Recent reports suggest that overseas investors now own almost 25% of all UK commercial property, most of it in London.
It's no surprise that the UK is such a popular destination, particularly for non-EU investors with its high degree of transparency and comparatively minimal red tape to completion.
However, concerns are natural: Is the huge investor appetite for UK property artificially driving up prices through un-natural demand patterns? Will domestic investors find themselves missing out because of consequent affordability issues? Is the resultant economic stimulation leading to a healthy and sustainable recovery for the UK?
FDI has historically fast-tracked emerging economies
The bottom line is that foreign direct investment (FDI) has played an integral part in successfully emerging economies for decades of globalisation, providing a rapid-financing mechanism on which sustainable economic strength has been built.
The biggest benefit of FDI is that even though it may have a debt-creating component, it is essentially equity investment. Profits are re-patriated only when a project yields return with part of the profits routinely invested in the host country.
As such, most of the risks are borne by the shareholders of the foreign companies, having marked advantages over bank lending which must be repaid with fixed interest regardless of the success or failure of the project for which the loan was used.
Investment revenues no threat to taxpayers in host countries
Moreover, creditors often look towards taxpayers to bail them out when projects fail, particularly during times of financial crisis when government bailouts are routinely sought and obtained by the banks, adding to the burdens of host countries' taxpayers. In this respect FDI is a benefit as it will by definition not lead to a debt crisis and debt relief will never be an issue.
In fact, the most important benefit of FDI is that it provides, along with financial resources, access to the whole range of technological, organisation and skill assets, as well as the markets of the parent company.
Historically, with few exceptions, the vast majority of fast-growing economies relied heavily on FDI to jump-start and sustain their rapid economic transformation.
UK's transparency and liquidity appealing to foreign investors
In terms of real estate, the UK is probably the best commercial property market in Europe being the most transparent; the most liquid (representing 37% of European transaction activity) and having the longest leases available.
Foreign ownership in the UK is well-established in other asset classes. For example, 50% of shares in the FTSE 100 index are foreign-owned and just one of the 'big six' energy suppliers in the UK is actually British-owned.
Although equities are an attractive prospect in terms of being easier to transact than property, they simply do not have the allure of a tangible asset with its unique combination of capital growth and income-generating potential. It is then no surprise that foreign investors consider the UK as an essential component of a global investment portfolio.
FDI in commercial real estate pays dividends to whole economy
For the above reasons FDI, particularly in the UK's commercial real estate brings huge long-term dividends to the economy and also introduces competition into domestic markets, stimulating business development and growth.
The liquidity and transparency of the UK's property market is attractive to foreign investors in itself but another compelling draw is the international kudos of its universities. The continuous release of human capital, irrespective of nationality, from academic powerhouses in the UK has resulted in an enviable skills pool that many commercial investors find extremely appealing.
Commercial investors drawn to UK's enviable skills pool
Capital tends to flow where there is skilled labour to use it and make it grow. Innovation is better achieved when there is a concentration of educated people who both co-operate and compete to create wealth.
To limit FDI would be like Britain cutting of its nose to spite its face. Foreign investment in the commercial property market is beneficial to all economic sectors and provides a solid framework for domestic growth through improved employment opportunities and the favourable ripple-effect that follows.
- Wednesday 05 November 2014