Foreign direct investment in UK to slow as investor priorities shift
Foreign direct investment (FDI) is set to slow over the next 12 months, as Covid-19 impacts financial services firms’ investment plans in the UK.
Last year investor sentiments placed financial services as the driving force of UK growth – the sector attracted 99 projects, equating to more than a quarter of all FDI in Europe, according to EY.
But now just 25 per cent of overseas financial services firms surveyed by EY plan to invest in the UK in the next 12 months, down from a 10-year high of 31 per cent in April.
Meanwhile 20 per cent of the financial services firms surveyed said they are planning a substantial decrease in investment in the UK over the next 12 months due to COVID-19, with a further 28 per cent planning a minor cut, while 18 per cent said they are putting plans on hold for the time being.
Positively, 23 per cent of respondents said they expect no change to their investment plans, and 10 per cent said they plan to increase investment.
Omar Ali, UK financial services managing partner at EY, said: “UK financial services entered the pandemic in a very strong position, having led the rest of Europe in attracting overseas investment over the past 20 years.
“Our latest research shows, however, that industry sentiment has dipped, and a significant proportion of global investors are currently viewing sectors like technology and real estate as bigger drivers of UK growth, with interest in healthcare also rising. In some respects, this isn’t surprising given COVID-19 and the sudden shift to remote working and the urgency of finding a vaccine. However, the shift in short-term investment plans suggests the lack of clarity about the relative importance of UK financial services in Brexit negotiations and trade discussions, and the future of the economy may have started to affect investor sentiment.”
For long-term investment, the sentiment is more positive. Over half of financial services companies surveyed (53%) now expect the UK to be more attractive for FDI in three years’ time, which is up from 40 per cent earlier in the year and 17 per cent in 2019, when investor sentiment was at an all-time low due to Brexit and wider political uncertainty.
The Covid-19 pandemic is set to have a significant long-lasting impact on business strategies and operating models. Almost three-quarters (73%) of respondents said the most important theme in their investment strategy is how city centre economies will change because of the virus.
Digital drive
National lockdowns and the shift to mass remote working have meant the digital sector is now seen by global investors as likely to be the biggest driver of future UK growth. Some 66 per cent of financial services firms surveyed believed this to be the case, up from 31 per cent in 2019.
Ranked second is the real estate and construction sector, and perhaps unsurprisingly amid a pandemic and the urgent work to create a vaccine, the healthcare sector has also increased in prominence for overseas investors.
The financial services industry, which was seen as the sector most likely to be a key driver of growth last year, now occupies joint third place with healthcare in the list of key growth sectors, with 28 per cent of financial services respondents expecting it to drive future UK growth, down from 46 per cent in 2019.