As the US China trade war and tensions continue to percolate, could these tensions have an impact on the stability of residential markets in the UK? The most likely outcome on the Chinese economy of a protracted US China trade war, would be a slowdown of the domestic economy, as well as general depreciation of RMB, as fewer consumers demand RMB to purchase Chinese-made goods. What repercussions might this have on us as operators in the UK property market?
Ultimately, neither of the outcomes mooted above would bode well for our domestic property market, as lower confidence within the Chinese economy will mean decreased investment capital flowing into the UK. And perhaps more concerningly, the central government of the PRC is likely to more rigorously enforce existing foreign currency controls, thereby slowing the outflow of funds; and therefore stimulating domestic consumption in China.
At the same time, as tensions simmer, residential markets around the world continue to face headwinds. Aside from the ongoing Brexit uncertainty, additionally, in the UK, this is in no small part driven by changes to government policy; particularly the way in which buy-to-let investors are treated relative to first time buyers and owner occupiers. As a result, developers have increasingly looked to new international markets to sell their developments and, for many, China is at the top of their list.
Already a major financial power in the global economy, China’s strength will only continue to grow – meaning that for many reasons, it is the obvious go-to choice. However, it is an opaque market and in particular does come with sales completion risk – this issue will be significantly magnified if Chinese nationals find it increasingly difficult to remit funds from China to their intended destination in order to complete property purchases.
Certainly this has an impact in other markets; for example in Australia, it is estimated that, in markets such as Chatswood, Sydney up to 90% of buyers were from mainland China. However, recent Australian government data shows China is no longer Australia’s biggest foreign investor amid a plunge in property purchases, primarily driven by greater capital controls and restrictions on foreign buyers.
Promotion of international property by agents or developers is not illegal within China, albeit it must be noted that the country adopts a foreign exchange control regime, and outbound acquisition of properties by Chinese national individuals is not permitted.
According to the implementation rules of the State Administration of Foreign Exchange (SAFE) Measures, each Chinese national individual has an annual foreign exchange quota of USD 50,000, the purchase of foreign exchange in excess of which is subject to strict restrictions and requirements of SAFE. It is notable that recently SAFE published notices in relation to individuals attempting to circumvent the regulations, with significant repercussions for them.
Although there have been no new laws or regulations promulgated to impose additional restrictions on Chinese nationals from purchasing properties overseas, there has certainly been an increase on the enforcement front which has caused attention and concern. It suggests that the Chinese government is strengthening its enforcement against illegal or non-compliant activities with respect to outbound acquisitions of properties.
The broader context of this is that the Chinese government has been tightening up the control over outflow of funds since late 2017 due to the significant pressure on China’s economic performance and depreciation of RMB. Such actions will surely only become more prevalent if US-China trade tensions continue, or indeed escalate further.
The impact of a US China Trade war on UK property
There is no doubt that the Chinese market will continue to be an important and growing market for developers to sell their schemes. However, in the short-term, should the US and China enter a long and protracted trade war there will no doubt also be further tightening of exchange rate controls which will create increasing completion risk for developers.
For developers, this underlines the need to have a broader buyer base for international purchasers of their schemes as a heavy reliance on specifically Chinese (or any group of buyers) creates a risk in the current volatile political and global environment. In particular, having an understanding of who the counterparty is to a transaction, and their ability to complete, becomes increasingly important. And for regulators, perhaps this further emphasises the stark reality that it is difficult to truly gauge what the outcome of manipulating market conditions will be.
Whilst there will always be a debate about both buy-to-let investors (domestic and foreign), the reality is that such capital is an important contributor to the overall creation of new housing supply which is desperately needed. I appreciate there will be some reading this article who will say that a reduction of international buyers is surely good for the local population – however I do not believe it to be that simple.
Fewer international buyers may well mean a reduction in investment by the property fraternity, and hence a decrease in housing starts. Decreasing supply will not address the affordability conundrum. In addition, domestic buyers (especially first time buyers) are typically far more active in a positive market rather than a declining one which, understandably, breeds apprehension & creates inertia.
The reality of our global world is that international tension and domestic repercussions far, far away are inextricably linked to the UK market – ignore that at your peril.