England’s rollercoaster at the World Cup and the latest episode in the soap opera that is Brexit may be dominating the UK property market, but for Chinese investors it all pales in comparison to the drama created by the UK-bound 45th US president.
The US has traditionally been the main focus for Chinese capital in recent years but a deterioration in international relations may refocus Chinese investors’ attention, to the benefit of the UK.
“In the past, around 75% of Chinese outbound investment was inbound into America and Australia, but now I’m sure that many Chinese businesses and investors will see investing in America as a bigger uncertainty than Brexit,” John Miu, chief operating officer at Chinese-based firm ABP, said, speaking at the latest City Property Association seminar.
“The uncertainty created with Trump – today he makes this commitment, tomorrow he makes another, forgetting what he said yesterday – is much, much more troublesome in many Chinese investors’ minds,” he added.
Aggressive stance
And it appears that the aggressive stance by Trump on foreign investment and trade has already caused Chinese investment into the US to plummet, with the National Committee on US-China Relations and the Rhodium Group having reported a 90% year-on-year fall in the value of deals for 2017.
In addition, China’s ministry of commerce said this week that the country had no choice but to respond to the latest raft of tariffs announced by Washington on a further $200bn (£151bn) of imports from the country into the US.
Conversely, Chinese investment into the UK more than doubled last year to $20.8bn (£15.7bn) compared with 2016, according to law firm Baker McKenzie.
This tranche of investment from China has been sunk most notably into UK property. Some £6.4bn was invested by Chinese investors in central London last year, with a further £2.5bn put into the capital so far in 2018, data from CBRE shows.
This investment has included the £1bn acquisition, by Hong Kong’s richest family, headed by Li Ka-shing, of 5 Broadgate, EC2, through CK Asset Holdings in June, and the Chinese government’s purchase of Royal Mint Court for its new embassy complex.
London seen as great value
Chris Harvey, partner at law firm Mayer Brown, says that for Chinese investors, which can expect to attain only a 2% yield or less in China and Hong Kong, a building in London represents great value. Trophy assets such as the Walkie Talkie at 20 Fenchurch Street, which was bought by LKK for £1.3bn last year, are being bought, he says, because they are perceived as being most resilient to downturns.
This, admits Adam Goldin, head of CC Land’s UK office, was the impetus behind his firm’s £1.15bn acquisition of the Leadenhall Building last year.
He says that CC Land always considered its London investments in the context of other global markets.
“When you look at the iconic buildings in London set against other markets, in particular Germany, France and Hong Kong, the margin in terms of yield profile and capital rates looks like good value,” says Goldin.
“The important thing for us is the maintenance of the income [from the lettings within the buildings] and increasing that income over time. That’s why we’re so keen to invest through our UK team and through our buildings to maintain their iconic status because, in these times where there is uncertainty, it’s the quality that rises to the top. As long as you can let the building, then you have income return.”
He adds: “It’s really important that we as a city continue to show that we are open for business and that the UK is the natural place for Chinese capital. I think that’s the biggest challenge as there is no one pressure to invest – it’s driven by desire, and it’s important we meet that desire.”
“In terms of Chinese investment, we’ve seen only the tip of the iceberg.”
China piles into central London
Stephen Pearson, CBRE’s executive director, says: “China’s share of inbound investment has grown over the past five years, reaching nearly 50% of the inbound capital from overseas into central London in 2017.”
“The trophy buildings that traded over the past 18 months have been powered by inbound capital from China, and while some of the yields may look relatively keen for the London market, if you look at this on a global scale and consider the global gateway cities many of these investors are looking at, it shows that there is value on a global levelin the trophy assets.
“But it’s not just core assets and long income that Chinese investors in London have been hunting for. They are moving along the risk curve – from buying residential in Nine Elms and developing Vauxhall Market through to investing in the microcosm of the City with the development of 40 Leadenhall and the planning that’s been achieved on 100 Leadenhall.”
However, Pearson warns that this capital from China “will ebb and flow with market conditions”.
“It is savvy, grown-up international capital that will react to changes in economic and political events, but I would suggest that Chinese capital is at the start of its new phase in London. I see it as a permanent resident of the London commercial market,” he adds.
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