Chinese investment

Will a new Capital Gains Tax on non-domestic investors impact Chinese investment?

In August 2017 the Chinese Government announced new restrictions on the amount of capital leaving the country, much of which was invested in real estate. Despite much speculation on how this might impact London’s investment market, the restrictions aim to control volumes of outbound capital, rather than prevent them. Investors from the Greater China region, including Hong Kong, who had been particularly busy in the London market, remain active, albeit with increasingly selective buying criteria.

This need for Chinese and Hong Kong buyers to be discerning in their cross-border investment has been heightened further by the announcement by the UK Government in the Autumn Budget 2017 that a Capital Gains Tax (CGT) will be introduced on foreign buyers of commercial property. This creates an added layer of legislation that could be seen as a deterrent for Asian buyers, but it’s worth noting the Government doesn’t plan to introduce the tax until 2019 after a consultation period and it’s anticipated that some investors may be exempted from the changes.

Investors from Hong Kong and mainland China, whether they are established players or first-time buyers, are drawn to the UK by the discount the fall in sterling creates, but more also by the comparative risk (or lack of) against other markets. The comparative returns are also higher than those in much of Europe and Asia-Pacific, for example prime yields on good-quality office buildings in London are 3-4 per cent, compared with prime yields of 2.8 per cent for Grade A offices in Hong Kong.

In terms of what they are looking for, first-time buyers are seeking the security of core office assets in the City and West End prime markets. More experienced investors, however, are starting to move up the risk curve. CC Land is a prime example of this – first acquiring The Leadenhall Building, which has a weighted average unexpired lease term certain in excess of 10 years – then later partnering with R&F to acquire a 10-acre development site located south of the river at New Covent Garden.

Overall, we are actively tracking 331 overseas investors looking at London, 241 of whom are from Asia. Why is appetite so strong? Because London remains the most liquid real estate market in the world. It’s attractive to Asian investors not just because of our resilient occupational markets and the discount the fall in sterling allows.

The UK is perceived as the most welcoming market in Europe to overseas investors and our landlord-friendly leasing structures, English language and market transparency make for an attractive marketplace that will continue to draw overseas interest. Even if investors are prepared to pay more to buy in France or Germany, language barriers can present problems and for this reason we expect the strong levels of Hong Kong and Asian capital targeting London to continue into 2018. 

Further information

Read more: City Investment Watch

 

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