Follow the money

Written by: Andrew Strange Posted: 02/07/2018

City_flowsThe Channel Islands are routing billions of pounds of foreign investment, both directly into the UK and outwards to the rest of the world – and this money flow only looks set to increase
 
According to the most recent figures, the international financial centres of Jersey and Guernsey are a conduit for around £800bn of foreign investment into the UK from investors seeking strong returns in the era of globalisation.

The flow of capital through the islands is having a huge impact, enabling the construction and development of everything from offices and residential property to roads, airports, hospitals and schools. 

The Channel Islands have emerged as the gateway to Europe for international capital, and their close ties to the City and tax-neutral status have seen investors – including sovereign wealth funds, pension funds, private equity firms and professional investors – routing money into the UK through the islands. 

A recent report found that Jersey was responsible for £500bn of foreign investment into the UK, which is around five per cent of the total stock of foreign-owned assets in the country and supports the livelihoods of almost 200,000 people. 

While Guernsey hasn’t assessed its contribution in the same way, it estimates that the amount of foreign investment into the UK through the island is between £200bn and £300bn, assuming the same methodology were used.

Money is flowing into the country through investment in safe tangible assets such as property, which remains a favourite of foreign investors, but there are also consistently high levels of private equity and infrastructure funds activity. 

And the recent Jersey’s Value to the UK report found that Jersey banks alone upstream £89bn of deposits to UK banks each year, providing 1.5 per cent of the funding of the entire UK banking sector.

Channel Islands-based law firm Ogier reports recent transactions including one through which a South Korean fund acquired a shopping centre in Bristol; another involving a joint venture between a UK real estate manager and a US fund that acquired properties to develop as student accommodation; an Asian client that’s invested in UK student accommodation; and structures investing in industrial real estate such as factories. 

This is typical of a pattern seen by many practitioners in both Guernsey and Jersey. So what’s the attraction? Jersey Finance Head of Business Development Richard Nunn says: “Jersey’s proportionate regulatory regime, which offers the highest levels of governance whilst retaining flexibility, is a key factor in attracting business, as is the high-quality, skilled labour force available in the island. 

“For cross-border investment, Jersey’s tax neutrality is vital too. It offers a simple and transparent environment that enables investors from all over the world to pool their capital in one place before it’s put to work. Tax is still paid where it’s due at the investor end and where capital is invested, but there’s no additional layer of taxation in Jersey itself.”

Dr Andy Sloan, Acting Director of Strategy at Guernsey Finance, agrees that the Channel Islands offer secure and stable jurisdictions in uncertain times, which is attracting investors from across the globe. Around 70 per cent of Guernsey funds have investors from two or more regions of the world, whether it’s Europe, North America, Asia or South America.

Route into the city

“What we do is provide an environment to route capital straight into the City,” Sloan explains. “How do we do it? By providing a well-regulated, tax-transparent environment that enables investors to service their requirements. 

“We provide a secure, stable, solid bedrock from which to organise their financial facilities. And we offer a tax-transparent investment platform that enables the efficient arranging and structuring of investments that can then be routed straight into the UK or elsewhere.”

The Channel Islands have been proactively building relationships with markets around the world for several years, which has left them in a strong position, particularly with Brexit likely to place even greater value on global connectivity. 

Jersey, for example, mediates £1.3trn of assets from institutional and private investors around the world through deposits, funds, trusts and corporate structures. Around 20 per cent of that is from the UK and 13 per cent from the rest of the EU. Jersey firms are also managing capital from North America, Asia Pacific, the Middle East and North Africa.

Simon Schilder, Partner at Ogier, says discretion is another reason why the Channel Islands are popular with overseas investors with an eye on UK assets. Privacy rules mean that while regulators can gain access to records, it’s more difficult for the public to gain details of ownership. 

This is particularly important for wealthy people from parts of the world where they face a high kidnap risk, such as South America. They want to be reassured that criminals won’t be able to identify a home they’re planning to buy in the UK.

Another important aspect of the islands is their proximity to London, which allows advisers to fly between the locations quickly for meetings, helping the investment process move more smoothly.

Heading out

But it’s not all about money flowing into the UK. The Channel Islands can also play a key role in helping UK investors seize opportunities around the world. 

Sloan explains that good relationships have been developed with Hong Kong and China, for example. And the top 20 countries for capital invested abroad through Jersey include Poland, Turkey and the Netherlands. 

Of total assets managed through the island, however, around a third is ultimately invested beyond the UK and Europe. Some 20 per cent of Jersey’s total outbound ‘greenfield’ foreign direct investment – which is focused specifically on developing new factories and other commercial sites – was targeting projects in the Middle East, underlining the island’s strong and growing links with the region.

And several African developing markets benefit from FDI originating in the Channel Islands, including Uganda, Mozambique, Mali, Guinea, Egypt and Senegal.  

Sloan adds that one of the key issues that funds face is the cost of global distribution and of trying to market and sell to investors. As a result, they need a consistent approach to reduce the regulatory and administrative burden of operating in multiple markets. Ideally, they need to use the same platform to move into as many different markets as possible.

The Channel Islands have built a network of relationships over a long period and have many capabilities and routes into markets that have been quietly developed over the years. In a challenging post-Brexit environment, the islands can provide a common investment vehicle into Asia, North America, the EU, the Middle East and South Africa.

“It gives investors flexibility, it gives them manageability and it reduces their costs,” says Sloan.

Richard Nunn adds: “Post-Brexit, we see a really positive role for the Channel Islands in enabling investors to bridge the Brexit gap with certainty and maintain business as usual – both in terms of facilitating high-quality investment into the UK and in supporting the UK’s global investment ambitions, so that everyone benefits. 

“Our third country status in relation to the EU will remain unchanged and, as such, we will continue to be able to support non-EU, including UK, fund managers in marketing their funds to EU investors. By the same token, EU investors will be able to structure their funds through Jersey to maintain access to the significant UK investor market.”

Jersey and Guernsey are high-quality centres that focus on working with investors around the world to offer them certainty and to help them achieve better returns. In a globalised and often uncertain world, they are secure and stable locations for international business.

The Islamic perspective

The Channel Islands have a long history of working with clients from across the Middle East and other Islamic countries, who want their money invested in a Sharia-compliant way. Much of the money from these countries is invested in UK commercial real estate, such as offices, student accommodation, distribution centres and industrial sites.
   Jersey-based VG, an independent provider of fiduciary and administration solutions, has been working with clients from Saudi Arabia since 1981. It reports a steady flow of Islamic investment and says Middle East family offices and sovereign wealth funds are also taking significant stakes in UK companies, while wealthy families continue to acquire properties for private use.
   Trevor Norman, Director, Islamic Finance and Funds Group at VG, says: “A Jersey structure is commonly used because of the island’s reputation for such services and the certainty of law that Jersey offers. The long-standing links to the Middle East – VG has had clients from Saudi Arabia since 1981 – and the number of practitioners with knowledge of the region are also factors.”
   With Sharia investments, the target assets must, for example, not be undertaking haram (prohibited or harmful) transactions or activities, such as trading in alcohol or pork products. And any structure and documentation should normally be reviewed by an Islamic scholar or board of scholars, who will issue a fatwa, declaring them compliant.
   Links between the islands and the Islamic world are deep and VG works with Islamic scholars across the world. In one deal, scholars from the US, Malaysia, Bahrain and Saudi Arabia were used to ensure compliance with various schools of Islam – a powerful example of the islands’ networks and connections.

 


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