The following article has been written by Jonathan Marwood for ‘WealthBriefing’ (February 2020)
Knight Frank recently estimated that £48.4bn is to be invested in London’s commercial property in 2020. A large part of this coming from Hong Kong. Why?
There has long been talk of Hong Kong investors buying up homes in London. But now their attention is turning to commercial real estate, as purchasers realise the deals that can be done in London and beyond. For example, last year’s acquisition by CK Asset Holdings of the UK pubs and brewery group Green King for £4.6bn is likely to have been supported by the £3.5bn Green King property portfolio; CK Asset Holdings is seen as a market leader so it is likely that many others will follow suit. What’s more, in November 2019, the Mayfair flagship store for Crombie (a high-end British fashion company) was sold to a Hong Kong financier, whilst there are several Hong Kong based investors developing major new buildings in London’s Square Mile as well as plans for significant investment in cities beyond the capital.
The unrest in Hong Kong in recent months has been well-documented, but its effects on the international investment landscape should not be overlooked. Anti-government protests have led to disorder and, in turn, revived some longstanding links with the UK as investors have turned to the country as a safe haven for their cash. In turn, the number of Hong Kong investors seeking property in London as well as the main regional cities across the UK has increased in the past three to four months. Buyers from Hong Kong are able to defy a broad drop in outbound capital from mainland China, partly because the mainland’s tighter capital controls do not apply in the territory. While difficulties in the UK of course still exist, it offers a more stable option when compared to current turbulence in other economies – take the US or China, for example – and the competitiveness of sterling is also a key factor contributing to the country’s appeal.
Education is key
Indeed, HNWIs from China and Hong Kong applying to live in the UK through an investor visa increased by 1/3 last year. In our experience, this has been driven by a number of factors. Undoubtably, the UK’s familiar legal system and language have an appeal to overseas investors looking to settle here, as well as the country’s high standards of schooling and universities. Influential Hong Kong business leaders have mentioned to me in private that a big part of the UK’s appeal to prospective overseas talent is its ability to put their children into quality education; many of the best UK schools are within commuting distance of London. What’s more, regional cities seeing the greatest rental growth at present are those with excellent universities. Unlike previous generations, many university graduates cannot afford to move to London. Accordingly, UK businesses are looking at key regional cities in order to attract the top domestic talent as well as those from overseas. There is an undeniable link between education and growth in the UK.
Calmer waters ahead?
In recent years, Brexit has not gone unnoticed by overseas investors. For many in Hong Kong, it was a key concern – not least because sellers fear exposing properties to an uncertain market. A run of big purchases by Hong Kong and Chinese buyers two years ago has been therefore followed by a quieter market.
However, whilst Brexit led to a flatlining of UK yields, the results of December’s election and a Brexit endgame on the horizon later this year mean there is now more certainty about the UK’s direction. Investors are now poised to move, as many have been put at ease by these political events and are positioning UK commercial property as a more stable option once more. Prime office yields in the City of London, for example, are currently at 4.5% and the West End of London 4%. In comparison, in Berlin they are at 2.65%, Paris at 2.75%, Amsterdam at 2.85% and Madrid 3.25%.
Looking to the regions, UK cities like Manchester and Edinburgh have prime office yields currently sitting at 4.75% – at least 50 basis points softer than their European counterparts like Warsaw at 4.25% and Dusseldorf at 3.1%.
If you add vacancy rates to this – 11% in Rotterdam versus 2.6% in Edinburgh; and 3.5% in Manchester and 3.3% in the City of London against 8.5% in Madrid and Paris’ 5% – then the pull to invest in the UK is strong.
Finally, we act for a large number of UK office investments in both London and key regional cities. In doing so, we are seeing a number of excellent opportunities for further growth. Namely, by re-positioning poorly managed and performing properties, many Hong Kong investors are gaining significant rental growth opportunities.
However, for such investors to maximise these prospects, attention to detail on the ground alongside a productive partnership with advisors who are used to acting in a collaborative manner with Hong Kong based investors, are key.