UK: Overseas Investment Boost To UK Residential Developments

Last Updated: 12 April 2011
Article by Andrew Smith

The Coalition's austerity plan has reduced public funds available for much-needed residential development, and for some of the major infrastructure projects which make those developments viable. On top of that, the banks just aren't lending – but all is not lost for new build, according to a legal property expert.

Andrew Smith, Real Estate partner says that money from the Far and Middle East, and from Eastern Europe is flowing into the country, as investors take advantage of the UK's mature and stable legal system, and the potential returns they can expect.

Andrew said: "We're seeing a lot of interest and investment from Singapore, Hong Kong, China and India, as well as from the Middle East and countries like Kazahstan.

"The pound is still low against the dollar and these nations only deal in US currency or the euro, which is also strong against sterling. That means, despite our perceived high land, labour and materials costs, we're an attractive option for investors.

"One contributing factor is that, unlike many other countries, our legal system is sound and fixed, protecting buyers. On top of that, property in the UK is seen as a substantial asset, akin to the likes of gold and we also have a recognised need for new, affordable housing, so the demand exists."

But it isn't just large corporates looking to put their money into the UK - high net worth individuals are also getting in on the act, as those with personal wealth join forces to provide investment to answer the UK's housing needs, and profit in the process.

Andrew said: "Over the last 18 months or so, we've seen a number of 'investor clubs' being created, as groups of investors band together to fund various schemes.

"These 'clubs' are largely informal, and most have been prompted by a need for more control over the money invested – both offshore and UK individuals are involved, and they're forming these funding relationships with like-minded individuals rather than simply handing their money over to a management company.

And, says Andrew, we do need that investment whether it's from Sovereign Wealth Funds, large corporate concerns or from the personal accounts of other wealthy families and individuals as the more traditional funding options have dried up.

"The banks just are not lending, at least not without a large amount of equity already in place; section 106 is causing issues because of its open-ended nature; and, for the last few years, residential property developments have relied on housing associations taking a chunk of the site - with the budget cuts in place, that's unlikely to happen moving forwards making developments more expensive.

"With the economic backdrop, land availability is also an issue – owners of potential development land may be reluctant to put that land on the market when developers are having such a hard time of raising funds through conventional means.

"We also do need to be very aware of the impact of public funds being withdrawn from major infrastructure – some of the sites identified for development are only viable if transport links are enhanced, for example. If developers have to foot the cost for those sorts of improvements, it could remove any financial incentive for them to go ahead."

Andrew also warned that we don't yet understand the implications of the various changes announced in the budget.

He said: "The major infrastructure projects regime is undergoing change, there is a consultation about replacing section 106 with a Community Infrastructure Levy – we don't have enough information yet to understand the impact – and there are pressures because, in some instances, higher standards of affordable housing might need to be met. Plans to give more power to local councils over projects which could be seen as having national import – new towns and the like – are also going to be key.

"But we have to wait until the detail of this information comes out before we can see what sort of effect this is likely to have on the UK's residential development projects."

However, while foreign investment is forthcoming, the construction industry can expect to be busy.

"When developments succeed in this country, they succeed well, providing great return on investment for those who provided the funding. We just have to make sure our own bureaucracy doesn't act as a stumbling block," said Andrew.

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.

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