The Brexit vote raised eyebrows across Asia, but a flow of private sector deals into the UK from China, Hong Kong, Japan and South Korea since then suggests that Asian investors continue to see potential within the country.
At least three major transactions announced on and since the referendum day on June 23 share the characteristic that one individual in the buying group drove the deal out of strong personal conviction. The £24.3 billion ($42.1 billion) takeover of Cambridge-based chip designer ARM Holdings by Japan’s SoftBank Group is the biggest Asian investment into the UK and was pushed by the belief of Soft- Bank founder and CEO Masayoshi Son that ARM’s technology will play a crucial role in the Internet of Things. “All things will be connected and what is the biggest common denominator? That is ARM,” he says.
Similarly, a £220 million investment into Sheffield by Sichuan Guodong Construction Group over the next three years — part of a £1 billion package spread over the next 60 years — is said to be the largest UK property deal outside London by a Chinese developer. It was a result of chairman Wang Chunming visiting his daughter when she was studying at a university there. “This agreement illustrates our confidence in Sheffield as a city going from strength to strength, with real growth potential,” he says.
Having personal knowledge of the UK is one way that some investors are managing to overcome the economic uncertainties that Brexit represents.
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 Travelodge Royal Scot Hotel in London’s King’s Cross area. The transaction, he says, gives 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”.
The pound’s 10% fall since the Brexit vote is an important part of the equation for potential Asian investors, says Robert Stassen, JLL’s head of capital markets research, Europe. “The UK looks relatively more attractive on pricing than it did pre-Brexit,” he says. “But does that 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 is too early to quantify the impacts on the UK’s direct commercial property investment market, according to JLL’s Brexit update in August. Most deals across the UK that 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 that Brexit is reshaping companies’ 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 “longterm, sophisticated investors” to hold through the current cycle. “We expect increased interest in a broader range of sectors, such as hotels and other alternative real estate asset classes,” she says.
Singapore’s state investment fund Temasek Holdings invested £417 million in student accommodation in Edinburgh, Manchester and other locations in a pre-Brexit deal, setting a path that Walters believes other Asian investors might follow. “The UK remains a centre 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 that Brexit represents. The sovereignty downgrade of the UK by Fitch Ratings 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.
Singapore’s state investment fund Temasek invested £417 million in student accommodation in Edinburgh
(pictured below), Manchester and other locations in a pre-Brexit deal.
Need to diversify outside Asia
Despite the Brexit uncertainty, Asian investors remain keen to diversify out of domestic real estate markets. China’s outbound capital, which has been on an upward long-term curve, is expected to remain active in the next 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 favoured markets abroad are the US, the UK and the rest of Europe.
In the absence of a European Union trade treaty with 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 that 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 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,” Stassen says. “In the end, it is not unlikely we’ll have a middle-of- the-road solution. The European Union 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.
Neasa MacErlean is a JLL Real Views writer. Real Views is a news site of JLL, a leading New York Stock Exchange-listed real estate advisory firm.
This article appeared in The Edge Property pullout, Issue 742 (Aug 22, 2016) of The Edge Singapore.