by Neasa MacErlean
The Brexit vote caused raised eyebrows across Asia but a flow of major private sector deals into the UK from China, Hong Kong, Japan and Korea since then suggests that Asian investors continue to see potential within the country’s shores.
At least three major transactions announced on and since referendum day on 23 June share the characteristic that one individual in the buying group drove the deal out of strong personal conviction. The £24.3 billion takeover of Cambridge-based chip designer Arm to SoftBank of Japan is the biggest ever Asian investment into the UK and was pushed by the belief of SoftBank founder and chief executive Masayoshi Son that Arm technology will play a crucial role in the Internet of Things. Explaining the deal, he said: “All things will be connected and what is the biggest common denominator? That is Arm.”
Similarly, a £220 million investment into Sheffield by the Sichuan Guodong Construction Group over the next three years – part of a £1 billion overall package spread over the next 60 years – is said to be the largest UK property deal outside London by a Chinese developer. It came about as a result of chairman Wang Chunming visiting his daughter when she was studying at university there. During negotiations, Wang said: “This agreement illustrates our confidence in Sheffield as a city going from strength to strength, with real growth potential.”
The attractions of a falling currency
Hong Kong property magnate William Cheng Kai Man is the driving force behind the £70.3 million acquisition by Magnificent Hotel Investments of the Travelodge Royal Scot Hotel in London’s King’s Cross area. The transaction, he said, gave the company “an ideal opportunity to get into the high-demand hotel sector in London, and the falling currency has made the deal more attractive”.
Sterling’s 10 percent drop since the Brexit vote is an important part of the current equation for potential Asian investors, says JLL’s Robert Stassen, Head of Capital Markets Research, Europe. “The UK looks relatively more attractive on pricing than it did pre-Brexit,” he says. “But does that positive pricing factor make up for the uncertainty that exists? Working that out is probably where potential investors need a bit more time.”
Indeed, the general consensus is that it’s too early to quantify precisely impacts on the UK direct commercial property investment market, according to JLL’s August Brexit update. Most deals across the UK which were in negotiation prior to Brexit are progressing with only a small portion withdrawn and the impact on pricing has been mixed.
Some corporate decision-makers are also biding their time and looking for greater clarity on the UK settlement with little evidence yet that Brexit is re-shaping company location decisions. With the start to any Brexit settlement at least six months away, location decisions will play out over a much longer timescale.
Looking to the longer term
Just as they did before the Brexit vote, Asian investors tend to seek strategic opportunities rather than quick gains. Singapore-based Dr Megan Walters, JLL’s Head of Research Asia Pacific Capital Markets, expects “long-term, sophisticated investors” to hold through the current cycle. Looking at purchases, she says: “We expect increased interest in a broader range of sectors, such as hotels and other alternative real estate asset classes.”
Singapore’s state investment fund Temasek invested £417 million in student accommodation in Edinburgh, Manchester and other locations in a pre-Brexit deal, setting a path which Walters believes other Asian investors might follow. “The UK remains a center for global education excellence,” she says. “And many people want to invest in the UK because they have family connections there.”
Having personal knowledge of the UK is one way that some investors are managing to overcome the economic uncertainties which Brexit represents. The sovereignty downgrade of the UK by Fitch and other credit ratings agencies, for instance, will “matter much more for risk committees” than for high net worth individuals who might be familiar with some UK real estate markets, according to Walters.
Need to diversify outside Asia
Despite the Brexit uncertainty, Asian investors remain keen to diversify out of domestic real estate markets. China outbound capital, which has been on an upward long-term curve is expected to remain active in the coming 12 months, according to Stuart Crow, JLL’s Head of Asia Pacific Capital Markets. And even Japan’s more traditional, risk-adverse investors are “chasing yield and diversification in offshore markets” in the face of negative interest rates at home, according to Walters. The favored markets abroad are the U.S., the UK and the rest of Europe.
In the absence of an EU trade treaty with either India or China, a UK outside the EU does not start off at such a large disadvantage. There is also the possibility controversial as it is, that the UK’s new immigration policy could be a points-based one which could make it easier for well-qualified Asians to work and live in the country.
Walters describes herself as “continuing to be optimistic” about the prospects for the UK as a recipient of direct investment from Asia. Stassen says that the “fundamentals of the UK real estate market haven’t really changed at this stage”. Meanwhile, the uncertainty that remains has narrowed, he adds. “What is priced in now is a process that will arrive at a reasonable conclusion,” he says. “In the end it is not unlikely we’ll have a middle of the road solution. The EU is pretty good at doing that.”
It is very early days in the post-Brexit vote world but early signs indicate that Asian investors concur with Chancellor Philip Hammond when he says the UK is ‘open for business’. Yet caution remains: for all the investors who have already committed themselves to the post-Brexit UK landscape, there are many more watching closely to see how the situation develops.
