As the world faces a financial recession of an even larger magnitude than we saw in the aftermath of the financial crisis of 2007-09 and lockdown restrictions begin to ease across the globe, focus in the market is increasingly on moving towards the New Normal.
Exactly what that will look like is, of course, not entirely clear and will be subject to ongoing scrutiny and discussion as the market tries to adapt to the continual challenges thrown up by recent events, whilst at the same time, doing its best to recover.
What are we seeing from Asian Investors?
One trend we have watched with interest both before and throughout lockdown is the ever-increasing investment into Europe by Asian investors coupled with readily available lending in support of those investments.
There will be many factors driving this trend (too many to set out here) but we consider the following to be particularly relevant based on instructions in recent months:
- difficulty for investors to find valuable investments in a mature Asian market and therefore a desire to diversify;
- a weak Pound; and
- in relation to investment in UK assets in particular, opportunities outside of London in regional hubs where there are potentially greater yields, sizeable investments, regeneration opportunities and notable developments in infrastructure, for example, the HS2 railway project which will link London, the Midlands and the North.
In addition, Asian investors continue to invest in Europe at pace notwithstanding uncertainties surrounding Brexit and potential currency fluctuations between the Pound and the Euro. The entry into the EU-UK Withdrawal Agreement in January 2020 has created some stability around the UK property market. In the London commercial property market in particular, discounted real estate valuations arising from a combination of Brexit and the Covid-19 pandemic are being reported.
Investors are also making use of Channel Islands protected cell companies and structures through which they are able to make Sharia compliant investments into Europe.
We have also seen Korean investors deploying capital to acquire UK commercial real estate assets with strong rental income streams via Jersey property unit trusts.
Which sectors are most popular?
The sectors that seem to be most buoyant among investors into Europe include:
- traditional investment in high grade office space, particularly assets with high-quality sitting tenants;
- logistics; and
- student accommodation also continues to be popular but with current uncertainty in the education sector arising from the pandemic, any negative effects or slow-down from an investor perspective in this class of asset remain to be seen.
A gradual and continued move away from retail investments is also noteworthy, as is a desire to diversify into UK real estate investments.
Lending – what activity are we seeing?
From a lending perspective, we are seeing a real uptick in activity with banks in the Asian market in both new money deals and re-financings, the latter not only in relation to COVID-19 led facility amendments but also business-as-usual refinancing deals.
We have also seen an increase in Asian-backed issuers listing on The International Stock Exchange in the Channel Islands.
Property Unit Structures
There are a range of entities that may be established in Jersey and Guernsey through which to invest and hold UK commercial property. Historically, Jersey property unit trusts (“JPUTs”) have been very popular vehicles for acquiring and holding UK commercial property. JPUTs have been and continue to be popular vehicles for these purposes for a number of reasons including:
- flexibility – the Jersey regulatory and legal framework applicable to JPUTs is extremely flexible allowing JPUTs to be tailored to meet the specific commercial requirements of investors;
- familiarity – JPUTs have been used to acquire and hold UK commercial property for a number of years and are well known to investors and lenders in the UK commercial real estate market; and
- transparency – JPUTs can be structured so that they are transparent for UK income tax and UK capital gains tax purposes.
Guernsey property unit trusts have not in recent times been as popular as the JPUT but we are seeing renewed interest in these as investment vehicles. Real estate investments through Guernsey vehicles are typically made via Guernsey non-cellular companies, cellular companies and limited partnerships, These vehicles also offer flexibility, familiarity and transparency, in varying degrees, and the choice of vehicle will ultimately be led by investor concerns surrounding tax and marketability, etc.
What kind of enforcement activity have you seen?
We have seen little actual enforcement activity to date, but we are receiving inquiries and having regular discussions around enforcement steps, and pre-enforcement steps. That is consistent with the messaging we have seen in the trade press, which is that up to this point, banks and other lenders have continued to demonstrate forbearance and take a longer-term view than might normally be the case.
We continue to work closely with our Insolvency & Dispute Resolution colleagues on these matters not just in Jersey and Guernsey but also elsewhere in Asia and the Caribbean.
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.