hualing has backed the £500m Thorpe Park project. It will take an equity stake in the 1.8m sq ft scheme that Scarborough owns in joint venture with Legal & General Capital. The first phase of Thorpe Park consists of 800,000 sq ft of completed office, hotel and ancillary retail accommodation.
Detailed consent for the second phase comprises 935,000 sq ft of offices, 400,000 sq ft of shops and leisure and 300 homes.
In Sheffield, Hualing Group is taking an equity stake in the final phase of Scarborough’s Digital Campus project where consent is in place for two further office buildings covering 130,000 sq ft in total. Construction of the first 80,000 sq ft office phase commences on site before the end of this year. In Sheffield Hualing will work alongside Scarborough on three residential projects that will deliver more than
200 homes.
