In the first of a four-part series comparing the real estate systems in the UK and China, Rob Thompson highlights some of the potential surprises that lie in store for Chinese investors over here
The UK property market, especially London, has long established itself as an attractive investment location for foreign investors from all over the world, with the latest surge in interest coming from China.
A number of factors, including the established legal system, stable economy and secure political environment, have resulted in the UK being ranked 10th overall in the Global Competitiveness Report 2015-2016 and fourth in the world in terms of its capacity to attract talent from abroad. As a result, it is widely regarded as the ultimate “safe haven” for foreign capital.
In recent years, interest from China in various UK asset classes has risen markedly, though perhaps most noticeably in property. An estimated £3.6bn of Chinese capital was spent in the UK property market alone in 2013. This figure has been rising since then, with iconic commercial buildings and large-scale residential developments high on the shopping list for Chinese buyers.
In the commercial space, Ping An Insurance purchased the Lloyd’s Building, EC3, for £260m, China Life took a 70% stake in 10 Upper Bank Street, E14, for £795m and ABP (China) Holdings Group has launched the 35-acre development of London’s third business district at Royal Albert Dock, E16, valued at approximately £1.7bn.
The scale of residential investment is equally remarkable, with Chinese conglomerate Wanda Group building a 200m-tall luxury residential apartment building in London and PGC Capital, having already commenced its Jewel Court scheme to build 77 flats in Birmingham’s Jewellery Quarter, announcing plans to start a further three major residential developments with a value of circa £1bn.
Despite this surge of investment capital heading in to the UK, there are a number of considerations that Chinese property buyers should be aware of in order to understand fully the ramifications of investing in the UK and how these might differ from doing business in China.
What Chinese investors need to know
There are key legal issues that investors should ensure that they are well versed in, such as tackling the English taxation regime (particularly with regard to the repatriation of profits), being aware of the challenges that can arise in obtaining planning permissions when considering a major development project, and being aware of the difficulties that can arise in enforcing arbitration and litigation awards, should matters reach that point. These issues will be addressed in more detail in further articles in this series.
In addition to the legal obstacles that investors can face, there are a number of practical, social and cultural considerations that bear equal weight. As the UK property market is very different to China’s policy-driven market, it can feel extremely unfamiliar to Chinese companies and individuals looking to invest in the commercial or residential property market here. The key elements of successful investment in the UK are good local knowledge, well-researched strategies and the ability to establish strong relationships with local partners and advisers. A sound understanding of the basics of the UK property industry and the main contrasts between the English and Chinese systems will prove to be invaluable to incoming investors.
Avoiding the “China premium”
Although recently relaxed, there remain a number of restrictions on Chinese nationals entering the UK property market, as in order to invest in the UK they must first comply with their domestic overseas investment rules. This involves record-filing obligations and potentially having to obtain approvals from the Ministry of Commerce or the relevant provincial competent commerce department.
The procedures to be followed are relatively lengthy, so it can take months to receive all of the necessary approvals. As a result, Chinese buyers can often find themselves at a competitive disadvantage compared to domestic buyers. Sellers sometimes attempt to charge a “China premium” to compensate for this delay and for the risk that a particular investment may not be granted the necessary approvals. In order to avoid this premium, it is imperative that these regulatory hurdles are cleared at the earliest possible time.
Double dipping
Foreign investors coming over to the UK often find it strange that UK agencies sometimes work on both sides of investment transactions. This practice is known as dual agency or “double dipping”, where a firm of agents that is already representing the vendor on a transaction is also approached by the purchaser to act on the “buy side”.
In many countries, the firm would not be able to do this. However, in the UK, this is perfectly legal and is relatively common practice; although in order to avoid the obvious conflicts of interests that may arise here, the Investment Property Forum, in conjunction with some property agencies and investment houses, has established a protocol which sets out good practice guidelines when acting for a seller, which agents have been urged to adopt.
Chinese v English leases
As in China, a lease is a contract between a landlord and a tenant, which grants the tenant a leasehold estate. However, there are a number of differences between the operation of leases in the UK and China.
Chinese leases are much shorter; for instance, commercial leases tend to have terms of two to three years and are rarely more than five years. In the UK, commercial lease terms vary from periods of five to 25 years and usually entail the payment of full market rent which is reviewed (usually every five years).
In addition in the UK, long “valuable” leases granted for 99 years are common, and it is not unusual to find leases for 999 years. These leases are more akin to buying a freehold property and, as such, a large capital sum is paid when the deal completes and only nominal rent is paid for the rest of the term.
The way in which rents are determined on renewal is also very different. With real estate values subject to sharp increases in the major Chinese centres, including Beijing, Shanghai, Guangzhou and Shenzhen, tenants can be exposed to sharp increases at the whim of the landlord when their leases come to an end, unlike in the UK, where there is greater statutory protection for the tenant. In addition, due to the short length of leases in China, rent review provisions are rare. In the UK, however, specific rent review mechanisms are more often than not included in leases.
It is also worth noting that in the UK, foreigners and nationals are also able to buy freehold land. Although the Crown is the ultimate owner of all land in England and Wales, a purchased property will not be expropriated by the Crown after a certain period of time, as it can be in China.
Rights of light
The skyline in many English cities is very different to the jungle of skyscrapers typically seen in some Chinese cities. Planning controls and regulations in the UK play a part in this, but so do special rights that can seem extremely unfamiliar to foreign investors, such as rights of light.
A long-standing building owner has a legal interest to enjoy sufficient natural light through a window, skylight or glass roof. To the unwary, these rights can have a significant impact on development and it is essential that these rights are borne in mind from the outset when contemplating a new multi-storey development or tower, especially in a built-up area. When surrounding buildings are in close proximity to the proposed new development, neighbouring landowners can obtain injunctions to prevent their rights to light from being undermined or may be awarded significant compensation if these rights are infringed, which can affect the overall viability of the development. Investors should therefore ensure that they are well advised of the implications of these rights.
The sky’s the limit
Despite the challenges that Chinese investors may encounter when entering the UK property market, there appears to be an ever-increasing appetite to own UK real estate and a new generation of astute, wealthy Chinese investors seeking high capital returns is set to increase the demand for prime commercial and residential property in London and in other regional cities like Liverpool, Birmingham and Manchester.
Projections as to the level of future investment in UK property will, to some extent, be dependent on the state of the domestic economy in China, which has of course been facing its own challenges in recent months. However, this wave of investment is set to gain even more momentum and, on current projections, Chinese property buyers will have invested almost £10bn in the UK property market by 2020.
Rob Thompson is head of real estate London at Irwin Mitchell LLP
See Estates Gazette on 26 March for an in-depth look at the UK tax regime for Chinese investors
