Foreign investment in Australian real estate – both commercial and residential – has increased dramatically over the past decade. Despite increased taxes for foreign buyers and restrictions to foreign lending in the past year, residential foreign investment seems set to continue in the foreseeable future.
To get up to speed on the rules, issues being faced and where foreign investment is heading we have summarised a brief overview of the current situation.
Why is Australian an appealing market for foreign property investors?
First of all, we have a relatively stable economy and political system, which is a suitable environment for a long term investment. Secondly, the Australian property market has promising growth prospects as well as further development opportunities. On top of this, our lifestyle is hugely appealing to foreigners.
For Asian investors, particularly the Chinese, there are further drawcards. In their homeland, Chinese property owners cannot purchase land as it belongs to the state. They can enter a contract to use land for residential purposes, but it is for a maximum term of seventy years, after which the property is passed back to the Government. In comparison, Australia’s property ownership laws are appealing, giving Chinese investors the chance to own the property for life and get greater returns from their investment. By investing in Australian property and using it for income generating purposes, they’ll also have access to property depreciation benefits, which they do not have back home.
Furthermore, there are established strong ties between Australia and China, as well as our other Asian neighbours. Some Asian investors may have family members living here or have future plans to migrate themselves, and there is a common desire for their children to receive an international education in Australia.
What are the rules for foreign ownership and what changes have been made?
Foreign investors wishing to purchase property in Australia must first apply to the Foreign Investment Review Board to gain permission to purchase Australian real estate.
Under Australian law, foreign investors cannot buy existing homes; they can only purchase new houses or apartments, or off the plan properties and vacant land. The aim of this is to stimulate new developments and housing supply, and in turn create additional jobs and support economic growth.
Foreigners living in Australia for no more than twelve months can buy one existing home, but they must occupy it and then sell it when their visa expires.
In the past year there have been notable changes to the taxes that foreign buyers must pay. When the New South Wales budget was handed down on June 21 this year, a 4 per cent stamp duty surcharge was introduced for foreign investors, and a 0.75 per cent land tax surcharge, the latter coming into effect from 2017.
In addition, foreign investors will no longer be entitled to the twelve month deferral for the payment of stamp duty for off-the-plan purchases of residential property.
This decision followed similar legislation from the Queensland and Victorian state governments earlier this year. In Queensland there is now a 3 per cent stamp duty surcharge, while in Victoria there is a 7 per cent surcharge on residential stamp duty and a 1.5 per cent surcharge on land tax.
The big four banks this year also placed some restrictions on foreign buyers, curbing lending to those without domestic incomes, making it harder for them to be eligible for home loan applications. This clampdown reportedly followed a series of shoddy loan applications from foreign investors.
Foreign investment figures
From 2010 to 2015, foreign investment in Australian property grew tenfold from $6.09 billion to $60.75 billion. In the second quarter of 2016, foreign purchases accounted for 23.9 per cent of all property sales nationally. This was highest in Victoria and New South Wales, at 30.8 per cent and 25.4 per cent respectively, and around 20 per cent in Queensland, South Australia and ACT.
Despite what we hear in the media, not all foreign investment is from China, and they don’t yet own as much Australian land as other foreigners. While China has led the way in the past year, other countries in the top ten for investment in Australia include the US, UK, Singapore, New Zealand, Germany, Malaysia, Hong Kong, South Korea and even the Netherlands. And in terms of agricultural land, China only owns about 0.5 per cent of our national stock, compared to 7.2 per owned by British investors.
In the last quarter, foreign property sales dropped from 24 per cent down to 21 per cent, most likely in response to the tougher lending conditions and increased government taxes.
Current concerns and happenings
The lending clampdown from our major banks has led to concerns that foreign buyers will not be able to settle their apartment deals. This could lead to apartments not being completed and further issues for developers. Some developers have already started to put measures in place to minimise this risk and protect their projects, such as having a cap on the ratio of foreign buyers for their developments.
Furthermore, when off-the-plan sales fall through, the property is no longer considered new. This means foreign buyers will no longer be able to pick up these ‘second hand’ properties (due to our foreign ownership laws) and may even turn to other markets. This leads to the second issue, which is a potential oversupply of apartments in the near future, particularly in inner-city areas. These concerns come at the same time as a report from Morgan Stanley estimating a surplus on 100,000 apartments in Australia by 2018, which would have ramifications for our housing market and economy.
The future of foreign investment in Australia
Despite a recent decline in foreign property transactions, many industry experts believe that the tighter lending restrictions and extra taxes won’t do much to curb foreign investment in the long term. The main drivers for investing in Australia are still there, which means there will still be demand, and foreign buyers who are truly interested will find another funding avenue, even it means paying in cash which some are currently doing.
However, we will likely see investors start to venture beyond the traditional hotspots of Sydney and Melbourne to take advantage of other up and coming markets.
Finally, recent times have seen the launch of companies that facilitate the re-sale of pre-settlement properties that foreign investors have failed to settle. It will be interesting to note what other new business opportunities may arise from foreign investment as it continues to grow.