Chinese investors have walked away from some £2.5 billion ($5.3bn) worth of property deals in London in recent weeks, posing a multi-billion dollar question: are these exceptions, or do they signify an emerging a trend?
Shanghai-based private property conglomerate Shenglong last month pulled out of a £195m deal to acquire Thames Court office tower, just one week after a London-based trade newspaper, Costar, revealed its identity as the buyer.
Established 15 years ago, Shenglong, which is controlled by the billionaire developer Lin Yi, has been making waves in the United States and Australia with a string of high-profile purchases.
Its Australian subsidiary Aqualand has acquired $600m worth of prime sites, including the head office of Channel Seven at Pyrmont in Sydney’s inner west.
Shenglong’s US subsidiary, Century City, is planning a 37-storey upscale apartment block in Los Angeles.
The Chinese real estate website, Mingtiandi, notes that “although little-known outside of China, privately-owned Shenglong appears to be making use of funds earned through China’s property boom, and extended family ties in strategic locations, to build an international portfolio that now includes eight real estate development projects”.
Back in London, the large Chinese insurer Anbang has decided not to proceed with the purchase of a prime office block, Heron Tower, the third tallest office tower in London, for £750m. It would have marked the entry of the Chinese insurer into Europe.
In defence of Anbang’s decision, sources say the transaction would have been difficult because of a complicated shareholding structure. The building is held in a trust, and its investors include the State General Reserve of Oman Fund, the Omani sovereign wealth fund, and members of Saudi Arabia’s royal family.
A well-connected property consultant points out, while Anbang might have walked away from the Heron Tower deal, within days it acquired the HSBC Tower in downtown Toronto, Canada, for $C110m.
The third Chinese deal to stall in London involves China Minsheng, described as China’s largest private investment fund. China Minsheng was to fund the £1.7-bn redevelopment of the Royal Albert Dock in London, being undertaken by a Chinese developer, ABP.
ABP plans to create a third CBD in London, with its East London project to rival Canary Wharf in size and scale. Canary Wharf, developed in the 1990s, is now London's second CBD.
Seven months after signing a letter of intent with ABP in Shanghai, China Minsheng last month withdrew from the project, reportedly because the partners could not agree on ultimate stakeholdings.
The Royal Albert Dock project has been revived following the state visit to London by President Xi Jinping. In one of 40 agreements inked during the visit, China’s large state-owned CITIC Group formed a joint venture with ABP. Its construction arm, CITIC Construction, will be the contractor.
London property consultants note that Beijing’s focus is on infrastructure projects, electric buses, nuclear plants and liquid natural gas, and wonder aloud whether Xi’s visit will also revive Chinese investment in London real estate.
They speak of other factors at play.
One simple explanation for the current hesitation may be that London has simply become “too expensive", according to a senior executive of a large firm in the City.
Others believe a further tightening of capital outflow in September may be starting to impact Chinese investors moving large money out of China -- if the funds have not already been transferred to Hong Kong or elsewhere.
This camp also believes that as the gaze of President Xi Jinping’s anti-corruption watchdog widens from the military, party cadres and public figures to business, wealthy Chinese businessmen are becoming more cautious.
Fear of being caught up in the anti-trust dragnet tells some Chinese business leaders to be prudent and to keep a low profile as big-ticket transactions overseas can attract unwanted scrutiny.
But sources admit such talk is simply conjecture.
“We are getting mixed messages from our Chinese clients,” says a source, whose firm handles many of the large foreign property investments from Asia into London.
It has also been suggested that the Chinese may be starting to see more opportunities emerging in their home market. Consequently, they are turning their attention back to China.
London ranks alongside Sydney and New York as a destination of choice for Chinese capital.
Aside from the flood of high net worth Chinese buying residential real estate, Chinese corporate investors picked off some choice prime office blocks in London, and acquired stakes in several large projects in the 18 months or so before the current hiatus.
Chinese institutional investment totalled at least £2.6bn on office buildings.
China’s Ping An Insurance bought the Lloyds of London building for £260m in July 2013 to mark the arrival of Chinese institutional buyers in London.
The biggest transaction so far has been by China Investment Corporation, China’s sovereign wealth fund, which in 2014 acquired Chiswick Park, a West London office park, from Blackstone for £1.28bn. China Life Insurance Company bought 10 Upper Bank Street in Canary Wharf, jointly with Qatar Holdings, for £795m.
The State Administration of Foreign Exchange has invested in a UK investment platform, Gingko Tree, to secure purchases of over $US1bn in office and retail properties in the UK and Germany.
As in Australia, some of the biggest spenders are Chinese developers: Dalian Wanda, China Vanke and Greenland. They have announced plans for redevelopment projects, with a large residential component, valued collectively at almost £7bn, in London.
Chinese developers may, however, be finding the going tough in the UK, where the planning approval system is tougher than in Australia.
In a recent commentary on Chinese outbound capital, the Beijing team of the global property firm CBRE noted that Chinese developers are starting to experience the “challenge of obtaining planning approval for development on bare sites” in London.
It says that, unlike Australia, where the planning process takes less than a year, in the UK it can take “three years or more” to obtain development approval.
CBRE also mentions unexpected changes in laws affecting Chinese buyers. Capital gains tax was introduced in the UK in February, specifically aimed at offshore buyers of residential properties.
“It is difficult to get a good handle on what is happening with Chinese investments. But definitely, we are sensing that Chinese buyers appear to be wavering,” says a senior executive with a British property firm.
That said, he adds: “We may well see them conclude a number of large deals next week or next month. It is hard to predict what they will do.”