Date
23 September 2017
UK Prime Minister Theresa May gave no details of her negotiating strategy over Brexit, a key concern of investors. Photo: Bloomberg
UK Prime Minister Theresa May gave no details of her negotiating strategy over Brexit, a key concern of investors. Photo: Bloomberg

UK election mixed news for China and Hong Kong investors

The result of the British general election on Thursday was good news for Chinese and Hong Kong investors, if not as good as they had hoped.

The Conservative Party remained in power as the largest party and obtained 318 seats, down from 330 in the previous parliament. That was not enough for an absolute majority in the House of Commons, which requires 326 seats. It will govern with the Democratic Unionist Party of Northern Ireland, which won 10 seats.

This means that the United Kingdom, and London in particular, will remain a magnet for investment by Hong Kong and mainland investors, both corporate and individual, especially in the property sector.

In 2016, according to JLL, Chinese investors bought more than 3.15 billion pounds (US$4.01 billion) of commercial assets in central London, 22.5 per cent of the total transaction volume. It said that London attracted about 16 per cent of overall mainland Chinese overseas investment, second only to New York with 18 per cent.

“The worst-case scenario for overseas investors, including from Hong Kong, was a Labour victory,” said George Brock, a political analyst. “Its manifesto promised to raise corporation tax from 19 to 26 per cent. To fund its very ambitious objectives, it would have to raise taxes. The easiest targets are foreigners, the wealthy and property. It could have imposed taxes on second properties and those purchased but left empty.”

The Conservatives, on the other hand, are the pro-business party. Its manifesto promises to cut corporation tax to 17 per cent by 2020 and increase the income tax personal allowance to 12,500 pounds and the higher rate threshold to 50,000 pounds by 2020.

“Since Britain is leaving the European Union, it needs foreign investment even more than ever,” said Brock. “China and Hong Kong are important sources of such investment. So Theresa May cannot afford to upset them.

“The UK has many attractions as an investment destination. It has a strong legal system and excellent lawyers which protect your asset. If you buy property in France or Spain, you discover there is a law or regulation you did not know about. London remains a global city that attracts and will continue to attract investment from around the world. You are buying a liquid asset.”

But not all the news is positive. One uncertainty is the outlook for sterling. Since the Brexit referendum last year, sterling has depreciated by 13 per cent. Most analysts expect this fall to continue because Theresa May does not have an overall majority and the outcome of the Brexit negotiations is uncertain. On the day after the election result, sterling fell 1.27 per cent on Friday, to US$1.2737.

On June 19, Britain will open negotiations with the European Union on the terms of its exit. The talks will be complicated and antagonistic. The EU has demanded an upfront payment of 100 billion euros to settle Britain’s liabilities and insists that talks be strictly sequenced; May has refused this figure. Arguing over this amount will be the diplomatic fight of the summer.

During the election campaign, May gave no details of her negotiating strategy over Brexit. So investors do not know the situation after Britain leaves the EU.
On Wednesday, the Organisation for Economic Co-operation and Development (OECD) forecast that the British economy would grow by only 1 per cent in 2018, down from 1.6 per cent this year.

“We assume that the UK will leave the EU without a comprehensive free-trade agreement to replace the single market arrangement, and the expectation that the UK will trade on more restrictive World Trade Organisation terms from April 2019,” it said. “The uncertainty, and the assumed outcome, is projected to undermine spending, in particular investment … Recently sterling depreciations have not stemmed the UK’s persistent decline in its share of global export markets.”

Hong Kong and Chinese investors will have to judge how many companies will leave the UK because of Brexit and relocate to Dublin, Frankfurt, Paris and other cities in Europe, taking their well-paid employees with them: how much will this affect demand for high-end properties, both commercial and individual?

Another issue is how long the new government will remain in power. If all the opposition parties voted together, they could bring the government down and cause another general election.

Theresa May herself has come under intense criticism from members of her party for her manifesto and the way she conducted her campaign; on Friday, she was forced to fire her two closest advisers, Nick Timothy and Fiona Hill. Rivals within the party may try to bring her down and replace her.

During the campaign, the Labour Party made housing one of its core issues. As in Hong Kong, young people with two average salaries cannot afford to buy homes in the major cities; the gap between rich and poor is widening every year.

The situation is most critical in London. According to the NGO Shelter, there are 170,000 homeless people in the city; its house prices rose 57 per cent from 2011 to 2016, while actual wages fell: British home ownership has fallen since 2010 and is the fourth lowest in Europe.

All this makes the property market vulnerable to drastic reforms and taxes if a Labour government under Jeremy Corbyn were to take power after another election.

So the election result leaves Hong Kong and mainland investors with many things to consider.

– Contact us at [email protected]

RT/RA

Hong Kong-based journalist and author. He had worked as a correspondent for the South China Morning Post in Beijing and Shanghai.

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