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Can Chinese capital flows into UK real estate ride out this storm?

Over the past few months, we’ve seen global stock markets despair as China’s economy slows down.

A Chinese slowdown could have a number of knock-on effects across business sectors including real estate, but there are competing factors at play.

On the whole, a reduced appetite for UK-generated goods and services could lead to fewer-than-anticipated export opportunities, which could adversely affect a significant number of UK businesses and their occupational requirements.

This in turn could have an impact on rental growth and reduce the attractiveness of UK real estate as an asset class.

Also, a slowdown may lead to reduced capital flows out of China and into UK real estate and infrastructure.

“Chinese investors will doubtless increasingly look to the UK as a safe haven for their capital”

That said, the macro-economic effect of a slowdown could be to delay any rise in UK interest rates, maintaining the arbitrage between cost of cash and investment returns, and thus the viability of the real estate investment market – particularly for UK investors.

Equally, even though outbound investment from China will become more expensive, we may actually see increased capital outflows, as investors relocate to where the currency is more stable in order to preserve the value of their assets.

Chinese capital coming

Some Chinese investors will doubtless increasingly look to the UK as a safe haven for their capital.

According to Pinsent Masons/Cebr China Invests West report, over £36bn of investment will flow from China into UK real estate between now and 2025.

The report also forecasts the UK real estate sector to receive a considerable share of inward Chinese foreign direct investment, averaging 24 per cent of total FDI up to 2025.

Real estate will attract a higher share in the beginning of this forecast period, peaking at almost 37 per cent in 2019.

Further on, as the ‘low-hanging fruits’ dry up and competitive returns in the sector diminish, real estate’s share of Chinese FDI is expected to decline to 13 per cent in 2025.

However, given the growth in the overall size of Chinese FDI into the UK, absolute values will keep rising to reach just under £4bn in annual flows terms in 2025.

“The US remains the largest source of inward investment and will continue to be for the foreseeable future”

We have no doubt we will continue to see large capital flows from China.

US in the lead

However, this should be seen in context.

The US remains the largest source of inward investment and will continue to be for the foreseeable future.

The US opportunity funds continue to receive enormous inflows of capital and, whilst they might have nearly exhausted the supply of UK NPL (non-performing loans) portfolios (and are now seeking NPL opportunities in Europe), they will be turning their eye to property companies and direct real estate investment.

This is only set to gather pace as the US economy strengthens and the dollar gains strength against European currencies in general.

James Crookes is property finance & investment partner at Pinsent Masons

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