Malaysia malaise – will domestic challenges in Malaysia affect investment in UK real estate?

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

UK real estate has seen significant inward foreign investment since the financial crisis, with Malaysian investors at the forefront of the most recent wave.

However, a relentless string of negative domestic stories emanating from Kuala Lumpur, and a number of London property divestments by Malaysian investors, have led some commentators to predict a further exodus of Malaysian capital from UK real estate (or at least a freeze in inward investment).

So is 2016 really likely to be a turning point for Malaysian (and other Asian) investment in the UK real estate market? This briefing examines the issues at play.

1MDB and other crises

There is no doubt that the domestic Malaysian economy is facing some difficult challenges. The ringgit is now at its lowest level since the 1990s, having lost 25% against sterling and the dollar since May 2013. Malaysia's economic issues have led to government calls for state-owned funds and related companies to repatriate overseas capital and invest locally.

At the same time, the Malaysian state is coming under increasing scrutiny following the 1 Malaysia Development Berhad (1MDB) investment fund scandal, with recent intervention and action by Swiss, US and Singaporean authorities. Most recently, on 1 February 2016 the Singapore authorities announced that they had seized bank accounts relating to 1MDB amid ongoing allegations of fraud and money laundering linked to the state-owned fund.

High-profile divestments

A number of Malaysian government-linked funds and private investors have recently divested UK property assets, including KWAP's sale of One Sheldon Square, Paddington and Tabung Haji’s disposal of 151 Buckingham Palace Road. Other Malaysian investors are reported to be actively marketing UK property assets for sale. Observers have, understandably, linked the domestic issues with the recent divestments and called a start to a Malaysian exit from UK assets.

But there is more to this. These exits and their timing are only part of the picture. Malaysian investors were especially active in the London market in 2010 to 2013. Since then, the capital values of these assets have increased significantly. So were it not for the recent events in Malaysia, these exits would most likely be seen simply for what they are – large investors cashing in strong returns.

In addition, several Malaysian investors have remained active in the UK in the past year, including noteworthy acquisitions and joint ventures by EPF, Amcorp, and Eco World.

Strong fundamentals

There is no doubt that Malaysia is in the midst of a political and economic storm, with one crisis contributing to the other, and vice versa (for example, the ringgit had risen by 3.3% against the dollar in January 2016, before slipping again as the 1MDB story entered its next phase in February).

However, as it stands, Malaysian investments in UK real estate appear to be performing well, with investors realising strong returns on exits whilst eyeing further significant investments. The Malaysian "crisis" may make the investment approval process slower and more challenging for Malaysian investors, but we do not expect there to be an absolute brake on deal activity.

London remains an attractive investment proposition for Asian investors more broadly. 2015 saw Chinese investors acquire £3bn of London real estate, and this is set to continue during 2016 amidst some of the most uncertain Chinese market conditions on record. Astonishingly, a recent study by CBRE suggests that some £740m of Chinese money will have been invested into London real estate in 2016 before February’s celebrations for the Chinese Year of the Monkey are over. Crisis or no crisis, London is still firmly in the sights of foreign investors.

London real estate is, for now, deserving of its "safe haven" label and irrespective of crises at home and abroad, we expect to see continued investment in (and certainly no hurried retrenchment from) the London real estate market by Malaysian investors.