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23rd June 2016 – referendum day – marked the end, or the beginning of the end, of a lot of things. Britain’s membership of the EU, of course. David Cameron’s premiership. George Osborne’s time in No. 11. Michael Gove and Boris Johnson’s friendship. Many thought it also heralded the end of the so-called ‘golden era’ of Sino-British relations, which had seen a vast increase in Chinese investment in the UK.
These fears may have been overblown. Professional services firm Grant Thornton reported earlier this week that Chinese-owned companies in Britain have seen triple-digit growth, with the 30 best performing companies enjoying a combined turnover of £9.8 billion. One of the most high profile UK purchases this month was that of the ‘Cheesegrater’ skyscraper dominating London’s skyline, bought by Chinese property firm CC Land for over £1 billion. There are rumours that its neighbour, the Walkie Talkie, is being eyed up by the China Investment Corporation, which already has a 11.6 per cent stake in the building.
Yet there can be no doubt that political developments have impacted Chinese investment prospects, with outward investment from China to the UK slowing down since Theresa May took the reins. Cameron and Osborne’s time in office saw increasingly close ties with Beijing, with projects such as the first offshore reminbi trading hub and offshore renminbi bond issuance. It also featured the high-profile state visit of Chinese President Xi Jinping, which was evidently perceived as being worth the significant controversy it attracted as a result of China’s less than stellar human rights record.
May has since sought to distance herself from Osborne, reining in the momentum of obviously ‘Osbornite’ projects such as the Northern Powerhouse, and the UK’s relationship with China is now somewhat frostier than before. In contrast to the former chancellor, May and her closest advisors in No. 10 are wary of Chinese involvement in UK businesses, as was made evident in the tense, even slightly panicked, approach to Hinkley Point last year.
And it’s not just UK politics that have impacted Chinese investment activity in the UK. Beijing’s move to tighten capital controls has had a drastic effect on overseas deals, with the total value of outward investment plummeting from $32 billion in October 2016 to just $6billion last month. China’s State Council has put forward rules that require foreign acquisitions above $10billion, or $1billion if outside the acquirer’s core business, to be signed off by government agencies. This may be seen by many in the Chinese investor community as simply not worth the trouble.
Property remains the most favoured sector for Chinese acquisitions in the UK, accounting for 44 per cent of the value of such deals between 2012 and the end of Q2 2016. Financially, this still makes sense – Chinese investors battling an oversupplied and overpriced domestic property market and the threat of a devalued renminbi have looked to the UK as a safe haven to balance their assets. Politically, however, the British property market may not be quite the sanctuary it appears.
London, long the subject of interest from foreign property investors, now has a Labour Mayor who has committed to stemming the surging tide of overseas buyers snapping up residential property, seen by many as a root cause of the capital’s housing crisis. In September last year, Sadiq Khan launched the UK’s most comprehensive inquiry into the impact of foreign investment flooding London’s housing market, emphasising the need to “better understand the different roles that overseas money plays… so we can figure out exactly what can be done”. It is still early days, but investors should keep an eagle eye on developments in City Hall, or risk being caught out by regulatory change.
Of course, not all Chinese property investment is focused on the capital, with investors increasingly focusing on regional hubs like Manchester, Liverpool and Birmingham. However, the issue of the younger generation being priced out of home ownership is one that resonates across the country, and politicians of all political stripes are eager to show their willingness to take action on this. But Chinese investors should look to their own government first – China’s State Council has set out its intention to put a stop to foreign real estate purchases above $1billion by state-owned firms.
Brexit seems to have triggered mixed reactions within the Chinese investment community. Speaking to the FT earlier this month, Denise Li, Chief Executive of PGC Capital, dismissed Brexit as “a first-world problem”, saying that the Chinese view of the British property market as a safe haven “has nothing to do with whether you have Brexit or not”. Others are less blasé. Cynthia Chan, Head of the Chinese Business Group at PwC, said that although pipeline real estate deals are “still going very, very strong”, “on the corporate side we are seeing a pause”.
With the Prime Minister committed to triggering Article 50 before the end of the month, the Brexit negotiation process is still shrouded in uncertainty. Foreign investors with their sights on British assets are likely to feel the impact of the UK’s departure from the EU, regardless of sector. Understanding political risk remains key to making the right decision.
WA provides political due diligence, strategic advice and reputation management for investors and assets in sensitive and regulated markets. If your investments are subject to political risks, we can help.