Go big or go home? 2018 - and Donald Trump - could prove decisive in making or breaking Chinese investors’ fortunes in the UK

By Shipeng Fu, Qiyu Li and James Buckley - Friday, July 06, 2018 15:00

Main news image
The first five months of 2018 have seen a tailing off in the acquisitive behaviour Chinese and Hong Kong investors demonstrated last year. But, as analysis produced by LondonKe.com’s Shipeng Fu and Qiyu Li, in collaboration with CoStar News, finds, 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.

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 Capco 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 for mainland Chinese investors, it is 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 while investors from mainland China 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.

So will Chinese investors remain hesitant or increase their London exposure in the second half of 2018?

According to Savills, 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).

Major deals included Singapore investment company Ho Bee Land buying Ropemaker Place for around £650m; Hong Kong property developer CK Asset Holdings acquiring 5 Broadgate £1bn; South Korean financial services company Mirae Asset Management purchasing 20 Old Bailey for £341m; South Korea’s Mirae Asset Daewoo and NH Investments & Securities buying Cannon Bridge House for £248m; the People’s Republic of China purchasing Royal Mint Court for around £220m; Hong Kong Nan Fung acquiring 90 Queen Street for £75m; and Korea Investment & Securities buying 70 Mark Lane in the City of London for £200m.

Yet 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 a 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 £130m.

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 41 Tower Hill and 50% of equity from 12 Moorgate

2018.06.05: ASIA COMM HOLD buys residential apartments in South Kensington for £3m.

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 20% 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.

Yet some market commentators have misinterpreted these failed sales as an indicator of a waning London market, arguing the market is undergoing a slowdown from Chinese investors. This discourages some Chinese investors and makes them hesitant about further investment. 

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.

Despite the ‘sabre rattling’ from the big banks and threats of relocating jobs to mainland Europe, all the hard evidence points to this being far less pronounced than some headlines have suggested. On the contrary, employment figures for London are on the rise, with some sectors, notably tech, creating new jobs. And as demands for both residential and commercial buildings increases, the risk of vacancy falls.

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. But why is that? Do they prefer new builds to second hand? Or is it that their inherent wealth affords them direct access to prime stock?

In fact, China’s capital controls policy once against dictates the agenda here, restricting the amount of capital outflow per person to an upper limit of $50,000 (equivalent to £37,740) per annum. Therefore, it takes a long time to collect all the money needed for these acquisitions.

To compound matters, many banks in the UK do not acknowledge the income from China, and may refuse to issue mortgages to Chinese investors, who in turn have to borrow mortgages from Bank of China or HSBC Premium and need longer payment completion period than others. Since most second-hand house sellers prefer quick transactions, Chinese investors lose their competitive advantage in buying this type of property because local buyers can proceed much quicker to payment.

A recent report by the University of York found that Hong Kong investors account for 28% of all overseas residential sales, outnumbering investors from any other countries, followed by Singapore, making up of 20.1% of all overseas sales; Malaysia, which accounted for 7.5%; and mainland China only accounts for 5.4%. 

Investors from mainland China, impeded by the capital regulation, are now seeking to invest overseas by delegating their capital to Hong Kong companies or individuals.

Therefore, there are actually two sources of capital inflows from Hong Kong to London: one is from mainland China via Hong Kong and the other is from Hong Kong families. Most of these Hong Kong families made their fortunes in mainland China after the Chinese economic reform in 1980s, and some even collaborated with the Chinese government. For example, Xiaoping Deng, leader of the People’s Republic of China in 1980s, invited a group of property tycoons from Hong Kong for a meeting, including Li Ka-shing and Henry Fok, in the hope of gaining support for the Chinese economic reform. Subsequently, these tycoons invested in hotels, office buildings and others properties in mainland China, reaping profits for the Chinese government and themselves.

More recently these Hong Kong tycoons have retreated from both mainland China and Hong Kong and have set their sights on London because they feel they are losing their competitiveness to mainland developers, such as Vanke, Country Garden, Poly, etc.

In addition, many of them are about to retire and pass their businesses on to their children. Since most of their children grew up in English-speaking countries like the UK or the US and are more familiar with Anglo-Saxon model than the model in mainland China, it seems logical that that these tycoons gradually shift their focus to London for the convenience of their children.

For the second half of 2018, whether mainland Chinese investors expand their London portfolio or not remains largely dependent on how the capital control regulations play out – and which investors are brave enough draw attention to themselves.

For Hong Kong investors, we believe that following Li Ka-shing’s investment, more Hong Kong families will join the wave and accelerate their investments in London.

Shipeng Fu is the founder of LondonKe.com, the China-UK investment media platform. Qiyu Li is an analyst at LondonKe.com.

Get in Touch
+44 203 205 4600