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07 November 2014
With significant capital flows moving from China and other high-growth economies to key real estate markets around the world, what are the implications for UK real estate?
The slowdown in the Chinese economy ranks among the key drivers of the exodus of capital from the country. In China, real estate is seen as an ideal investment instrument for avoiding inflation and market fluctuations. The Chinese have accumulated tremendous capital in recent decades to deploy on good investment projects, while the Chinese government is encouraging outbound investment with a wave of deregulation.
London has been the top destination over the past few years for the growing number of Chinese investors and developers looking to European markets for higher returns and strong growth, and UK government support provides further encouragement. The UK government was the first outside China to issue renminbi bonds and the presence of seven Chinese banks in the City of London reflects the commitment of Chinese investors to the UK market.
The exodus of Chinese capital is underpinned by a need and desire for diversification. The United Kingdom is seen as a safe haven for investment, thanks to its political and economic stability – in particular, its well-developed legal system and the minimal impact of regular political events such as elections. International standards, of which the Chinese have a thirst for knowledge, and a strong growth profile are also key attractions of the UK market.
Asian investors are as diverse as those of any region, each with their own objectives and constraints. Chinese investors include the following key players:
The London office market is often the landing spot for overseas investors entering Europe, but once they have gained a foothold a proportion will target other prime European locations and diversify into other real estate sectors. To enter the retail sector in a big way, such as with a shopping centre, the investor will need a management platform, so will likely be looking for a local partner.
Chinese residential developers such as China Country Garden often target 'gateway' cities with large Chinese expatriate or student populations in order to capitalise on brand recognition among the Chinese population.
Most investments are structured through holding companies in intermediate jurisdictions for a variety of commercial, regulatory, financing and other reasons. Tax considerations will influence the choice of location, including the existence and terms of double tax treaties with the host jurisdiction and China, as well as transaction taxes. The Channel Islands in particular have practical advantages for investments in the United Kingdom and Luxembourg offers additional flexibility for some investors.
The differences between UK and Chinese organisational structures can be important in the context of negotiations. It is important to:
Many branches of influence, both inside and outside the organisation, can affect the outcome of a negotiation. Motivational factors are not always transparent. Face time is critical throughout the negotiation process.
The UK market may see knock-on effects from other European markets. For example, the German market has traditionally been dominated by indigenous investors and is known for its stable and tight yield environment; but these domestic investors now face competition from Korean, Indonesian and Chinese investors, to the extent that yields are being forced down and German capital is revisiting London and the rest of the United Kingdom.
For now, the injection of funds into the UK real estate market presents vast opportunities to be seized. The scale and success of the real estate players in China over the past decade and the pressure for diversification mean that the wave of investment into UK real estate is only just beginning.
For further information on this topic please contact Bryan Pickup, Heather Corben or Darren Rogers at King & Wood Mallesons by telephone (+44 20 7111 2222), fax (+44 20 7111 2000) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The King & Wood Mallesons website can be accessed at www.kwm.com.
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