It is high tide for investment in real estate assets in UK and European markets. 2014 has been a strong year with double digit returns and London leading rental growth throughout the UK. A significant amount of interest is from foreign investors, which reflects a history of global investors looking to London as a safe haven. Recent trends driving Asian investment is the relative high value of property in China and parts of South East Asia, as well as the need to diversify from risks in local markets.
The UK, and London particularly is seen as the primary market for overseas investors in UK real estate, and that looks to remain notwithstanding the election due in May 2015.
According to real estate firm, JLL, "The general election in May will obviously draw attention away from the housing market, but our research of past elections reveals that the housing market generally continues along its growth path. For the majority, perhaps with the exception of higher value properties in London in recent times, the outcome of a general election will not govern whether people buy, sell, upsize or downsize".
Residential Property Demand
It is this stability that appeals to international investors in UK property. Over the past few years overseas investors have substantially invested in London residential property and none more so that investors from the Far East, who according to JLL collectively accounted for 52% of their sales of central London residential property.
It is predicted that investors from Singapore, Malaysia, Hong Kong and China will continue to drive growth in property values, with continued momentum for investment in UK residential property, whether it be from the perspective of a "lock up and leave", "buy-to-let" or as a base for a child studying at a university in the UK. But it is not just individuals who are pouring into the UK's property market. Asian developers are also increasingly diving in, helping to solve the riddle of the UK's critical housing shortage.
31 October 2014 marked the global launch of the Battersea Power Station development by bringing the Foster + Partners and Gehring Partners designed apartments to the market in a limited international release. Construction began after many years of failed attempts and only after a Malaysian consortium stepped in to redevelop the site into 3,500 homes, plus offices, shops and a park. London Mayor, Boris Johnson recently marked the relationship between London and Asia, by naming the heart of the Battersea Development as "Malaysia Square". Interestingly, the Malaysian consortium chose Jersey to structure their acquisition.
While Battersea is often cited as the leading example of Asian investment in UK residential property, there are a number of other Asian developers playing a role. Knight Dragon, a Hong Kong based developer set the standard for luxury development with its development of "The Knightsbridge" which was voted "Residential Development of the Year" by Property Week. It is following up that development with the transformation of 190 acres of Greenwich into a hi-tech village made up of 10,000 homes.
Singapore is also making its mark. Oxley Holdings, a Singaporean lifestyle property developer had launched its maiden overseas property development project in London. "Royal Wharf" is a £200m plan to develop a 363,000m2 waterfront development into 3,400 apartments and townhouses, as well as approximately 20,000 m2 of retail and office space. They are not holding back when they proclaim that their development "also has the world's best back yard. 1,600 square metres of arguably the greatest city in the world: London".
With growth in international investment in the UK residential property market continuing unabated, there is increasing pressure on UK domestic buyers who are struggling to compete. In response, the UK government has introduced a number of new taxes - a higher rate of Stamp Duty Land Tax for higher value residential properties & residential properties held in companies, and an Annual Tax and Chargeable Gains Tax on properties held in a company. In 2015 a new Capital Gains Tax will be introduced which reflects the existing tax paid by domestic buyers and puts them on a level playing field with international investors. As the 2015 election approaches, there is increased talk of an additional "Mansion Tax" to be imposed on high value residential property, should the UK's Labour Party win the election.
Commercial Property Trends
It is not just the UK's residential property market that is gathering a head of steam, there has been significant growth in the UK's commercial property sector too. Commercial real estate advisor, CBRE is also predicting growth in the prime London commercial property market. Increasing confidence and investor interest will in their opinion result in a ripple effect of price growth into the regional markets.
In the Property Data Report 2014, the British Property Federation highlighted that the number of overseas investors have substantially increased over the last 10 years, and now between them own almost a quarter of all UK commercial real estate, three quarters of which, is located in Central London. According to DTZ, Central London alone saw £14 billion worth of transactions, of which 27% was attributable to Asia Pacific investors.
As with residential developers, there have been a number of examples this year of substantial investments by Far Eastern entities. Malaysian investor Permodalan Nasional bhd completed the purchase of Avalon House in London for £155m, having earlier in the year purchased 77 Queen Victoria Street for £25m. Herons Plaza (very close to Collas Crill's London office) in Bishopsgate was snapped up by Singaporean UOL Group Limited for £97m and Hong Kong based investor Emperor International Holdings Limited bought a prime retail investment on London's Oxford Street for £35m, to name but a few.
Commercial property has not been impacted by the new taxes introduced on residential property, and there are few restrictions imposed on the ownership of commercial property by foreign incorporated companies. Many investors turn to the Channel Islands in this respect, and particularly to Jersey's Unit Trust as an efficient holding structure for UK commercial property.
Use of Jersey structures for UK real estate investment
There are limits to using offshore vehicles for residential property investments due to the recent tax changes (highlighted above). However, for UK commercial property investments, using Jersey companies, unit trusts or limited partnerships as holding vehicles can have significant benefits.
The types of transactions for UK property investment where our clients use Jersey structures include:
- Funds investing in various areas of the commercial property markets which are managed by specialist real estate fund managers and marketed to professional investors worldwide.
- Special Purpose Acquisition Vehicles listed on the London Stock Exchange. These have a broad remit to make acquisitions within defined investment criteria, which are usually highly focused on specific sectors.
- Bespoke property holding vehicles for high net worth clients investing in property projects.
- Real estate financing provided by UK and Asian banks to funds or other investors via offshore vehicles. We advise on the (a) initial borrowing of debt and the security to be provided, (b) refinancing of debt, including syndicate loans involving multi-jurisdictional international banks, for the purchase of investment assets, and (c) recovery of loans, either at the end of the lending term or otherwise, and this includes dealing with refinancing as a solution to the recovery of funds.
Jersey Property Unit Trusts
This is a popular structure for UK property investments so it's worth considering some of its features.
A unit trust is governed by a trust instrument which is a very flexible document which can be prepared to meet the bespoke requirements of a select few investors or be prepared in generic terms for a larger number of investors. A unit trust fund is usually pooled to obtain a wider spread of investments, which enables greater returns. At the same time, the risks are diversified reducing the overall risk of investment and potentially maximising returns.
Investors (called unitholders) will subscribe for units (rather like shares in a company) which gives them rights to a proportion of the profits of the unit trust's investments. There is no limit to the number of investors who can hold units.
In a property unit trust there is a contractual and trust arrangement established by a triangular relationship between the investment manager, the trustee and the unitholders: there are contractual and trust features of that triangular relationship. The trustee is a regulated company in Jersey. The trustee and manager owe fiduciary duties and obligations to the unitholders to be carried out solely for the benefit of the unitholders.
The principal benefits of a Jersey structure are that it will not be subject to all the usual regulations and taxes imposed by the UK and EU. This can be crucial for Asian investors who do not wish to necessarily establish a presence on the ground in the UK. Management and control of structures can be conducted in Jersey so that investors can take advantage of zero corporation tax, capital gains tax, withholding taxes and stamp duty in Jersey.
Most importantly, Jersey has a long track record of investment into London and the UK. The investment community in the UK are very familiar with use of Jersey structures. Jersey's infrastructure is second to none in terms of the expertise of advisers and corporate service providers for setting up and operating property holding vehicles.
Originally published by Centillion London Capital Markets Newsletter - January 2015 issue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.