View of Hong Kong harbour

Hawk-i - 05 October 2018

Make way for China

Hong Kong and Chinese family offices have been funnelling money into British bricks and mortar for decades, snapping it up before any of us have a chance to blink. Hawksford's Global Head of Private Client, Darren Kelland, discusses the impact of this continuing trend.

Author of article:

Darren Kelland

Global Head of Private Client Services

China is a big market and it is believed that only 3% of investors from China have been coming to the fore, meaning that there is a virtually untapped goldmine waiting to invest.

A study, jointly published by UBS and Campden, states that there are 262 family offices across the globe with an average of US$921 million assets under management; one of the largest chunks of those assets? Real estate.

Chart of Average family office portfolio in percentage of global composite portfolio

Why real estate and why the UK?

Among the big trends, real estate in London and other European cities have emerged onto the radars of wealthy Chinese families, as many see the retreat in property prices coupled with the currencies’ volatility after the Brexit vote as “a good buying opportunity”.

In the fourth quarter of 2017 alone, Asian investors put some 16 billion euros into European property. The move towards asset allocation favouring equities, private equities and real estate in Greater China portfolios is due to these particular assets providing attractive long term returns. Younger generations coming through and looking at how to diversify their portfolios are especially focused on getting the best returns.

London is a major destination for Asian family offices due to liquidity, a sophisticated legal system, a simple tax structure and it being an English-speaking country. The key factor here, is stability. Despite the potential implications of Brexit, the UK remains a stable and known jurisdiction that will see returns for its investments. In addition to this, more and more ultra HNW Chinese individuals are sending their children to the top British schools (an export market worth about £1bn a year to the UK, according to the Financial Times), which entices them to invest more in tangible assets as a foot hold in Europe.

However, it is not as easy as it might seem on the surface for the Chinese to invest across their borders.

What are the hurdles for Chinese ultra HNW individuals trying to invest in cross border real estate?

While investment outside of China was encouraged between 2012 and 2016, the government more recently began to restrain it with more rigorous foreign exchange regulations, with major restrictions on private firms taking their money out of the country without prior approval from Beijing.

However, a new ruling from the National Development and Reform Commission of the People’s Republic of China (NDRC) has now created a route for Chinese investors to, in essence, reinvest cash into the UK, as long as it is recycled from an existing property venture, or raised by non-Chinese banks.

Furthermore, state approval will no longer be required for any overseas investment from China relating to infrastructure and development, even if the funds are currently in China and not yet ‘arranged’ overseas – resurrecting access for Chinese investors to enter the UK property market.

In the latest turn of events, Prime Minister, Theresa May, has announced the proposed changes to stamp duty for foreign investors. It is unknown as to whether or not this will come to fruition, but it will certainly impact on Chinese, or any foreign investors wanting to purchase property in the UK. 

What does this mean going forward?

With the latest research from Cushman & Wakefield revealing that private Chinese investment into London property has fallen to a new two-and-a-half-year low with just £482m worth of commercial property transactions completed in the first quarter of 2018, the news could bring a much needed boost to the market. 

As Chinese family offices are now expected to begin taking advantage of the new NDRC ruling, we could be set to see another significant uplift in UK property market investment from China, especially if the changes to stamp duty do not come to light any time soon (if at all). 

This will of course create a much more competitive environment for private investing and most likely drive prices up. It will also continue to bolster the UK and Europe as global markets. For those wanting to sell high value property in the UK, it might be time to stop looking to Private Equity houses and start tapping into the Chinese Private Client market. 

However, with every positive, there is a negative and it is likely that we are getting close to the end of the current economic cycle. There have been talks in the industry about the markets cooling off. With Brexit looming, there could be a number of positives and negatives for foreign investors in the UK property market, and they will need to have the flexibility to act quickly and accordingly. It is time for private investors to start choosing wisely; diversity in investments and capital preservation will be key in addition to a long term plan that focuses on long term gains.

How can your advisors support you best for the future?

With many factors in the industry having an effect on our investments, it is crucial that no matter where you are based and what you are wanting to invest in, that you align yourself with the right advisors to create a flexible structure that plans for the future. A critical point of investing in the UK is that you get the right advice about the way you structure your finances (i.e. trust structures vs corporate structures) and also with regards to knowing that you are setting up the right structure to acquire and control an investment in line with your objectives. 

When it comes to your investment committee, it will be important to ensure that you employ an impartial director or trustee that can mutually advise you on your investments and help you make the right decisions for you and your family. Being able to diversify your investment portfolio will help you to protect your capital in the event of market headwinds, diversity is key to capital preservation and the more diverse you can afford to be, the more successful you will be. I have seen many family offices coming to me wanting advice after an ill-advised investment hasn’t gone to plan.

Going forward from here? If I can leave three pieces of wisdom, it would be to choose your advisors wisely and make sure they can help you to achieve your objectives, pay attention to key trends in the market (or at least know that your advisors do!) and never fail to diversify.

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