Asian investors, from pension funds to HNWIs, are as keen as ever to steer their capital to the West, so what does that mean for the Channels Islands as the structuring jurisdiction of choice?
There is currently a wall of capital from Asian investors focused on European assets. But why the interest?
Gavin Wilkins, Global Head of Client and Intermediary Relationships at Hawksford, believes that, although interest has existed for a long time, there’s a broadening of interest from some markets to others.
“There has always been a strong appetite for UK investment from Malaysia, India and China into the UK,” he says. “You don’t have to rack your brain particularly hard to come up with high-profile industrial, commercial and even nuclear investments.”
He points to an increasing appetite in Malaysia for real estate investment in the UK, extending a longstanding theme in other parts of Asia.
“UK real estate has held a special place in the hearts of Asian investors for decades, particularly London. ‘Trophy assets’ are seen as attractive at an ultra-high-net-worth individual, family office, pension fund and sovereign level.
The obvious example is London’s Battersea Power Station – once featured on the cover of Pink Floyd’s album Animals and now an £8bn mixed-use regeneration site that has attracted major investment from Malaysia to the UK.
Wilkins adds: “An advantage of being prestigious is that they are arguably more liquid and, as such, they are attractive to international investors willing to pay the required premium.”
Richard Daggett, Partner at Ogier, agrees – we need only look at the London skyline for evidence that Asian investors like to acquire landmark buildings.
The so-called Walkie Talkie (£1.28bn) and Cheesegrater (£1.15bn) buildings, as well as Battersea Power Station, are all iconic developments now in the hands of Malaysian and Hong Kong purchasers.
Broader appeal
What has changed in recent years is that investors now come from a more diverse range of countries, with investors from Singapore, Taiwan and Korea now investing heavily in Europe. Korean investment rose 122% year-on-year in 2019, to €12.5bn.
The rapid rise in the economies of Asian countries is resulting in a growth of long-term savings, which also drives the size of pension funds.
In China, population controls from the 1970s mean the working-age population is now at its peak, which is also driving investment capital growth.
Furthermore, in 2012, the Chinese Insurance Regulatory Committee relaxed restrictions allowing domestic insurance companies to hold overseas investments, which increased the capital available.
There is no shortage of money to invest, and a need for diversification means investors are looking to established foreign markets with attractive valuations.
Maturing market
Real estate has long been regarded as a safe asset for Asian investors. But a key factor now is how the market is maturing.
Daggett elaborates: “In years gone by, trophy assets seemed to be the main prize of the Asian investor. You are now more likely to find Asian purchasers looking at logistics assets in Dunfermline in Scotland, or student housing in Birmingham.”
Alasdair McLaren, Head of Private Wealth, Guernsey, at IQ-EQ, agrees that investors are looking beyond central London landmarks and towards educational institutions.
“The reason is that a large number of the current generation of Asian investors have been educated in Europe and have seen the opportunities. A lot of UK schools have expanded into the Far East too, so there is more familiarity,” he says.
“The focus is not just on prime central London property, either. There is less interest in properties on Bond Street or stores on Oxford Street and more in ideas outside the M25.”
Although investment in data parks and distribution centres might not sound overly sexy, on the back of Covid-19, these are being perceived as growth areas with higher yields, he adds.
So has there been an increased interest from Asian investors in ‘cheaper’ assets across Europe as a result of the coronavirus crisis, where lockdown restrictions have driven valuations down? Not at the scale initially predicted, says Daggett.
“The Covid-19 pandemic has restricted the ability of investors to visit the UK and assess potential property targets,” he says. “A brief lull between coronavirus waves in the summer, when investors could get boots on the ground, resulted in a bit more movement in the market, but Covid-19 has affected the nature of properties sought, rather than their price tag.”
Channel Islands’ increased role
The ongoing interest from Asian investors in European assets has implications for the Channel Islands as the structuring jurisdiction of choice.
Jon Le Rossignol, Group Partner at Walkers’ Jersey Banking and Finance Practice Group, says the Channel Islands have not historically been used for holding European assets outside of the UK, but there has been a trend towards this in more recent years.
This is particularly the case among UHNW investors and family offices, given the professional service levels and familiarity with real estate as an asset class across the islands.
From a corporate and funds perspective, Wilkins stresses that we are already seeing Jersey Property Unit Trusts (JPUTs) enjoying a resurgence among South East Asian sovereign and institutional investors.
The Jersey Private Fund regime is also highly attractive for Asian-based investors looking to access opportunities in the UK and Europe due to its flexibility, cost-effectiveness and speed to market,” Wilkins says.
“We have also seen a trend over the past 18 to 24 months of Asian family offices establishing family funds and co-investment vehicles with other family offices, and the JPF is often an ideal solution in these scenarios.”
On the private wealth side, Jersey’s credentials are familiar in Asia, and the value of what a sustainable international finance centre like Jersey offers is now much better understood.
Wilkins says: “In some ways, value perception in Asia has been a blocker in the past and that probably shouldn’t be entirely surprising.
“The global flight to quality and transition to substance-based structuring may not have favoured the traditional British Virgin Islands model, for example, which has been incredibly popular in Asia.”
He adds: “The costs associated with global compliance and operating within a sustainable model are greater, and the willingness to pay those costs ultimately depends on value perception.
“There have been more and more cases of bad and outdated structuring, causing issues that will continue to support that value appreciation.”
Could associated higher costs be a potential challenge to the Channel Islands as they look to further establish themselves as a jurisdiction for Asian investors?
McLaren takes a similar line to Wilkins on the value proposition. “Yes, the costs may be higher, but you get what you pay for. Issues such as the Panama Papers and the substance regulations have put a much greater focus on reputation, security and the ability to genuinely provide management and control.
“You need infrastructure and experience to support substance in a jurisdiction and that’s why the Channel Islands have benefited from the flight to quality.”
Succession planning
With the rising level of wealth in Asia and the impending generational transfer of this wealth, are Asian families reassessing the management of their family assets? Are they considering using external providers, with experience in succession planning and family office functions?
“Absolutely,” says Wilkins. “There has been a shift in approach that has been progressively gaining traction over the past decade. Trust is everything.
“And in some cases, the selection of family advisers in Asia has arguably placed a greater emphasis on trust than professional competence.
“The right approach is to try and work with trusted family advisers rather than compete against them, in time becoming a trusted adviser in your own right.
He adds: “The global nature of Asian families and next-generation considerations are well documented and have probably been brought into sharper focus by the immediacy of the pandemic.
“Covid-19-driven travel restrictions are likely to have accentuated that. So, it should be no surprise that succession structuring has moved from the ‘some day’ list to the ‘high priority’ one.”
Covid-19 travel restrictions have also, Wilkins claims, caused some families to reflect on governance and the sheer geographical spread of their investment holding structures – the original rationale of which may have become less clear with the passage of time.
Ada Ling, Business Development Manager in Ocorian’s Singapore office, agrees that political and geographical complexities are persuading families to rethink and bring in expert assistance.
Ling points to a combination of political situations – economic war between China and the US; uncertainty over tax regimes; China introducing the inheritance tax; as well as the international emigration trend of recent generations.
“It’s essential for North Asian UHNWI families to seek help and professional advice to mitigate the potential risk and manage the complexity of their family issues and investment/wealth – especially when they are located in different regions.”
What the future holds
The appeal of European assets will continue for the short term at least, but many questions remain about the longer term.
Will the property market in the UK hold up post-Brexit? Will commercial property and central city office developments – some of them still under construction – have the same pull for investors now that companies have adapted to remote working? And how will European assets generally be affected by a deep, Covid-19-induced recession?
These are the potential headwinds. But there are also potential incentives for increased investment.
For instance, as Wilkins points out, further liberalisation of exchange controls in China may well increase the level of Asian investment into the UK and Europe.
He concludes: “At the end of the day, people tend to favour investment in countries that they know and where they understand the market.” And those credentials certainly aren’t going to change.
• This feature was first published in the Asia Edition of Businesslife in December 2020