(Report authored by Joelson JD LLP)
DEVELOPMENTS IN THE UK SINCE THE JUNE 2016 REFERENDUM
Joelson JD LLP
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In June 2016, a referendum was held to determine whether the UK should leave the European Union. The British public voted narrowly in favour of leaving the EU and the British government, led by Prime Minister Mrs Theresa May, are now starting the necessary plans. The latest economic data would seem to suggest that the UK economy is in better shape than many had anticipated would be the case by now post Brexit.
Brexit has not altered the case for the UK as an easy place to do business. It is an attractive economy with demand for goods and services, a skilled workforce and one of the lowest rates of corporation tax in the developed world.
There have been some early effects and indications since the referendum as set out below:
In the initial period following the Referendum result, Sterling fell 15% in value to a 30 year low against the dollar and 12% against the RMB. This has resulted in a significant increase in foreign investment activity in certain sectors by Americans, Chinese and others as investment in the UK market became more affordable. Essentially, UK transactions have become at least 10% cheaper.
2. SPECIFIC SECTORS
a) Luxury Brands
China has historically invested in UK luxury brands. Last year, British luxury brands won the most Chinese luxury consumer awards. Dunhill and Net-a-Porter each, won awards, namely the “Accessory for Men Star Performer” and “Online Luxury Retailer Best New Arrival” awards, respectively.
High net worth individuals such as Jack Ma, founder of Alibaba, have chosen the UK as the desired location to establish their European headquarters. They believe that by establishing themselves in the UK, this will help European brands understand the type and quality of goods that Chinese consumers demand and also that they will be better placed to make investments in luxury brand owners in the UK and the rest of Europe.
b) The Technology Sector
Foreign investors are keen to understand (and own) the technology behind and used the UK’s most successful businesses. London is a leading international technology centre for entrepreneurs and investors. A buyer can purchase technology, own the intellectual property rights, and is then able to replicate and develop it for use within its own markets. This includes Edtech, Fintech and Cleantech. Fosun International continues to look to invest in UK businesses with high quality technology.
Earlier this year, Chinese technology and investment group Cocoon Networks announced that it would be launching a $720 million London-based venture capital fund in the next three to give years aimed at investing in UK and European tech start-ups. Many other Chinese investment funds are taking a similar interest in the UK.
c) Real Estate
Homelink, one of China’s biggest real estate agencies, explained that the number of enquiries received by their Chinese clients has increased by almost 50% since the UK Referendum. The British real estate market continues to appeals to Chinese investors. The UK has a renowned and transparent judicial system and a sophisticated and competitive tax system, top educational institutions (the UK has long been the main destination for Chinese students in the EU with over 50% of Chinese students studying in the EU being enrolled in UK institutions) and a very high cultural diversity. Some of the most impressive real estate projects that have taken place in the UK over recent years have been backed by Chinese investors. By way of example, One Nine Elms, a pair of luxury residential towers with their own five star hotel, are currently being built in London and were funded by Dalian Wanda, China’s largest developer.
The domestic housing market continues to be the part of the UK economy, with other infrastructure projects, that is likely to see a further boost. Relaxation in planning procedures and possibly a reduction in the rate of SDLT are both anticipated.
d) Sports and Entertainment
Over the past year, Chinese investors have also started investing in European football clubs. Earlier this month, The Sino-Europe Investment Management changing group acquired AC Milan for approximately $815 million, clearing the club’s debts and enabling it to compete with the elite clubs on the player transfer market. Three rival English football clubs were also sold to Chinese investors. Aston Villa was sold to Chinese businessman Dr Tony Xia, Wolverhampton Wanderers was sold to the Chinese conglomerate Fosun International, and Yunyi Guokai Sports Development purchased West Bromwich Albion.
Chinese investors understand the commercial benefits in investing in well-known European football clubs. Many have claimed that they are investing to “change the behaviour of viewers” towards pay-per-view sports in Asia. They also believe that, by investing heavily in foreign players for their own Chinese teams, their team’s chances of success will increase, thereby generating more income revenue from sponsorship deals and an increase in the domestic fan base.
Chinese investors have also continued to invest in the Western entertainment industry. US cinema chain AMC Theatres, which is owned by Chinese conglomerate Dalian Wanda, the world’s biggest Chinese operator, recently purchased Odean & UCI Cinemas group from private equity group Terra Firma for $1.2 billion.
3. THE LABOUR MARKET
Many British industries currently rely on a migrant workforce and the principle of free movement of labour across the EU has provided employees for such businesses. If immigration controls are imposed post Brexit this pool could shrink and, in a market where labour is less readily available and therefore potentially more expensive, UK businesses could look to China for cheaper resources and labour. But this has not deterred many Chinese companies from their UK expansion plans. For example, Huawei, a Chinese global leading telecommunications equipment and ICT solutions provider, has promised the UK government that its £1.3 billion investment to incorporate UK suppliers into its network of clients will still go ahead.
4. DEREGULATION AND CUTTING AWAY RED TAPE
There is a strong possibility that a deregulation across a number of sectors will occur following Brexit negotiations. In particular, the UK will cease to be subject to the wide range of regulatory requirements currently imposed on it as a member of the EU. Post Brexit, the UK will be free to introduce its own regulations. This could be attractive to Chinese investors as the UK likely to provide a more accommodating environment for overseas investors.
5. FINAL COMMENTS
a) Despite the uncertainties brought by the Brexit vote in June 2016, Britain’s stock market and currency have gradually stabilised. Softbank’s acquisition of Arm Holdings a few weeks after the Referendum signals the strong confidence in the post-Brexit economy. The vote to ‘Leave the EU’ has not affected London’s position as the world’s premier business city. The UK remains as the World’s 5th largest economy with free movement of goods and services. London & Partners say this: “London’s fundamental strengths, its deep international talent pool, its global trading links and its cosmopolitan, vibrant culture remain”.
b) According to a report conducted by Ernst & Young, 57% of investors cite London as the top European city for Foreign Direct Investment. The United Kingdom has the lowest corporation tax (20%) within the G20 countries. This will be reduced to 19% in 2017 and 17% by 2020 (it may also reduce further to 15%), making it even more attractive for overseas investors and corporations. With flexible labour laws, R&D tax incentives and a time zone that enables access to both US and Asian markets, the UK economy is recognised as one of the most competitive in the world. Reuters recently reported that Ping An Insurance Group is seeking to increase its overseas investments and its Chief Financial Officer, Jason Yao has emphasised that UK remains one of the key target investment markets as Britain’s vote on the EU Referendum was not an issue.
c) The recent launch of the weekend Night Tube service in London creates exciting opportunity and as Mayor of London Sadiq Khan puts it, it will ‘unlock the full potential of London’s night time economy.’ The 24hour economy will benefit the hospitality industry – creating new jobs and bringing in substantial economy. E&Y has predicted that by 2030, this could support 790,000 jobs across various industries and contribute £30bn to London annually. The move towards a 24hour economy will further increase London’s position as the most attractive city for foreign investment in Europe.