2018, Could Donald Trump prove decisive in making or breaking Chinese investors’ fortunes in the UK?
The first five months of 2018 have seen a tailing off in the acquisitive behaviour Chinese and Hong Kong investors demonstrated last year. But US president Donald Trump’s trade war with China – and the ensuing depreciation of the yuan - together with ‘Superman’ Li Ka-shing’s £1bn bet on London, could see the re-emergence of these investors on the UK property scene.
Posted by Shipeng Fu, Qiyu Li and James Buckley on Wednesday, 18th July 2018
So far this year, many of the UK’s property investments involving Chinese companies were made from one Chinese party to another. Wanda Group sold One Nine Elms to R&F Properties; Reignwood Group sold the Corn Exchange in the City of London to Haotian Development; and Hong Kong Affluent Partners Group bought 49 apartments of Lillie Square from Capco Earls Court, half funded by the Kwok family.
Unlike 2017 when Chinese and Hong Kong capital flowed into London, this year has seen the same investors become decidedly more cautious. However, Li Ka-shing’s £1bn acquisition of 5 Broadgate in June was seen in China as a bellwether for the London market, and a compelling investment indicator for Chinese investors sitting on the sidelines.
This was followed by the family behind Nan Fung acquiring 90 Queen Street for £75m and Li Ka-shing’s attempt to buy the London headquarters of Goldman Sachs for more than £1bn.
It seems that investors are once again becoming more confident in the fundamentals behind London real estate and we expect to see more investments from Hong Kong ‘old money’.
As Chinese investors from mainland China who were expected that they will also grow their portfolios in London as Donald Trump’s US-China trade war has accelerated RMB depreciation and created anxiety among wealthy Chinese families, prompting them to increase their exposure to foreign currencies and overseas assets to safeguard their fortunes.
London property - along with undervalued sterling - ticks all the boxes. But Chinese investors would like to invest big in London property; they remain hamstrung to a large degree by overseas capital restrictions. What we expect to see is more of these investors rerouting capital via Hong Kong or Singaporean vehicles, but the insidious and lingering political pressure from Beijing to avoid such strategies cannot be overstated.
Therefore will Chinese investors remain hesitant or increase their London exposure in the second half of 2018?
Figures show Asian capital invested into City of London offices has already hit a record volume for the first half of the year, with £3.39bn transacted in the year to date, representing c.70% of the total investment volume (£4.90bn).
The fact remains that Chinese investment in the UK has dropped to its lowest level in two and a half years. Although The National Development and Reform Commission of the People’s Republic of China (NDRC) posted a ’relaxed’ amendment to its 1 March restriction to overseas investment, any potential capital easing could be offset by reluctance among Chinese investors to put their head above the parapet.
Notwithstanding the overseas regulations, Chinese investors remain among the most dominant players in Asia, as this timeline of major investments from Chinese investors in the first half of 2018 observes:
2018.01.21: Hao Tian Development Group buys The Corn Exchange in the City, for
2018.02.08: Poly Real Estate acquires Mill Hill for around £76.65m.
2018.02.23: Affluent Partners buys 49 apartments and 31 parking spaces in Lillie
Square Phase 2 for around £6.6m.
2018.03.13: R&F Properties purchases One Nine Elms from Wanda Group.
2019.03.29: Bank of China purchases 60 Gresham Street for £70.75m.
2018.04.03: Country Garden teams up with a Hong Kong fund, and purchases Ailsa
Wharf for more than £80m.
2018.05.03: Ronghe Group purchases 50% of equity from 41 Tower Hill and 12
2018.06.05: ASIA COMM HOLD buys residential apartments in South Kensington for
Since 2016, the Brexit negotiations have brought uncertainty to the property market, business, investment and the entire UK economy. Chinese investors are still unclear about what, if any, the fallout will be from the UK’s divorce from the EU from a property perspective, so are maintaining a holding pattern before the fog begins to clear.
However, with the currency advantage, Chinese investors have already been the big winners of the Brexit vote. Since the referendum, the pound has dropped massively against the yuan and such currency depreciation acts as a discount to foreign investors. Chinese buyers have benefitted from an effective discount of 15% on UK property prices.
Apart from currency advantage, many Hong Kong and Chinese investors are becoming more sophisticated in their understanding of UK property fundamentals. Experienced investors from the region now have a better grasp of the true value of a property than when they entered the market. This better understanding has led to a handful of aborted acquisitions in London.
Regarding Brexit, most Chinese investors still believe the UK is capable of running its own country and view London as one of the most investable property markets in the world.
So what is the current situation of Chinese investors and what will they do next?
Now that the US-China trade war is underway, President Trump drew up a list of $200bn worth of Chinese goods which will be subject to an additional 10% tariff. He also threatened to expand the list if China did not recant the retaliatory tariffs on $50bn worth of US goods. Moreover, Trump is planning to restrict Chinese investment in US businesses and prevent US companies from selling some high-tech products to China in an attempt to render the country inaccessible to US technology.
In retaliation to the tariffs, China not only imposed similar tariffs on US goods, but also allowed the Chinese currency to keep devaluing. By making Chinese goods relatively cheaper than others, China is able to export Chinese goods without being so affected by the trade war.
But this is not good news for mainland Chinese investors because, as the value of their assets drop, so does their purchasing power. To cushion against the falling RMB, these investors are opting to sell RMB and buy overseas assets in foreign currency, such as London properties, to prevent further erosion of their fortunes.
For investments in residential property, Chinese investors have traditionally focused their efforts on new build acquisitions.
Editor: Judy Smith