Why Chinese investors are pouring billions into London’s skyline despite ‘Brexit headwinds’

Cranes tower above construction sites, and surround 20 Fenchurch Street, nicknamed the Walkie-Talkie building, in the financial district of the City of London, in Britain February 13, 2016.Reuters / Hannah McKay

LONDON — It’s boom time for commercial property investment in London.

Total investment hit £12.03 billion in the six months to June, according to figures from commercial estate agents CBRE, marking a 24% increase on the same point last year.

This year’s figure was inflated by the record £1.3 billion sale of 20 Fenchurch Street — the much-maligned “Walkie Talkie” building — to Hong Kong-based Infinitus Property Group.

But the figures do point to a wider trend of growing investment from Hong Kong and mainland China: investment from the region accounted for just 3.4% of total investment in 2012, and in the year so far counts for over 32%, as the chart below illustrates:

So what’s driving it?

A cheap Brexit pound

The fall in sterling’s value after the EU referendum means dollar-pegged buyers of commercial property can purchase UK property with an approximate 20% discount compared to pre-vote prices.

“The weakening of sterling has been quite significant in terms of the impact as a driver to push people into activity,” said James Beckham, head of Central London investment at commercial estate agents Cushman & Wakefield, which advised on the sale of the Walkie Talkie and the Cheesegrater buildings.

He said a cheap pound combined with historic links between Hong Kong and the UK made London an increasingly attractive destination for investors.

“There are extremely strong links between Hong Kong and the UK, both through long-term historical relationships and the UK’s rule of law, transparency, and its liquidity.

Even with the headwinds of Brexit, London is a global gateway city

“Those are aspects which are really important to global investors. When a Hong Kong investor considers where to invest around the world which is stable. with a legal system they understand and have grown up with, they might go to Sydney, they might go to London, and they might also go to Vancouver.”

“But London out of all of those has the biggest population, at 8.6 million people, and even with the headwinds of Brexit, it’s a global gateway city,” he said.

Political unease in China

The Chinese government has announced a crackdown on capital outflows from the country this year, meaning that money flowing out of from the mainland is increasingly restricted. Estate agents Knight Frank say 92% of total Chinese investment into commercial London property comes from Hong Kong, however, with just 8% from the mainland, meaning the crackdown is unlikely to have a big impact on overall London investment anyway.

Hong Kong maintains strict judicial independence from the mainland, meaning its capital outflows been largely unaffected. In fact, recent worries about mainland encroachment on Hong Kong’s judicial independence — which saw opposition leaders jailed in August — could even be driving Hong Kong investors towards London in a bid to diversify their assets.

“It’s difficult to gauge how significant [recent political concerns] are, but one would clearly perceive an increasingly assertive regime as a [possible contributing] factor in terms of outward activity from Hong Kong,” said Beckham.

Beckham said Asian investment in Europe forms part of a wider trend of rich individuals in the region looking to diversify their assets, especially given their more attractive yields, which are around 3.4% on buildings like the Walkie Talkie and Cheesegrater, compared to around 1% for a similar building in Hong Kong, according to CBRE figures cited by Reuters.

Beckham said: “I think also we’re seeing a more general globalisation of investment portfolios by ultra-high net worth individuals, and they clearly see that as well as having assets in Asia they want to diversify and come into Europe as well. So it’s a bit of both: a bit of push and a bit of pull.”

“A safe haven”

Ben Habib, chief executive of property fund First Property, has launched a new UK-focused commercial office fund which will not invest in London because higher yields of 7% or 8% are available elsewhere in the country.

He says that foreign investment in London is driven by the capital’s reputation as a “safe haven,” rather than the yields it offers.

“Capital values in London have been and remain very high, so the income return available is relatively low,” he said.

“Buying property there is more of a capital play than an income play. London presents itself to different people for different reasons, but it’s regarded as a safe haven for capital.

“It attracts a lot of international capital from investors who the political set-up and the stability of the United Kingdom as attractive, and who therefore don’t mind overpaying to put their money into a secure investment.”

Long-term leases: Insurance against Brexit?

Buildings at the top of the commercial market — such as the Walkie Talkie and the Cheesegrater — are fully-occupied on long-term leases. The Walkie Talkie is 100% leased to tenants on an average 13-year lease, while the Cheesegrater is 100% leased on an average 10-year lease.

Beckham says this offers some insurance against the short-term volatility associated with Brexit.

“If you were concerned about Brexit, these buildings have no vacancies or question around vacancies until well into the future, well beyond Brexit, and well beyond any fall-out or rebuilding from Brexit. So they’re really very, very secure assets from that perspective,” he said.

Long-term prospects

Much activity in the commercial London market from Hong Kong comes from several well-known investors who already hold high-value assets in the capital. Beckham says some of them, including CC Land and the Nen Fung Group, are looking to increase their exposure.

First Property’s Habib said London’s market would retain its attraction after Brexit.

“London attracts a lot of money because it is a safe haven, and it will hold itself in the world after Brexit because people invest there for many reasons beyond access to Europe. Chinese investment is part of that,” he said.

Chris Brett, head of international capital markets at CBRE, said investment in London would remain firm even in the short-term.

He said: “London remains a global financial city and is one of the most important real estate markets in the world, something that short-term political uncertainty cannot undermine. It is an obvious place for investors to look when diversifying their portfolios.”