06 March 2018
In my previous post I commented that, so long as the spread between treasuries and yields remains as is, commercial real estate in the UK will likely continue to be an attractive asset class for many investors; despite the impending capital gains tax (CGT) changes and continued uncertainty around Brexit negotiations. For foreign investors such as those in the Far East, there is a further reason to deploy capital to this market: the weak pound.
The results of the UK’s EU membership referendum in June 2016 do not appear to have acted as a deterrent for Far Eastern investors and since then we have seen Chinese investment comprise some 32% of total investment in London real estate to November 2017 (up from approximately 3.4% in 2012). Some of the biggest purchases of 2017, the ‘Walkie-Talkie’ and the ‘Cheesegrater’, were funded with Chinese money.
China has over $3.1trn in reserves, but it is also notoriously difficult to extract capital under the watchful eye of the Communist Party of China. Cushman & Wakefield (C&W) predict a drop of up to 40% in Chinese outbound investment in global real estate in 2018, as many investors are facing real difficulty in obtaining foreign currency and necessary clearances. It seems, however, that many of those who are successfully able to extract capital are then deploying it into real estate in the UK and Europe.
In 2017 we anticipated a drop-off in Chinese investment into US real estate and this is borne out in C&W’s latest figures showing Chinese investment in US real estate dropped 75% that year. Along with the US, Australia and Canada are also expected to experience a reduction in Chinese investment. Meanwhile, mainland Chinese investors put $42.2bn into the UK and Hong Kong real estate markets last year. With capital still needing to be deployed, the UK, together with the rest of Europe, is likely to continue to attract capital. Industry commentators suggest that interest in logistics and infrastructure is likely to remain strong while the historic attraction of ‘trophy’ assets is likely to wear off – although notably hotels still feature regularly on our Chinese clients’ wish lists.
China is not alone in looking to real estate to generate solid returns; in April 2017, the Japanese Government Pension Investment Fund announced that it would allocate 5% of its significant $1.3trn fund in real estate; an impressive $65bn now also in the market place. It is highly likely that other pension funds from the region will follow suit, with the UK, and London in particular, poised to do well as pension money follows other Japanese investors already active in this market.
In addition, deployment of capital from South Korea is set to increase again in 2018, having slowed slightly in 2017. It seems that real estate debt rather than direct assets continues to be the preferred route to market for these investors, while bond and other treasury yields remain compressed. We have seen a number of the large South Korean insurance houses active in this space, providing long-term loans backed with UK situs assets.
In light of the recent uncertainty following the Brexit referendum result and proposed CGT changes, it is encouraging to see such continued interest in the UK market from such significant overseas players.
Paula Thompson is a director with First Names Group and part of our international real estate team. Paula specialises in structuring for the acquisition, development and holding of commercial real estate across a wide variety of property classes.
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