China capital controls hit UK capital investment

By Cynthia Chan, Director, International Business Reorganisations & Head of China Business Group, Legal and Amit Unadkat, Real Estate Legal Leader | Solicitor

Cynthia Chan
Cynthia Chan

UK Property – Opportunities for Overseas Investors

Amidst Brexit negotiations, European elections and the UK election next month, the UK property industry is experiencing an unsettling time.

However, the “Brexit discount” coupled with the weak pound has attracted overseas investors who have swooped in to secure real estate assets at competitive prices.

Chinese Investors

In the months following the EU referendum result, there was an increased flow of capital into the UK, especially from Asia, with Chinese investors securing some of the biggest deals in the City office market – 88 Wood Street, EC2 for £270 million, 20 Moorgate, EC2 for £155 million.

Although China is not the biggest overseas investor in the UK market, it was anticipated that this Chinese investment would continue and grow in an economic climate that has significant advantages to buyers with foreign currency, and that its interest in London in particular would help offset the reduced demand in the regions.

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Capital Controls

Faced with an exodus of funds overseas, China has been making moves to control capital outflows and strengthen foreign currency reserves since November 2016. It was feared that the controls would put a large dent in Chinese investment in the UK.

These controls do have a detrimental impact on a Chinese investor’s ability to act quickly and also to acquire a variety of assets. Any overseas investment will face closer scrutiny and approval must be sought from several internal ministries. There are also tightened restrictions on the amount of money that can be transferred out of the country without state permission and a limit on how much can be spent on a single transaction. Targets for such “closer scrutiny” include “extra-large” foreign acquisition valued at $10 billion or more per single transaction, real estate investment by state-owned investors above $1 billion, and investments by any Chinese investors above $1 billion in any overseas project which is unrelated to such investor’s core business. In addition, some other deals are also caught: overseas direct investments made by limited partnerships, investments in overseas-listed companies that are less than 10% of total equity, and Chinese capital trying to participate in the delisting of overseas-listed Chinese companies etc.

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Recently, the Chinese government has relaxed some of the controls which is a positive move. The restrictions on overseas funds transfers subsist and the need for approval from different government departments remains.  The layers of bureaucracy coupled with a high demand for approvals slows the process down, and could result in Chinese investors losing out on target deals.

It is also thought that recent CEO changes in some of the large Chinese corporates could contribute to a dip in deal flow with the new leadership bringing in strategic changes and suspending investment targets while “bedding in”.

Impact on UK market

Despite these current investment barriers, in the UK there is not a great deal of evidence that these are having a significant effect on Chinese investment.

Also, while the capital controls are in place, interest from Hong Kong (who are not subject to the same controls as mainland China) in UK assets could increase – see Hong Kong listed China Resources Land seeking its first property acquisition in the UK with the £307 million purchase of London’s 20 Gresham Street, EC2.

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UK property remains a solid bet for investors looking to generate income returns. China’s trading links with the rest of the world are stronger and closer than ever before, and its interest in UK property remains high. It is thought that the capital controls are a temporary measure and that the Chinese government will allow its companies to diversify their investment portfolios more freely in the future. Certainly in the short term there appears to be no real decline in desire for the returns UK property continues to offer.