Brexit May Favor Chinese Investors

DTZ/Cushman & Wakefield, a global leader in commercial real estate services, recently released a special report < BREXIT MAY FAVOR CHINESE INVESTORS>. According to the report, on the heels of Britain’s historic vote to leave the European Union, the general sentiment in China is the UK economy is entering a temporary period of adjustment – a period that is recognized by many Chinese investors as a buying opportunity.

Ahead, China is watching with interest with early signs showing investors falling into three distinct camps, according to DTZ/Cushman & Wakefield’s interviews with notable outbound property investors in China.

Opportunistic: Many investors in China, from core, core+ and opportunistic investors, will look to take advantage of a weaker British pound and softened euro in the UK and Europe should favorable investment opportunities arise. Examples of this might include insurance companies that have previously sought core assets in London, but the initial yield hurdle was previously hard to achieve given the market conditions prior to Brexit. Recent volatility may cause them to take another look.
Wait-and-See: Another camp is other Chinese investors who are taking a wait-and-see approach, concerned about growing volatility in currency markets and uncertainty surrounding Europe’s flirting with further referendums to break up the trading block.
Conservative/Risk-Adverse: Finally, more conservative investors perceive the EU and UK as higher risk at the present time. Such investors will likely seek shelter in the large “safe havens” like the U.S., Canada and Japan, flocking to core real estate assets of high quality and reducing investment in higher risk assets. With that said, if there is favorable development down the road, their focus will eventually return to Europe and the UK.
Justina Fan, Managing Director, Asia Pacific & Head of Outbound Investment Greater China, DTZ/Cushman & Wakefield said: “The activity of individual investors will depend on a variety of factors such as their risk perception, investment appetite, current and future asset allocation, available capital and identification of the right opportunities. Their ultimate decision hinges on getting a good deal and whether it aligns with investment and asset allocation strategy.”

James Shepherd, Head of Research, Greater China, DTZ/Cushman & Wakefield said: “In the view of some Chinese investors Brexit has produced the double-hit of an exchange rate discount and potentially some room for softening in pricing of certain asset classes. Asset classes in the UK that could be targeted by opportunistic investors in China include residential, hotels, office and retail properties. Certain retail real estate is projected to benefit from a tourism spike and boost in retail spending stemming from rising purchasing power of foreign currencies.”

Should Chinese investment pick up significantly, it could provide welcome relief to the recent slowdown in overseas commercial real estate deals in the UK, which according to industry experts has been down in part because of uncertainty surrounding Brexit. Data from Real Capital Analytics (RCA) show Chinese investment in UK properties dropped to US$2.2 billion in 2015, down from US$3.82 billion in 2014.”

The need for asset diversification continues to drive Chinese firms’ overseas acquisition patterns. With many Chinese funds already exposed to euro- and U.S. dollar-denominated assets, if Chinese investors are confident of the underlying strength in the British economy, then UK property investment may well offer currency diversification and good upside potential if the Brexit is a success for the UK.

Other property investors in China and elsewhere are likely to be more risk-averse given volatility in the markets. Some are concerned about an unavoidable period of uncertainty in the near-term that likely leads to lower growth in both the UK and EU. Whether Chinese or local, investors already invested in the UK property market are unlikely to look for an exit while the value of the pound remains low.

Meanwhile, volatility could be huge should a significant global influx of capital suddenly be directed at the UK property market. Such volatility in the market exposes potential investors to higher risk. Despite investment opportunities arising from a currency drop, there is greater uncertainty now than ever before and acquiring UK property opens investors up to increased risks such as rising vacancy pressure and potentially large price swings.

Edward Cheung, Chairman of Asia Pacific Board and Chief Executive, Greater China. DTZ/Cushman & Wakefield commented: “Though the UK is undoubtedly entering a period of uncertainty in the near-term, Brexit has raised the profile of the UK globally. Over the next few months, Chinese investors are likely to hold back, hoping for indications of market recovery. But mid- and long-term interest in the UK from China is likely to increase, particularly in the event of any price reductions and the pound remains weak at the same time.”