UK commercial real estate market continues to be a draw for Chinese investment, with rental growth in this market, especially in London office space, remaining attractive. Jersey sits front and foremost as the jurisdiction in which to establish acquisition structures.
The increase in Chinese investment overseas has partly been driven by the recent fall in property prices in China, expected by many observers to continue, and the Chinese government's easing of restrictions relating to moving money overseas. For Chinese investors looking to acquire UK real estate, trophy assets, of which there is an abundance in London, continue to be highly prized.
In addition to its investment options, London has other competitive advantages as a place to do business for Chinese investors. The Big Four in Chinese banking, namely Bank of China, ICBC, China Construction Bank and Agricultural Bank of China, each have large, well established operations in London and, from a Jersey perspective, have experience of lending to offshore real estate holding structures. London also provides access for Chinese investors to other financial markets.
Stability and expertise are key elements in Jersey's proposition. Jersey's low tax regime, proximity to the financial markets of Europe and a sophisticated banking and professional infrastructure have contributed to its success as a base in which to establish long-term, real estate holding structures. These structures benefit from Jersey's status as a well-established, transparent and appropriately regulated offshore jurisdiction. Also, whilst Jersey sits in the same time zone as London, many of the offshore law firms, including Ogier, recognise the value of the Asian Pacific market and now have offices in Hong Kong and mainland China. This allows for face to face contact, which is a key factor in establishing strong relationships with clients.
There are a number of other advantages for those using Jersey vehicles. These include the ability to sell interests in the real estate holding structure, as opposed to a direct conveyance of the underlying property, free of stamp duty or stamp duty land tax charges (SDLT). A well-structured acquisition can reap rewards several years down the line on an exit, with SDLT savings being a great attraction to potential bidders.
The types of Jersey vehicles we see used for property holding structures are Jersey property unit trusts (JPUTs), limited partnerships and companies. A key attraction to using a JPUT to hold UK commercial property is that a JPUT can generally be structured as a "Baker Trust", meaning that income of the JPUT will be directly attributable to the unitholders and taxed on the basis of their own tax status. Unitholders will also have the ability to set off interest and real estate operational expenses of a JPUT against rental income. In a similar manner, Jersey limited partnerships will generally be treated as transparent for UK income tax purposes, resulting in partnership income being treated as arising directly in the hands of the limited partners who will be taxed in accordance with their own tax status.
Another advantage for a Jersey holding structure is that it can register under the non-resident landlord scheme whereby rents may be received gross of UK tax. Furthermore, Jersey holding structures can register for VAT purposes to allow recovery of VAT on the purchase of UK real estate.
With China set to continue its economic expansion and Chinese investors looking for safe but stable returns with the potential for capital growth, the appetite for real estate assets in countries like the UK looks set to increase. As the UK real estate market remains an extremely attractive prospect and Jersey vehicles continue to be popular for holding such assets, we expect that Chinese investors' current use of Jersey property holding structures is only just beginning.
This article first appeared in Jersey Finance's Links with China publication
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