13th October 2016
The phenomenon of Chinese capital entering UK and European property is only just beginning, but already challenges exist.
by Robin Marriott
It seems that in terms of UK real estate, China is being spoken of being the most interesting capital source currently.
So far this year, CBRE estimates £1.5bn of Chinese investment has taken place, and just in the last few weeks we have seen China’s Vanke acquire Ryder Court in Mayfair for £115mln from Henderson Global Investors (which owned it via a previously frozen open ended fund). Meanwhile, China Minsheng Investment is said to be close to adding a second London office property.
As well as hard data, there is anecdotal evidence underling growing interest: CBRE’s International Capital Markets team tells me they received an average of five Chinese delegations per week over the summer, inspecting UK development and investment angles. That’s more than ever before, they add. In addition to the data and anecdotes, we are seeing in real time the way Chinese capital is positioning itself. In recent days, we met with a senior European real estate figure setting up a London office for a Chinese institution, about which we feel the market will hear more of shortly. Not only is this about China exporting capital to the UK and European property market, but importing European investor money into China – to that extent it is a two-way street.
For the UK, intensifying pursuit of property is just part of China’s keenness to do business here. The readiness of Britain to allow Chinese involvement in a new £18bln nuclear power plant at Hinckley Point proves this is welcome, and financial analysts expect further participation in diverse sectors from financial services to football clubs, and yes – real estate too.
It is our sense that the private equity industry believes we are just two or three years into a phenomenon. It may be wise to temper expectations given the existence of certain regulatory limitations upon some Chinese investors such as insurance companies and the way China seems able to impose capital controls at the flick of a switch. Also, an economic shock cannot be ruled out forever. Nevertheless, undeniably there is huge pent up wealth in the country looking to diversify outside of its borders, and investors are easily capable of setting up appropriate holding structures using Hong Kong in association with other jurisdictions such as London, Luxembourg and Jersey for example.
At Langham Hall, we have recently set up an office in New York from which vantage point we see the wave of Chinese capital continuing to enter gateway cities across North America. Europe is certainly behind this curve, but demand is as strong for UK and European gateway cities as it is for US conurbations. London in particular is attracting huge attention as well as Germany, the latter being a trusted, solid economy from the Chinese perspective. London has the added advantage that so many Chinese professionals involved in the real estate decision making process may well have lived or studied in London, providing that extra comfort factor.
As the story unfolds, it is fascinating to observe how Chinese entities are approaching the market in differing ways. Some, such as the conglomerate Fosun have been making financial investments in private equity real estate fund managers. Fosun – which is said to be bidding for part of the UK’s National Grid - took a stake in Resolution Property in 2015. There is also a category of investor setting up offices in London; Gaw Capital and Vanke being examples of having “boots on the ground”, hiring local talent. As previously mentioned, we are aware of one more example yet to make the headlines.
By contrast, some Chinese financial organisations are investing in real estate funds without having any real physical presence and there are developers that have stuck up joint venture partnerships with domestic European players. Incidentally, some predict Chinese entities will do a lot of land banking of development sites in London and other UK cities.
However, when one surveys the entire landscape, one can see that it is challenging for each and every Chinese entity to make inroads.
In line with a global trend, the majority want core, income-producing assets in European gateway cities. But in London return compression has made it harder to achieve attracted risk adjusted returns. Secondly, a lot of the larger, trusted investment managers in Europe have already signed separate account mandates with the larger parties from China. This means that the smaller, mid-sized or private Chinese wannabe brides are forced to look at funds, but there are queues to enter the few pan Europe low leverage core semi- permanent real estate funds that they seek. This raises the unattractive prospect of Chinese investors on the shelf either offering a premium to get in or going for a less obvious route. Some will consider country-specific or targeted asset-type strategies. Here we should spare a thought for the Chinese professional with his credibility at stake. How easy is it for him to place a bet on one single country, one asset type, and with perhaps one operating partner? It is way riskier career-wise than going for a big brand and placing a pan Europe bet.
For these reasons, we share in the excitement of this potentially huge pool of money coming into European property. Yet the reality is that while we are only two or three years into a long term trend, it isn’t as easy as one might think to invest. It’s a good thing Chinese capital is patient, and so are we as we remain on hand as advisors.
* Langham Hall has been monitoring these capital flows for many years, having set up in Hong Kong in 2008 and grown to be the largest administrator of international private equity and real estate funds focusing on mainland China. Many of our clients are now investing gains overseas including in London and where possible we are introducing them to local Managers. In the UK, the focus is mainly on London and we try to help not only with the establishment of their offices but also offshore with SPVs for deal by deal strategies. In time we expect them to become more adventurous as they become more familiar with the European market.
If you would like to discuss this or any other matter, please contact:
Rob Short - Managing Partner
T. +44 20 3597 7900
M. +44 77 7580 6308
Robin Marriott - Business Development Manager
T. +44 20 3597 7940
M. +44 75 5712 3515