As we near the end of 2023, we reflect on the activity in UK corporate real estate from inbound real estate investors.
The UK property market remains relatively active for overseas investors, driven by the rental and property development market particularly within London. We have advised a significant number of international ultra-high net worth (UHNW) individuals and families, including an increasing number from the Middle East region, on their investment into corporate vehicles owning prime central London residential real estate as well as investments into commercial and other residential property prospects around the UK.
Based on our experience of the market this year, we have set out our views on what should be the top priorities for other investors looking to invest in the UK property market:
- Appointing advisors: it is important to decide what UK advisors you will need to appoint when considering an investment into property in the UK. Whether or not you are considering a straight property investment or a corporate property investment, you will need to have identified legal, tax and accounting advisors to help you, and these advisers should be appointed early on. In addition, for corporate acquisitions, you will also need to consider whether local counsel will be needed if the corporate entity is incorporated outside of the UK (which will be likely) and whether warranty and indemnity (W&I) insurance will be required, in which case an insurance broker will need to be selected. We work with a number of international investors who have also appointed a wealth manager or investment manager who acts as the first point of contact with other advisors and can assume the administrative burden of making the investment. It will also be key to identify a reliable property agent who can provide you with advice and help you to source prospective opportunities.
- Challenges with developing land: investing and developing land in the UK can pose unique challenges (and surprises) for overseas investors.
- Availability: is often one of the first challenges an investor faces when considering a UK property investment. There can be limited availability of land in prime locations, and different regions and cities exhibit varying levels of demand and growth potential.
- Planning: investors may also need to navigate the planning system. Known for its complexity and strict regulations, the UK planning system can significantly impact property development projects due to being time-consuming and often unpredictable. Obtaining planning permission can take several months and sometimes even years, resulting in increased costs for developers which could impact profitability. Some of the key concerns investors may need to consider as part of a planning application include: (a) local opposition and community engagement, (b) preservation of heritage and conservation areas, (c) sustainability and environmental considerations, and (d) affordable housing requirements on residential schemes.
- Building Controls / Health and Safety: building controls and warrants will need to be factored in and health and safety will be a key consideration for developers. In the wake of the Grenfell fire in London, the Building Safety Act has now placed additional obligations on owners of high-rise buildings, such as nominating “accountable persons” and maintaining a “golden thread” of safety information.
- Structuring considerations: the structuring of a proposed investment is important to consider early on so that you can build this into initial discussions with other investors, a joint venture operator or lender. The potential return structure can be quite complicated and takes some time to agree with the other counterparties. For example, if you are investing in a property development via a corporate joint venture and you are the lead investor you may wish to receive a priority return over other investors, there may be certain milestones which need to be achieved before any payments are made to shareholders, and you will need to consider the exit horizon and how exit proceeds will be distributed. It is much better to have these conversations early in discussions so that the commercial agreement can be reflected in the documents. Your legal and tax advisers should be involved in these discussions so that they can advise you on your options and the different types of structures which can be put in place. It is also important to consider whether a corporate investment or straight property investment is preferable, and it is likely this will largely be driven by tax considerations.
- Debt Funding: deciding how your investment is going to be funded will be an important consideration early on in the investment process. If the intention is to fund the investment (in whole or in part) with debt then you will need to consider a number of factors. These include:
- Who will provide the debt (for example, it may be a bank which specialises in property investment loans or an alternative lender),
- The security the lender will require (which is most likely to include security over the property as well as over other rights and assets relating to the property, such as the rights under any related insurance policies),
- The price of the debt, which is particularly relevant in the current high-interest rate environment,
- The terms and conditions of the documents relating to the debt, which may or may not be open to negotiation (depending on the lender and the size of the loan), and which may include restrictions on dealing with the property,
- Whether any personal or other guarantees will be required by the lender in relation to the debt, and
- The costs involved in putting the debt in place (such as valuation and legal costs in respect of the latter, particularly if there is a non-English entity involved in the structure, meaning overseas law advice will be required).
- UK Regulatory considerations:
- Disclosure regime: the disclosure regime in the UK is becoming increasingly transparent and is often more onerous than other jurisdictions. It is therefore important for overseas investors to understand the disclosure requirements that may be placed on them. The "Persons with Significant Control" regime was introduced in the UK in 2016 and requires companies incorporated in the UK to identify their "persons with significant control" with the identifiable PSC's details being included on the public Companies House register. The Economic Crime (Transparency and Enforcement) Act 2022 came into force at the beginning of 2022 and extended the transparency requirements to overseas entities which hold property in the UK. It is important for investors to be aware of these regimes and the disclosure requirements which may be placed upon them. See further guidance here and here.
- NSIA: the National Security and Investment Act 2021 (NSI Act) is a significant piece of legislation setting out a standalone regime allowing for the UK Government to scrutinise, and potentially block, acquisitions and investments in sensitive sectors or locations which could impact upon national security. Certain property transactions (eg data centres or property linked to energy infrastructure) could fall within the remit of the NSI Act and so it is important that your advisors are appointed early to assess whether this regime will apply and whether a notification to the UK government is required. See further guidance here.
We have advised numerous private capital investors on their investments into the UK property market and are expecting activity to continue into 2024. If you would like further advice or information, please do not hesitate to get in touch with us.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, November 2023