Between Brexit and the plunging pound, the UK has been making international headlines for all the wrong reasons recently.
But that doesn’t mean that international investors have necessarily been put off.
The weaker pound makes the UK attractive for overseas investors and property buyers, as they can generally get more bang for their respective buck.
Figures from the UK Home Office show that, in the first half of this year, 255 individuals and 381 of their family members received golden visas.
The Tier 1 Investor Visa allows successful applicants to live in the UK for a maximum of three years and four months. Although an extension of two years can be granted.
Individuals must have at least £2m ($2.4m, €2.2m) of investment funds.
Buoyed interest
“Hong Kong Chinese are snapping up golden visas at an unheard-of pace,” said Georg Chmiel, executive chairman of Chinese overseas property website Juwai.com.
“Accounting for 45% of investor visas, mainland Chinese applicants remained the top nationality constituency. More noteworthy, perhaps, is that Hongkongers came second, taking 13 visas, up from seven last quarter.”
Citing data published by media platform Investment Migration Insider, Chmiel added that it makes a new record as, “not since the entry price was half of today’s – five years ago – have more Hongkongers obtained UK Tier 1 Investor visas in a single quarter”.
It currently costs £1,623 to apply.
“Since the unrest over the extradition bill only began in earnest in June, Hong Kong interest in the programme may set new records again.”
Expat issues
But what about British expats across Asia who have GBP-based income and assets?
Is investing ‘back home’ still something they are choosing to do?
“People tend to gravitate to the familiar,” Paul Gambles, managing director of MBMG Group, told Portfolio Adviser’s sister publication International Adviser.
Many still think in sterling terms where they automatically convert value and cost to GBP. Others have private pensions in the UK, as well as residual accounts or assets that are tied to GBP.
But taxation, among other reasons, can mean that UK-based or GBP-denominated assets aren’t the best idea, Gambles said.
“The first issue to understand is to what extent should each client’s assets be regarded as GBP base currency.
“The next issue is to determine which GBP and non-GBP denominated assets, liabilities, income and outgoings cannot be changed.”
Basically, what are you ‘forced’ to have in pounds/other currencies, he explained.
Gambles pointed to the UK state pension, which is always paid in sterling, versus locally earned income – both of which can be converted, albeit at a cost.
“This should enable every client to design a personal balance sheet of assets and liabilities, and future cash flow of expected income and liabilities and identify any mismatch.”
Next steps
There are two common issues that MBMG Group uncovers after clients go through the above process.
Firstly, they might need to review investment holdings structures.
“Some of the open architecture international portfolio life insurance bonds are really designed from a sterling remit and this can be unsuitable for international clients,” Gambles said.
“We’ve noted that at least one of the major international companies charges a penal amount (2%) for currency switches, much higher spreads for policy overdrafts in other currencies outside GBP and insists on converting assets to GBP, thereby levying the penal FX charges, on full surrenders.”
Secondly, clients might need to review if the currency exposure is appropriate.
“Sterling has such huge upside and downside risk right now with nobody knowing whether or not the UK will leave the EU on Halloween or whether an election or other change of government will take place prior to that.
“A plausible range for sterling is between parity with the US dollar and $1.40 – such extreme outcomes mean that the risk of holding GBP has rarely been higher for those for whom GBP isn’t their entire base.
“Nor has the risk of not holding GBP ever been higher for those for whom GBP is base.”
Gambles flagged that a similar degree of uncertainty also applies to UK assets and he recommends undertaking a similar review process.
“Risk management supersedes return chasing in such an extreme environment.”
Think twice
For Huw Wedlock, director-Singapore at The Fry Group, GBP could be a good long-term bet, based on current valuations, “as long as you can stomach some short-term volatility in its value as Brexit plays out”.
“The FTSE 100 yield offers access to multinational companies that make a lot of their revenue in USD, so the more GBP weakens the more attractive they look,” he told IA.
“Some of the factors that always made the UK attractive are permanent,” he added. “Such as its geographic position and time zone, its well-educated and flexible workforce and its judicial system.”
He highlighted that other developed market international equities and bonds are at, or close to, all-time highs.
“Anyone considering delaying an investment decision into the UK needs to consider an alternative asset/jurisdiction.
“The alternatives may not be that attractive.”
Cleaning house
For Gambles, the only really compelling investment case for UK expat GBP-base and non-base investors might be catching up with (or prepaying the maximum future) national insurance contributions.
“Locking these in at $1.20, notwithstanding the risk of sterling falling lower, is worth looking at,” he said.
“Specifically in Asian markets, local currencies are strong at the present time and, while converting to sterling en bloc might not be the optimal investment strategy at this time (depending on asset/liability and cashflow mismatches), it is a great time to think about a strategy of starting a series of planned conversions.
“These can be both directly to sterling and also, perhaps, via other currencies, such as US dollar, that might look better value against Asian currencies but still possibly represent a good diversification against the pound.
“Beyond that, it’s more a case of making sure you understand your currency bases and take the opportunity to do some housekeeping.
“This can include looking at the small print of any portfolio bonds and seeing how much you are being charged for currency transaction. Also whether your so-called international bond is genuinely global or just a sterling product shoehorned into the international market at the expense of the client,” Gambles added.
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