Will Chinese capital continue?

Real estate 360

The EU referendum has created a favourable landscape for overseas investment. While volatility acts as a break on domestic spending, the weak pound creates a big incentive for international investors. In the first three quarters of 2017, Chinese investors spent £6.4bn on UK property: up from £2bn in the same period in 2015*. The opportunity to snap up high-quality assets at a favourable price has sustained demand in UK real estate.

International capital propped up 80 per cent of transactions in 2016 , hitting £43.2bn*. Today it is widely seen as an essential tool to grow the commercial and residential sectors and help the UK hold on to its crown as one of the top European destinations for real estate investment.

Middle and Far Eastern buyers are among the most active. Capital flows into Manchester, Birmingham and other regional hubs as investors seek new markets. Brexit has so far done little to dampen interest. In the week the prime minister triggered Article 50, Qatar announced plans to invest £5bn in UK transport, property and digital technology projects.

Chinese buyers this year completed stellar deals in London’s commercial property sector. Just a month into the year, the Leadenhall Building was bought for £1.15bn, and Hong Kong investors acquired the Walkie Talkie in a record £1.28bn deal. Investment activity in other major cities was also strong. CBRE data shows Chinese investors have spent almost £4bn in the UK since the start of 2017.

Looking ahead, the biggest threat to overseas interest in the market will not be born from Brexit, but a tightening regulatory environment domestically and overseas. In China, a recent decision to limit acquisitions of foreign assets has already slowed demand for high-value commercial properties. The UK government’s recent decision to change the tax rules governing non-resident landlords will only compound these challenges. 

Adrian Benosiglio, RSM’s real estate tax partner warns that investments in the UK could become less viable, both from a commercial viewpoint and due to the need to navigate through increased regulation.

From April 2020, rent receivable by non-resident companies will be subject to corporation tax rather than income tax. Although the rate of tax will be reduced, the corporation tax regime is more complex and, given interest restrictions, could result in higher tax charges. This is all in addition to changes on capital gain made by overseas investors.

Adrian Benosiglio
Real Estate Tax Partner, RSM

*Source: CoStar Q3 Investment Report, November 2017

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