For many international real estate investors, London is no longer the place to be. Since the UK voted to leave the EU in June, investment flows into London commercial property have dropped to less than half their level of a year earlier.
But one group of investors is proving markedly less pessimistic: buyers from China and Hong Kong, who have continued to snap up trophy assets in the City of London and the West End, largely undeterred by Brexit.
Peter MacColl, head of global capital markets at the property advisers Knight Frank, describes a "surge of Chinese money" into UK property, including cash from state-owned enterprises, corporations and ultra-wealthy individuals.
Demand from mainland China has been at least equalled by that from Hong Kong, says Chris Brett, head of international capital markets at CBRE. "At the moment, there is about £4.5 billion (€5.25 billion) of live equity targeting London from Hong Kong investors," Mr Brett says. "It's the most activity we see from any international buyers."
These inflows are helping to limit an overall decline in overseas buying since the EU referendum.
Rushed through
While total investment into London property has dropped 55 per cent since the vote compared with a year earlier, to £7 billion, Chinese investment is down only 22 per cent, to £1.25 billion, making it a much larger proportion of the market, according to data from Real Capital Analytics. And this figure does not include purchases in the process of being rushed through before the end of the year.
Beijing Capital Development Holdings, a state-owned group, is one of the latest to commit to a high-profile London purchase, offering more than £200 million for 30 Crown Place, the City headquarters of the law firm Pinsent Masons.
Similarly, last month, 20 Moorgate, a building let to the Bank of England, was acquired by Hong Kong-based investor Asian Growth Properties for £154 million.
Appetite for London real estate extends to other sectors, too. Lee Kum Kee, the soy sauce manufacturer, bought an office building in the Isle of Dogs this month, while the insurer China Life bought the Aldgate Tower in a joint venture with the Canadian group Brookfield in April for £346 million, Knight Frank says.
Chinese investments in London commercial property are part of a broader flow of capital from the country into overseas assets, prompted by the decline of the renminbi and fears of greater capital controls. At the same time, cheaper prices for London buildings, partly because of a post-referendum fall in the pound, and the likelihood of steady income, have provided a lure for this capital.
“You’ve got a pressure on the Chinese to get their money out before it becomes worth less,” says Mr MacColl, noting state monitoring of outward remittances of as little as $5 million, and draft rules to restrict large overseas acquisitions, in a bid to relieve pressure on the currency.
Hong Kong companies
Although Hong Kong companies are not subject to the mainland’s capital controls, they have also been seeking to diversify beyond their home market as the semi-autonomous territory feels the impact of China’s market instability.
For those of them who can invest in London, a drop in prices generally has combined with a fall in sterling to make London assets more attractive. “Four or 5 per cent, which is now the net yield in the City on prime buildings, is a very acceptable level of return compared to what they can get elsewhere,” Mr MacColl points out.
Chinese and Hong Kong investors first moved heavily into big UK assets in 2013, RCA figures show. In that year, they committed £3.2 billion to London property and another £960 million to regional real estate, more than quadruple the sums invested a year earlier.
Since then, they have plunged at least £2 billion a year into UK property, largely in London.
Deals currently under way include the auction of a stake in the “Cheesegrater” or Leadenhall building, marketed for about £500 million, which has attracted strong Asian interest.
Irish sell-off
Jace Tyrrell, chief executive of the New West End Company, a group that brings together retailers and property owners in London's West End, says about 15 per cent of the area is now Chinese-owned, after a sell-off of property by Irish groups hit by the financial crisis. "[Chinese investors] tend to hold for a long time in London. We don't see that much flipping," he says.
There are questions, however, as to whether this level of investment in the UK capital will continue. Tom Leahy of RCA says the "opportunistic nature" of some purchases, by groups whose UK holdings are small, suggested that the flow of capital might not be sustained.
Meanwhile, Adam Bogdanor, a partner at the law firm Berwin Leighton Paisner, warns that future investment from the Chinese mainland may be affected by the new regulations on outbound capital.
“There are rumours of new Chinese regulations imposing greater scrutiny, and therefore potentially delays, on outbound investment from China,” he says. “According to CBRE China, this is likely to cover deals worth over $1 billion – most outbound deals fall below this threshold.
“It is possible, however, that restrictions on the top end would result in Chinese investors taking a more cautious approach for particularly large transactions.”
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