London prepared for Chinese real estate investors

An aerial view of London at night. [Photo/IC]

While the recent stock market turmoil could see more Chinese money flow into European property markets, industry insiders say the trend over the past few years has come about from a complex set of factors. Chief among them are China's enormous overcapacity and the sluggish domestic property market, which have prompted wealthy people to diversify with offshore assets.

Walter Boettcher, research director and economist at global realtors Colliers International, based in the UK, says: "When we (Europe) went into the financial downturn, there was a lot of uncertainty, so obviously the Chinese, like many other foreign investors, were looking for safe places to invest. There was a bit of a push factor, too. The Chinese (companies) realized they were very exposed to dollar-denominated economies, and in some measure they were looking at the UK, and even Europe, as a means of diversifying their exposure to various currencies."

Air pollution and health and social services issues have also led many Chinese individuals to buy property in the developed countries to which they may eventually emigrate.

"What's more, the Chinese government is encouraging companies to go out and invest in overseas markets," adds Rasheed Hassan, director of cross-border investment at Savills.

Insurance giant China Life is one of the biggest corporations to follow that advice, buying No 10 Upper Bank St - an iconic skyscraper in London's Canary Wharf - for 795 million pounds last year.

Simon Barrowcliff, executive director of central London capital markets at CBRE, a commercial real estate company, explains that, initially, the acquisitions were for occupational reasons, such as Chinese banks that had expanded into the UK buying their own headquarters in the City.

"From there," he says, "that developed more into mainstream investment, mostly by institutional investors, until what we have today, which is a position where we're seeing a number of different streams of investment coming from China: the developers, the property companies, the institutions (particularly insurance companies) and the quasi-sovereign wealth."

The appreciation of the yuan in recent years has also made overseas assets more affordable.

Nick Braybrook, head of City investment at Knight Frank, says there are push and pull factors for the flow of money into European property markets. The pull factors for London, he says, largely come from the state of the market, "which is one that has originally seen a lot of outward yield movement, with yields looking quite competitive compared with a lot of other competing cities".

However, one thing that sets the British capital apart from other markets, according to Eric Zhao, head of China desk for cross-border investment at Savills, is that the city has such a large concentration of overseas buyers.

"Because about 70 percent of trade (in London) involves overseas investors, they don't stand out," he says. "In other markets - Paris, Berlin - you have a much bigger percentage of domestic purchases, and therefore overseas buyers, be they Chinese or from anywhere else, are a smaller percentage and tend to have less choice perhaps of things they can look at."

The influx of Chinese capital into London and other major European cities that is expected to follow the stock market crash in China will have a dramatic effect, some analysts say. They believe the investment will potentially attract even more money to the real estate industry and create tens of thousands of jobs.

However, critics argue that foreign investors have already had a detrimental effect, with locals blaming them for the soaring house prices in many cities.

The government in the UK has made a series of changes to the country's tax system in the past three years aimed at discouraging wealthy foreign buyers from entering the London housing market. The crackdown focused particularly on homes bought using offshore companies, which make it hard to trace a property's ownership.

Another challenge comes from the fact that commercial properties do not come with a guaranteed, steady rent flow or price appreciation in all European cities.