As the Chinese economy slowed to an 18-month low last quarter, local investors and developers are increasingly eyeing overseas property – with the UK at the top of the list. But could a lack of market intelligence and anti-foreign narrative from UK politicians and media put them off? Helen Roxburgh reports from Shanghai, where an inaugural summit is marketing the UK property sector
In a conference hall at the Mandarin Oriental hotel in Shanghai, Chinese real estate experts are furiously taking notes. As sessions switch between English and Mandarin, delegates listen through translation devices, snapping bilingual slides on smartphones for later reference. And after every presentation, crowds of interested parties swarm the speakers, desperately trying to get their hands on business cards and tailored advice.
This was the scene last month at the inaugural RICS Future Cities Summit. Hosted by RICS and Savills, day two of the event focused solely on marketing the benefits of investing in UK real estate. And with more than 400 delegates – including representatives from some of China’s biggest developers, including Vanke and Hong Kong Land – looking for insights into the intricacies of the UK property system, there was a clear demand for that information.
At this end of the overseas investment route, it’s easy to imagine reams of Chinese investors and developers following stories of previous returns and safe property assets to the UK without too much of a second thought.
In fact, many prospective Chinese visitors feel they still don’t know enough about the market and are after insider information, reassurance and guidance. Especially as they start to consider a wider pool of assets outside of the trophy commercial properties they have traditionally honed in on.
So what is their current understanding of the UK property sector? What are they looking to invest in next? And how much more should we be doing to pique their interest with overseas marketing drives – especially in the wake of anti-foreign investment rhetoric which has led some Chinese investors to think seriously about continued investment in the UK?
Pent-up wealth
As the Chinese economy slowed to an 18-month low at the end of the first quarter of 2014, investors have increasingly been looking to diversify their assets. This, combined with an increasingly open government policy has seen Chinese investment into UK real estate soar by 124% in the past year, from $2.9bn (£1.7bn) in 2012 to $7.6bn in 2013, according to Jones Lang LaSalle figures. Key projects include ABP’s purchase of the Royal Albert Docks and Greenland’s acquisition of two development sites in Wandsworth, SW18, and Canary Wharf, E14.
Mark Cho, China chief executive of pan-Asia private-equity real estate manager Limetree, says: “It’s all about diversification. There’s so much pent-up wealth here, we will see more and more Chinese money going abroad. They want to try something different, and aspire to be a global brand and not just a Chinese brand. This is a trend that will continue for the next 10 to 20 years.”
Alistair Meadows, head of the international capital group for Asia-Pacific at JLL, says it is the “pace of change that has been quite startling”.
“We have seen a real shift in gears in the past 12 months, in terms of both the volume and diversity of Chinese capital tied to the UK,” he says.
“I would categorise that into two camps: Chinese institutional capital, in particular from the insurance groups, that are seeking core, stabilised office investments, and the second camp of large developers, looking for mixed-use residential-led sites.”
London love-in
As a global financial centre that bridges both US and Asian time zones, it’s primarily London that is piquing interest.
“Why London?” asks Clement Lau, head of development and valuations at developer Hongkong Land. “It has a very good infrastructure in terms of tax, the legal system, the cost system and monetary policy, so as an investor we would feel free and safe to make an investment decision without intervention from the government or any sudden policy change that might drive business away.”
Other real estate experts are quick to agree. Goodwin Gaw is co-founder of private-equity fund manager Gaw Capital, which debuted in London in summer 2012, backed with Asian money.
“When people say, ‘Why not go to New York instead?’ I say, ‘It’s very simple: tax.’ The UK is very friendly for foreign investors. And there’s more – if I view a building in New York, the lease is typically 10 years. In London, it’s a different game.
“What you see is what you get in London,” Gaw adds.
The UK government is very keen to build on this reputation as a safe pair of hands. UK Trade & Investment has offices across China, ready to offer advice on visas, legal issues and trips for interested investors.
“The UK government welcomes investment from China in all forms,” says Georgina Watts, deputy head of inward investment for China at UKTI. “The UK legal framework is the most robust in the world, and so the stability and certainty of your investment is given over a period of time. We are the foreign exchange capital of the world. The tax system is very competitive, and we are working to make it the most competitive in the Western world.”
Testament to the importance of the UK-China relationship is the fact that ABP chairman Xu Weiping had to drop out of the conference to accompany Chinese premier Li Keqiang on a trade trip to the UK. Political support from London mayor Boris Johnson and the UK government are seen as extremely important.
Aside from long leases, other benefits in the UK commercial property market include upward-only rent terms, secure tenants and the fact that both sides are typically represented by professional advisers in any deal.
Communication breakdown
But what about the other side of the coin? Attending the Shanghai conference, it soon becomes clear that there are pitfalls to be navigated.
“There are still a lot of investors that don’t know a lot about the UK,” warns Tony Ho, deputy director of RICS North Asia. “How do they know the best property or understand the legal system? This is the information that is not readily available here in China.”
Understanding the planning system also requires a change in mindset. “Laws in the UK are very straight – yes, or no,” says Albert Lau, head of Savills China. “In China, sometimes, you can negotiate with government.
“Public opinion is also very important. You have planning consent, public hearings – in China we have this, but compared with the UK it’s a small part of the process. These are the types of risk Chinese businesses need to understand.”
For some developers, the investment is not appealing enough. Singapore-based developer Mapletree has investments across Asia, but has not yet been tempted into the UK.
James Ng Boon Chye, general manager for Mapletree Investments in Mining, China, says: “When we invest in another country, one of the most important factors is scalability. If we invested in only one project in a particular country, it would not be very efficient in terms of resources and corporate cost.
“So far, we have reviewed quite a few markets and taken a view that those markets are not scalable.”
And it isn’t only assessing the system that could throw up problems. High-profile investments involving international capital has led to a deluge of anti-foreign rhetoric in the British press, particularly in relation to residential property, with columnists lamenting that UK buyers are being priced out of the market. Johnson has now said developers must market homes to Londoners on an equal level with overseas buyers.
“If this sentiment rose to a more alarming scale, we Asian investors would start thinking, ‘Is London still the right destination for my money?’” says Clement Lau.
“Any investor, when they make decisions, will look at the sentiment of the locals towards the foreign investor. I think there is concern here about the British saying there may be too many foreign investors coming into London.”
“The UK is competing for global capital alongside the US and Australia,” says JLL’s Meadows, “and without the key message that we are open for business and we welcome Chinese investment, there’s a risk that capital will go elsewhere.”
“If the British government feels that Chinese investment is welcome, there are a lot of things it can do,” adds Albert Lau. “It depends how widely they want it to happen.”
Paving the way
A range of measures have been suggested by Chinese developers that they believe could potentially help ease the way for Chinese investors. Goodwin Gaw isn’t the only investor to cite the tax system as the main attraction for Chinese investors. But tax changes will see overseas owners of UK property charged capital gains tax on sales for the first time from 2015. Many Chinese investors agree the tax system is a huge plus for the UK; moves to make it more expensive will potentially deter investment.
Continual improvement to the visa system also ranks highly on developers’ wishlists.
But much smaller issues make a big impression, too. Hotels in London are viewed as expensive and scarce. The lack of cultural understanding about China is cited as a problem, together with low levels of Mandarin speakers and a fairly negative portrayal of the country overall in the UK’s media.
One way to navigate anti-foreign investment feeling can be to partner with domestic developers: a model taken by China’s largest developer by revenue, Vanke, in other countries.
Tom Zhang, manager of strategic investment and business development at Vanke Group, says: “Although we’ve been in the Chinese market for more than 30 years, we are still the new guys in a foreign market. And that’s why we are a little more cautious than some of the other Chinese developers in terms of international investment.
“We always want to work with a local developer; we believe they have been there a long time to understand the market, they have the customer base, and we want to work with the best in international cities.”
Developers such as Vanke can also market schemes to their huge customer base in China. “When we go out of China we want to focus on the middle market, the core demand,” Zhang adds. “That’s our strategy – it’s the same as what we do in China and the US.”
This partnering approach throws up challenges for property agencies.
“A lot of the work we’re doing now is working to marry London developers with Chinese partners. That is an art and a science,” admits JLL’s Meadows.
Opportunity knocks
Despite concern over the negative view of foreign investment, the general mood among those at the conference is that there are too many opportunities to be taken up in the UK to put off investors. Particularly for sophisticated developers such as Greenland and ABP, investments into foreign markets are long-term, weighty projects that have been heavily supported by the UK government.
While soundbites from politicians cause concern, as long as they don’t feed into sweeping tax changes, they are unlikely to deter developers.
Judging by the number of business cards being swapped in Shanghai, property ties between China and the UK look set to grow.
“The UK has demonstrated a very good track record in terms of international investors,” concludes Albert Lau. “There’s virtually no government interference. If the government continues on this policy of becoming even more open, I can’t see any reason why Chinese investors won’t continue to see this as an investment market.”
Buy to learn
It’s not just the major Chinese corporates that could be reaching for their cheque books to invest in UK property. Chinese students studying in Britain and looking to buy homes represent a £1.3bn market.
A report by Language Brand Communications has revealed that 83,790 Chinese students are currently studying in the UK – a third of all foreign students – with 15,000 in London, and 13,500 in Manchester. The total has leapt from 47,035 in 2008-09. This contrasts with the Indian student population in the UK, which has fallen from 34,065 in 2008-09 to 22,385 today. Hong Kong’s London population is the only other group to have increased significantly, jumping from 9,600 to 13,065 over the period.
With a rising market share comes a potentially lucrative demographic. The report revealed that on average, 6% of Chinese students were looking at buying UK property either during or after their studies. This figure rose to 9% in London, Manchester and Nottingham.
Language managing director Ben Hui says: “I was most surprised by the number of Chinese international students planning to buy property in the UK over the next 12 months.
“I anticipated that the figure would be lower because a property is such a big purchase for a graduate. Besides, as a non-UK citizen, I thought that it would be hard for them to get a mortgage. Therefore there’s an assumption they will be buying in cash. Asset diversification and migration are often cited as the main reasons for Chinese investing in UK properties. This may mean the wealthy Chinese middle class are buying UK properties while still in China and also investing via their children studying here. I was also surprised that Manchester performed so much better than neighbouring cities such as Leeds and Liverpool.”
The London market has an estimated value of £553m from Chinese international student purchasers of all residential property, compared with £24.8m in Manchester. Much of the demand reflects far higher prices in large Chinese cities such as Beijing, Shanghai and Guangzhou, and the relative attractiveness of London property investments.
The report also stated that 7% of Chinese students in London pay more than £300 per week, with 4% paying more than £450 per week for accommodation.
In Southampton, Manchester and Nottingham, more than 7% of Chinese students pay above £300, the national average.
The largest share of those paying more than £150 per week is in London, followed by 26% in Nottingham, 21% in Southampton, 20% in Birmingham and 15% in Manchester and Leeds.
The report marks the first time dedicated market data has been gathered on the Chinese student sub-market. It reveals the increasing resources being poured into understanding and mapping out Chinese demand for UK property.
• See also – China crisis
