Hong Kong’s investors are making hay while the sun shines

Until last month, Hong Kong-based Lee Kum Kee Group (LKK) was best known across Asia for its oyster flavoured sauce and ubiquitous red-labelled bottles. Outside of Asia, it is now better known for its £1.28 billion ($1.68 billion; 1.44 billion) purchase of London’s 20 Fenchurch Street or Walkie Talkie, as its known.

The splashy acquisition – UK’s largest ever office deal – by a subsidiary of LKK, whose only other property purchase in the country was a £37 million office buy last December, carries a striking resemblance to the outbound investment strategy of its mainland China peers.

At least for now, Hong Kong-based firms appear to be benefiting from the capital controls enveloping their neighbouring institutions. From PERE’s conversations with advisory firms, some Hong Kong’s biggest investors are becoming attractive bidders in international auction rooms by virtue of both the prices they can offer and their lack of restrictions. Doubts over mainland investors’ ability to close deals has reduced at least perceptions of their competitiveness in global markets.

LKK’s purchase stands out because of the record price tag. But the list of Hong Kong conglomerates, family offices, developers and wealthy individuals making global acquisitions, particularly in London, is steadily increasing. In fact, Hong Kong investors are now the second biggest inter-regional buyers from Asia, with $4.9 billion worth of outbound property investments made in the first half of the year, according to research by property consultancy JLL. In contrast, their outbound investments in the first half of 2016 totaled $1.7 billion.

A weaker pound makes buying core assets in London an obvious investment choice. Hong Kong-based investors’ office investments in the City of London already reached £2.2 billion in H1 2017, which broker Knight Frank says represents a five times increase in comparison to a year ago, according to news reports. Among this recent flurry of deals was CC Land’s £1.15 billion purchase of The Leadenhall Building, another top-five price paid in the city (see table below), and SEA Holdings’ purchase of 33 Broad Street for £258 million in May.

It is worth keeping in mind that some of this investment volume could also be coming from the deals done by the Hong Kong-listed subsidiaries of Chinese companies. Several Chinese institutions, including China Life Insurance, have been using their offshore platforms to fund overseas property purchases, as a way to circumvent capital controls.

According to some onlookers, there is more to Hong Kong investors’ overseas push than just a hunt for yield. Diversification and capital preservation are also key motivations. PERE’s sources speculate that those factors reflect a fear contagion emanating from China’s mainland and is rooted in the political uncertainty surrounding Hong Kong’s own regulatory future under Chinese rule.

In theory at least, there are decades to go before 2047 – the year when the “one country, two systems” framework that China has allowed Hong Kong to live by, since the 1997 handover of the island-city’s sovereignty from Britain to China, expires. However, events of the past few years, including the so-called umbrella revolution in late 2014 and the uproar preceding the election of a new chief executive earlier this year, has accelerated the uncertainty.

The real estate sector has been particularly stirred, partly due to the question of what will happen to residential mortgages after 2047. Developers and private individuals signing new land leases (with a 30-year mortgage) next year onwards will see their leases expire after 2047, creating uncertainty about the future of their mortgages. According to a recent Nikkei report, ambiguity about the legal structure of these leases after 2047 could make it harder to get bank loans.

For now Hong Kong’s marquee investors appear to be unshackled on the regulatory front, and the LKK’s purchase of the Walkie Talkie is evidence they are taking full advantage. Operating at such close proximity to their Chinese comrades however, they will know the tide can turn any moment.