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For a country so involved in the development and building of Shanghai in the early part of the 20th century, the UK has contributed little during the cities recent renaissance. This is to be regretted; particularly in the case of London based developers practiced in balancing modern commercial requirements with the demands of historic conservation.
When it comes to choosing potential areas for investment, despite its impressive growth rates and recent returns for property, there are clear reasons why China might not rate as highly for UK investors. Issues of language, currency controls, financing constraints and local competition combine to make accessing, exiting and understanding this market more difficult. This is particularly true when contrasted against opportunities in other 'emerging markets' such as Eastern Europe and even some of the new European Union Member states.
There are exceptions to this trend, including Grosvenor Estates, which recently established an operational centre in Shanghai. In addition, Alchemy Capital, a UK based private equity firm run by Dyfed Evans, former Managing Director of Cushman & Wakefield in Shanghai, focuses exclusively on real estate investment in China. Working with UK and European corporate, institutional and private investors, many having come from the 1970's and 80's vintage of successful London developers. Alchemy has been active in seeking investment opportunities in Shanghai and elsewhere in sizes up to US$500m and sectors ranging from Offices and Retail through to Hotels. The types of issues and problems facing Alchemy and its' investors are typical of those facing any UK property company.
Risk is probably one of the main issues any investor wishes to be comfortable with; particularly in the case of 'non-located investors'. In Alchemy's case, this means investments in those properties with an existing income stream or those close to completion where such an income stream is possible to more clearly assess. The objective is to aim at net initial yields of over 10% with, surprisingly, retail investments currently offering some of the most favourable opportunities.
Problems facing these UK investors will in part, vary according to the circumstances of each company. However, there are a number of areas which will likely effect any potential market entrant. These can be broadly defined as (i) Financing (ii) Currency Risk (iii) Domestic Competition. All of which combine to increase the returns demanded by UK investors looking at China real estate.
Financing of commercial property deals is a case in point. Most obvious is the problem of established UK investors leveraging banking relationships in their home markets against those in China. With few banks offering reciprocal services, even established operators in the UK struggle to obtain similar credit terms, credit rating and service once in China. Without appropriate leverage (the amount which can be borrowed to purchase a property), local investors with better access to credit, and fewer investment alternatives, have a clear competitive advantage.
Currency risk is a further issue which requires consideration. Although many of Alchemy's investors remain sanguine about convertability over the medium to long-term, the issue still raises difficulties. It is possible to bring hard currency in and repatriate hard currency from both the current and capital accounts (for this read capital investment and rental income). However, the processes are complicated, require additional time and expense and are always subject to potential delay or other unforeseen hold-ups.
Finally, local competition both in the form of better access to credit (as mentioned above) and a lack of alternatives, makes it difficult for potential UK money to find attractive deals. In a climate of low bank deposit rates and a weak stock market, property offers an attractive alternative for local investors. Even if yields are as low as 4-5% these are still significantly above either savings or equity returns. With domestic investors ready to accept such low rates of return (in part because of hope of future capital increases) it is difficult for UK investors, who need often substantial yield premiums to reflect China risk, to compete.
While the above problems are real and credible in terms of potential deterrents for UK property companies they are no more than this. In a country famed for its architects and its past innovations in property construction, it remains disappointing to see such limited UK interest in China. Time, patience and experience should, in the long term allow them to understand and manage these risks and problems of market access. But, until companies actually start this process, don't expect major UK developments any time soon.
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