Ma Li (a pseudonym) is typical of a new Chinese homeowner in London. The mainland businessman, married and in his mid-50s, recently purchased a two-bedroom apartment in a high-rise building still under construction on Fulham Road in the city’s posh Chelsea neighborhood.
Though he’ll stay there occasionally when he’s in London for business, the flat is primarily for his daughter, who is studying biomedical engineering at nearby Imperial College London. And while he was attracted to Chelsea because of its beautiful old mansion blocks and townhouses, he purchased a flat in a newly built apartment complex – one with ample security, underground parking and low maintenance costs. The going price for a two-bedroom in the complex is US$1.2-2.25 million.
The UK real estate market has long been attractive to foreign investors, but never more so than in the past five years, when overseas demand for new residential and commercial properties skyrocketed. Buyers from the Middle East, North America, East Asia, Europe and Russia snapped up huge swaths of London and other major British cities during this period, helping to push prices steadily upward into a property bubble. Investors from the Middle East alone tripled their share of commercial holdings from 2005 to 2009.
Things changed in an instant following the economic crisis, however, when credit dried up in the West, the oil barons of Russia stopped flashing their cash, and the property bubble burst. Fortunately for the UK, Chinese investors have been steadily taking up the slack.
Individual mainland investors have not historically been significant participants in foreign property markets, largely due to the regulatory hurdles at home and the fact the domestic real estate market offered so many opportunities. But the aftermath of the financial meltdown has caused many Chinese investors to start looking outward, particularly at the suddenly affordable UK market.
In the 12 months ending in March 2010, nearly half of all residential buyers for new properties in London were from East Asia and India, with investors from China and Hong Kong making up the largest segment at 11%, according to report issued earlier this year by the British real estate and property services firm Knight Frank.
By contrast, residential investments from the Middle East and Russia shrank during the same period, accounting for just 3.5% and 3.1% of the market, respectively.
Chinese investors have also begun to nudge into the commercial property sector in the past 18 months, albeit on a much smaller scale. According to research conducted by CB Richard Ellis (CBRE; CBG.NYSE), a multinational real estate services firm, foreign investors accounted for nearly three-quarters of all commercial property sales in London from the beginning of 2009 through the first quarter of 2010.
Most were from North America, the Middle East, Europe and East Asia excluding China. However, 3% of buyers were from mainland China – up from virtually none in 2008.
"There’s always been private Hong Kong buyers here. They’ve always been comfortable with London," said David Green, head of investment in London’s West End for CBRE. "But we haven’t seen any mainland investors until relatively recently … Now, you get the feeling that something is really happening."
Not only are individual mainland investors sinking money into British real estate in ever-increasing numbers, institutions have also made some very high-profile investments. Last August, China Investment Corporation (CIC), the country’s sovereign wealth fund, teamed up with Qatar’s sovereign wealth fund to bail out the debt-ridden owner of London’s Canary Wharf complex, Songbird Estates, by striking a deal to pay down a US$1.32 billion loan – its first major foray into the UK market.
Then, in November, Bank of China (BoC; 3988.HK, 601988.SH) closed on a new 114,000-square-foot headquarters in the City of London for US$150 million, located directly across from the Bank of England. "They are face-to-face," said James Beckham, head of City of London investment for King Sturge, a UK-based commercial property consultancy. "That’s a pretty symbolic acquisition."
So why the sudden intense interest among mainland investors in a country seven times zones away? In short, because it may be a solid investment.
For wealthy homeowners – those who already own several apartments in China – the UK property market is a platform to diversify their portfolios at a time when soaring real estate prices at home have sparked fears of an asset bubble and prompted stricter government regulation.
"London is a safe haven for property investors from China. If you look at what’s happened in the last few months, the [Chinese] government has tried to control the investment market and every investor has felt the squeeze," said Jeff Cao, head of the China division at Think London, a London-based nonprofit agency that helps foreign investors set up their businesses in the UK.
"In cities like Shanghai, affordability is now an issue, too. With new houses and luxury flats, the oversupply of the market means a limited return, especially on the rental side," he said.
London is a relative bargain by comparison, thanks in large part to the dramatic fall in the relative value of the pound sterling over the past year. Even though residential real estate prices started inching upward again in 2009 following the economic crash, the pound’s decline against the renminbi still delivers net savings of up to 30% for Chinese investors compared with the peak prices of 2008.
A flat priced between US$750,000 and US$1.5 million is now suddenly competitive with residential property prices in first-tier Chinese cities, especially when issues like quality, durability and legal regulation are factored in.
Chinese investors have expressed their appreciation of these factors with their wallets. According to Knight Frank’s data, in May 2009, Chinese buyers were paying for London property at US$300 per square foot. A year later they were willing to spend US$900 per square foot.
The outlook remains positive: The pound is expected to remain weak through the rest of 2010, and new developments continue to rise in the run-up to the 2012 Olympics. According to Knight Frank, rents have rebounded after falling precipitously from mid-2008 to mid-2009. The city is once again a landlord’s market.
But investment yields still remain low, as capital-price growth has outpaced rental growth over the past year, and both the Olympics and the new flood of Chinese capital are pushing prices up.
"They aren’t going to see stellar returns here," said Green of CBRE. "The Chinese have always had other markets they’ve been interested in, such as Vietnam, Cambodia, where they could see huge potential to double their equity despite the fact there might be some risk. [But] now, safety is a big factor, as is liquidity. That’s a direct reaction to the last few years."
Concerns about the stability of the euro are keeping many investors out of Europe for the time being, but some analysts believe Chinese buyers will remain bullish on the UK market for years to come, thanks in large part to the perception that it is fundamentally safer than comparable domestic property markets.
The other motivation for buying in Britain is focused on a different kind of investment. Many Chinese want to educate their children in the UK. The number of Chinese students enrolled in British universities rose from just 4,000 in 1998-99 to 47,000 in 2008-09 – an increase of nearly 1,200%.
"The Chinese take a very holistic approach to investing," said Cao. "If they find there is an opportunity in a London property, they would investigate other types of investments to make their [money] go further. For a Chinese family man, this includes finding top private schools for his children who would use the property while studying here."
And cash-strapped British universities are more than happy to cater to these legions of Chinese students. Not only is it a boon to their finances – unlike their British peers, international students pay full tuition, generating some US$3.76 billion a year – the schools believe it also creates lasting bonds with the young elite who will become China’s future leaders.
Cash or credit
Still, many difficulties remain for Chinese investors seeking to buy property overseas, particularly when it comes to financing. The Chinese government has been gradually rolling back restrictions on foreign investment in recent years, but restrictions on converting more than US$50,000 annually into foreign currencies means large-scale investments remain tricky.
While some resourceful Chinese homebuyers have figured out ways around the rules, such as pooling money from family members, wiring money abroad through Hong Kong businesses or bank accounts, or transferring currency on the black market, others have been shut out.
Borrowing is also not an option for most Chinese real estate buyers in Britain. "If you’re a Chinese citizen in London, you can’t just walk into a High Street mortgage provider and get a mortgage," said Ray Clancy, Paris-based editor of Property Wire, a global real estate news website.
BoC, the only Chinese institution currently offering mortgages to Chinese buyers in the UK, charges slightly higher interest rates than British banks and requires a larger deposit. Most Chinese buyers therefore pay for their new homes with cash.
Yet BoC’s presence may be more significant in the long run. The bank has been in Britain since 1929, but has only begun to seriously expand its operations over the past year, opening new branches in Manchester, Glasgow and Birmingham.
"It wouldn’t be doing this unless the demand is there," said Clancy. Right now, a lot of that demand is coming from British first-time homebuyers who are having trouble getting loans from UK institutions, but BoC may be better-positioned to evaluate the applications of new Chinese investors than other UK banks, and will likely have a brand-recognition advantage.
BoC is also starting to dabble in the UK commercial property market, recently providing a British-American joint venture with US$48 million to refurbish a London office building. Sensing the changing climate, other Chinese institutions are also eager to expand their operations in the UK.
In the past year alone, Industrial and Commercial Bank of China (ICBC; 601398.SH, 1398.HK) opened its first retail bank in London, China Construction Bank (CCB; 601939.SH, 0939.HK) upgraded its current rep office to a full branch, and China Merchants Bank (CMB; 600036.SH, 3968.HK) opened its first office in the UK.
Where am I?
Unfamiliarity with the UK property market is another issue. Chinese investors who can’t visit the country rely heavily on British real estate agents to help them find apartments in desirable parts of the country, advise them on the nuances of British property and tax laws, and sort out all of the paperwork. This can lead to a myriad of cultural and communication problems.
"Chinese people buying overseas are generally well-off financially and don’t trust people very easily," said Philip Leung, founder of Premier Capital Limited, a Hong-Kong-based real-estate consulting firm. "They are also so na?ve when it comes to investing overseas. They ask a lot of questions and want a lot of proof. They might want agents to provide information that the agents cannot give them."
This is where Think London steps in, at least for foreigners who are establishing businesses in the capital. The agency, funded primarily by the London Development Agency, can match investors up with tax attorneys, commercial property specialists, and employee recruitment agencies, as well as expats from China with whom investors may feel more comfortable.
Wooing the Chinese
In London, Chinese buyers will find a diplomatic welcome mat. On a trip to Beijing two years ago, then-Prime Minister Gordon Brown urged Premier Wen Jiabao to open a CIC office in London, openly courting the sovereign wealth fund to take more equity stakes in UK companies to spur the sluggish British economy. CIC has since begun talks on a London branch, which would be its first overseas expansion.
Sino-British ties are likely to grow stronger under the leadership of the new prime minister, David Cameron, who has opined that attracting foreign direct investment is crucial for UK economic growth, and specifically stressed the need to bolster trade with China.
Following a personal invitation by President Hu Jintao at the G20 conference in Canada, Cameron is planning to make his first visit to Beijing in November. While individual Chinese investors are unlikely to base their decisions on the state of high-level diplomatic ties, they will welcome the knowledge that political winds favor their investments.
"The whole relationship between the UK and China is going to change in the years to come," Clancy said. "London is very much on the radar as far as the whole of China is concerned."