Assessing inward investment into the UK from emerging markets
Steven Landes, Managing Director, Corporate Services, at Hawksford, explains why investors from emerging markets are significantly investing in and supporting the UK economy.
TO REALLY UNDERSTAND the role that investors from emerging markets play in foreign direct investment (FDI) into the UK, we need to consider a broader range of non-traditional investment factors. Looking at data across these investment classes over the past three to five years enables us to identify trends that show which markets are
heavily investing in the UK and which are likely to become more prominent supporters of the UK economy in the future.
It won’t surprise many readers that one region increasingly investing in the UK is Asia. The UK has traditionally been a very open economy, attracting a significant amount of FDI. From January 2009 to August 2018, London was the most successful city in the world in attracting FDI, with 4,110 projects – ahead of Singapore with 3,832 projects and New
York with 2,854 projects, according to FDI Intelligence.
When it comes to the location of European headquarters of Fortune 500 companies in 2018, the result is even more startling, with 87 headquartered in London, followed by Geneva as the second most popular with just seven and then Amsterdam with five. It remains to be seen whether this strength will continue after Brexit. Looking at sources ranking countries based on inward UK FDI, only India (£12.5bn, 18th) and China (£9.5bn, 20th) from the traditional emerging markets (otherwise known as BRICS – Brazil, Russia, India, China and South Africa)feature in the top 20 (Office for National Statistics, 2018).
On the face of it, this may seem unexpected – but it’s important to remember this is only based on traditional FDI that results in investment into companies and directly creates jobs. If you take a broader view, including investment in residential property and students attending UK educational establishments, the results are markedly different. There was a time when Russian money flowed into luxury London real estate. In 2008, a leading London estate agency stated that between 30% and 40% of all luxury real estate purchases by international buyers were by Russian investors. However, between 2014 and 2016, investors from the Far East were the new big buyers of London property, with 61% of all new
build properties sold to overseas investors from Hong Kong, Malaysia and China (University of York study, 2017).
Similarly, for sales of mortgaged property in the London area to overseas buyers, just over half came from Singapore and Hong Kong alone (University of York study, 2017). And these trends are not just confined to London. Second-tier cities are also benefiting from a new wave of Asian investors in buy-to-let investment property. According to Georg Chmiel, Executive Chairman of Juwai, Chinese buyers are purchasing build-to-rent properties in Manchester and Bristol to house students studying in the UK. The statistics for foreign students also show large numbers coming from emerging Asian countries. For example, in 2018/19, of the 485,000 foreign students in the UK, 120,000 were from China, 27,000 from India, 20,000 from the US, 16,000 from Hong Kong and 14,000 from Malaysia. This equates to 36% of all foreign students coming from emerging Asian countries (www.studying-in-uk.org).
The economic impact of these students on the UK is much greater than simply the tuition fees and living expenses they pay. It also includes some parents buying property for their children to live in while they are studying in the UK, as well as foreign students deciding to stay in the UK after they have graduated.
These results are even more surprising when factoring in a significant increase in taxes on foreign ownership of UK residential property. That includes the Annual Tax on Enveloped Dwellings (ATED) for properties with a value of more than £500,000 owned by a company, and a 3% stamp duty surcharge for a second home purchaser.
This will be supplemented by a further 2% surcharge on foreign purchasers of UK residential properties from 1 April 2021. So while official FDI for emerging markets may not be very high, taking a broader view of investment shows that investors from emerging markets are significantly investing in and supporting the UK economy. The classification of a jurisdiction as an emerging market is also changing, with Russia and Brazil being eclipsed by economic growth in Asian countries such as Malaysia, Hong Kong and Singapore. In the future, one can only see investment from these emerging markets increasing. The UK’s stellar education system, trustworthy legal and political system, and being home to one of the most respected financial centres, all contribute to making the UK a very attractive location to investors from emerging markets.
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