Why London real estate is at the top of Chinese investors' wish lists
The acquisition of the Cheesegrater last month [March 2017] by Hong Kong based developer CC Land for £1.15bn hit the headlines of the financial and property press. Sold for 26% higher than its most recent valuation in September 2016, the deal set a record in terms of scale and capital value, making it the largest investment by a Chinese company in British real estate to date.
The Cheesegrater - a worthwhile deal for CC Land
While many commentators focus on the record-breaking aspect of the deal, what’s more interesting is the other side of the equation – what made the deal so attractive to the buyer? CC Land is a Hong Kong listed company originating from South Western China, which – as is typical of emerging capital – accumulated its wealth very quickly. Having exhausted the investment opportunities of a very limited home market CC Land was looking to diversify its wealth, and decided that the Cheesegrater was a very worthwhile deal. What you’re seeing here is a private investor, driven by wealth preservation, taking a long-term view rather than a trading position. This isn’t only true of CC Land but of other investors from mainland China and Hong Kong.
In 2016, investors from mainland China and Hong Kong represented 25% of total central London transaction volumes, compared to less than 1% in 2006, purchasing around £3.15bn of central London commercial assets in 2016.This makes them the second biggest investor in London’s commercial real estate after the USA. They too are taking a generational strategy and are seeking long-term investment opportunities.
Key drivers of Chinese investment in London
From a Far East perspective, New York and London are often regarded as the two markets with the best long-term investment potential. And, London is the winner at the moment. Let’s look at why this is the case.
Brexit certainly had an impact as it led to a sharp fall in sterling but, crucially for investors, it was driven by political events rather than an economic downturn. The softening of sterling against the dollar provided investors from mainland China and Hong Kong with a golden opportunity to sink their funds into London real estate for a discounted price, and many have been motivated to move quickly because they perceive that the depreciation may only be temporary. At the same time, recent depreciation of the Chinese yuan against the US dollar has made investment in the US a more expensive proposition, influencing many to favour the UK over the last 12 months.
More generally, a fundamental driver for market selection is a transparent and robust legal and tax system. London has hundreds of years of historical data against which to benchmark real estate property value. What’s more, the fundamentals of the London market are very solid. The market continues to experience low vacancy, and the planning process is very rigorous, limiting the potential for over-supply in future. London also benefits from a broad base of corporate demand across all sectors. All of these factors give confidence to investors that they will see a solid return over the long term.
Domestic appetite for global capital market
It’s also worth looking at the Hong Kong/mainland China dynamic. Investors that originate from mainland China, like CC Land, who list in Hong Kong can tap into the global capital market – it creates a window for them to establish a global investment portfolio. Added to that is the strong legacy that the decision-making class in Hong Kong has with the UK. Many of the important families, CEOs and senior executives are UK-educated, so they have a strong attachment to London.
Impact of China’s outbound investment restrictions
Domestic conditions in mainland China have also been creating a pent-up demand for London real estate. In Q4 of 2016 China implemented several restrictions on outbound investment. While it isn’t a complete shutdown, the government is putting in place a more thorough vetting process for overseas investment proposals. Will this slow down inward investment to London from China? My belief is that it won’t. We will still see the same volume of investment but it will be more regulated, more targeted, and from more mature, experienced investors. This is because China needs to diversify its capital internationally to safeguard its savings and manage its foreign exchange reserves. Chinese capital also needs to go overseas in order to balance the country’s current portfolio, which is mainly in the domestic market.
Take Chinese Investment Corporation (CIC) as an example. Before 2016 the property section was a sub-division in the alternative investment area. Now CIC has restructured the system making property a separate division, which shows that they are gearing up to allocate more capital to overseas property.
My view is that there are very determined market entrants, both new and more experienced international investors, coming our way. I don’t think we will have another record for 2017 but we will see a healthy volume of transaction volumes from Far East market.