As China Puts Hong Kong On Fast-Forward, Investors Look To London
Does the year 2047 feel soon to you? Probably not. But it might if you were one of Hong Kong’s super-wealthy families. After all, 27 years is only really one generation away.
The year is fixed in the minds of Hong Kong investors, one of the reasons why money from the island keeps flowing in to London and UK real estate, and one which, after the events of the past couple of weeks, feels a lot closer.
When the UK transferred sovereignty of Hong Kong to China in 1997, China agreed to maintain “one country, two systems” for at least 50 years, leaving Hong Kong with its own democratic legal and political apparatus.
But in the past 12 months, those assurances have seemed less concrete. Last summer, protests erupted over an extradition law that was dropped but would have potentially made Hong Kong citizens subject to domestic communist Chinese law.
And two weeks ago, a new national security law was passed that critics fear will essentially ban criticism of Beijing, and remove some of those democratic freedoms China had promised to protect until 2047.
As a result of the new law, Boris Johnson said the UK would offer the right to live and work in the UK to the nearly 3 million Hong Kong citizens eligible for a British National Overseas passport. And since money is easier to move than people, whether or not there is a significant migration of Hong Kong citizens to the UK, there may be a significant migration of cash — with commercial real estate one of the big beneficiaries.
“At the beginning of last week we saw a significant uptick in enquiries from Hong Kong investors regarding London,” CBRE Head of EMEA Capital Markets Chris Brett said. “More unrest in Hong Kong is a significant push factor for capital, which involves diversifying assets away from Asia. If you are a high net worth family or a corporation run by one of these families, you will be looking to diversify, and London is always No. 1 for Hong Kong capital.”
The numbers very much bear this out. Hong Kong investors ploughed £14B into London commercial real estate between 2015 and the end of 2019, according to Real Capital Analytics, by far the largest outbound investment destination, excluding China. Singapore was a distant second with £3.7B invested, and the largest U.S. city was New York, where just £2.1B was invested.
There are deep historical and cultural links between the UK and Hong Kong. Hong Kong was a colony and British Dependent Territory of the United Kingdom from 1841 to 1997, apart from a brief period under Japanese occupation from 1941 to 1945. As a result, its legal system is similar to that of the UK, business practices are similar and English is an official language in Hong Kong, making transactions between the two areas relatively easy.
Some of the most eye-catching deals of the past five years have been undertaken by wealthy Hong Kong investors. CC Land paid £1.15B in 2017 for the Cheesegrater office tower in the City of London, and has since invested in two major high-end residential development projects.
Li-Ka Shing’s CK Asset Holdings paid £1B for the Broadgate HQ of UBS in 2018, and a year later the company paid £2.7B to take private Greene King, the pub company with a portfolio across the UK valued at as much as £4.5B.
Li has come out in recent days in support of the new law, but his investments speak of a desire to diversify beyond his home market.
Even during the period following the coronavirus lockdown, when London deals have been few and far between, Hong Kong investors have been among the most active.
Mighty Divine Investments, a family office, paid £94.2M in May for the 78K SF 10 Fenchurch Street office building in the City of London. The acquisition could lead to a major new development on the site.
The same month, Lifestyle International Holdings, a department-store operator run by Thomas Lau, brother of Chinese Estates founder Joseph Lau, told the Hong Kong Stock Exchange it had bought a £50M stake in Landsec.
A group of Hong Kong investors paid HB Reavis £120M for an office block at 20 Farringdon Street last week.
And this week React News reported that Link REIT was in talks to buy the Cabot office building in Docklands for £390M. The company had been in talks earlier this year to invest up to £1.5B in Intu's ultimately aborted rights issue.
Of course, the link between political uncertainty and outbound investment capital is not always direct and instantaneous.
“We are talking to capital from all over the world, I’m not feeling an overwhelming buzz from Hong Kong in particular, more than anywhere else, right now,” Savills Head of Cross Border Investment Rasheed Hassan said. “But in spite of that, I do think you will see some eye-catching deals from investors there this year. They’ve been among the more active investors even during lockdown.
“You have to remember that it can take a while for these things to come through. Instability affects some people’s confidence, that sense of feeling flush and being ready to make a discretionary purchase.”
Brett said there could be another immediate term impediment: Investors looking to find bargains in London as a result of COVID-19 are likely to be disappointed.
“A lot of these investors are looking for distress, to buy at discounts of 20-25% in London, but you won’t get that,” he said. “In the early days after the [global financial crisis] there was some uncertainty, but in the aftermath of Brexit yields in London only rose by 25-50 basis points. So will there be price movement, yes, but not the extent that people imagine. That is why some investors have looked to public markets, which are more liquid and where you have seen that movement.”
The ties that bind the UK and Hong Kong are deep. As China looks to pull the island closer to the mainland, London property is likely to continue to see investors look to use it as a hedge against a date that may not be as far away as it once was.