Foreign Investors – Page 5 – Digital Finance Analytics (DFA) Blog

Real Estate Investment In Australia From China Doubled Last Year – FIRB

China foreign investment in real estate in Australia doubled that last year, according to the Foreign Investment Review Board (FIRB) in their annual report for the year 2014-2015. Total foreign investment approvals across all categories were worth $194.6 billion. No applications were rejected last year, though some were approved only with conditions.

Looking at the real estate sector, we see significant growth in applications compared with previous years.

Approved investment in real estate (comprising commercial and residential proposals) was $96.9 billion in 2014-15 (compared with $74.6 billion in 2013-14). Residential approvals rose from $34.7 billion in 2013-14 to $60.75, of which $49.25 billion were for development.

Looking at the state analysis, VIC leads the way in terms of the number and value of approvals. For example VIC had $20.6 billion of developments for approval, compared with $16.24 billion in NSW.

The FIRB report includes a state analysis by type of development

Our analysis shows the largest proportion of new dwelling approvals in NSW, compared with VIC and QLD. On the other hand, VIC had the highest proportion of existing property and vacant land approvals.

The Country data provided by the FIRB report does not separate residential real estate from commercial property. That said, the data shows China as the largest investor, based on number of approvals and value. In the previous year, China originated 14,716 approvals, compared with 25,431 in 2014-15 overall, whilst real estate was worth $12.4 billion in 2013-14 compared with $24.3 billion in 2014-15.

Foreign Investor Forced Property Sales Announced

From Mortgage Professional Australia.

The Federal Government’s crackdown on the illegal ownership of Australian real estate has continued, with it announcing the forced sale of eight residential properties.

According to the government, the eight properties, valued between $200,000 and $5 million, bring the total number of forced sales since the Coalition formed government to 27.

The eight properties in question were owned by investors from five different countries.

“The individuals involved come from a range of countries – Canada, China, India, Malaysia and the United States of America,” Federal Treasurer Scott Morrison said.

“The foreign investors either purchased established residential property without Foreign Investment Review Board approval, or had approval but their circumstances changed meaning they were breaking the rules,” Morrison said.

Morrison said the discovery of the illegal ownership of the eight properties was thanks to new powers granted to the Australian Taxation Office (ATO).

“The Government’s transfer of responsibility to the ATO for compliance has enabled more active investigations and actions targeting illegitimate purchases,” he said.

“Since this transfer in May, over 1,500 matters have been referred for investigation. Through information provided by the public, together with the ATO’s own enquiries, over 800 cases remain under active investigation.”

Was the housing boom in Sydney and Melbourne driven by foreign buyers?

From The Conversation.

House prices rose by an average of 64% in Sydney and Melbourne in the decade from 2004 to 2014. At the same time foreign investment proposals in developed real estate rose by almost tenfold. This correlation led to a lot of anecdotal stories of Chinese buyers driving up prices and to a Parliamentary Inquiry.

How much can we attribute the decade-long housing boom in Sydney and Melbourne to foreign buyers? The numbers are hard to find and a little rubbery, but our best econometric estimate is that about one quarter of the growth in house prices in Sydney and Melbourne can be attributed to foreign investment.

This means that if foreign investment had been steady over the period, average house prices would have grown by about 50% compared with the actual growth of 67%. In the other capital cities, by the way, the growth in house prices was much less and it was not possible to find any econometrically significant effect of foreign buyers.

This amounts to a modest effect of foreign investment on house prices in Sydney and Melbourne. The hype about Chinese buyers driving up house prices appears to be overstated – at least in terms of the effect on average house prices – there may have been more significant effects in certain locations.

The quality of data however is a failure of public administration. The Parliamentary Inquiry essentially came to this conclusion. It found that there is no accurate data on foreign investment in Australian real estate and therefore “no-one really knows how much foreign investment there is in residential real estate”.

The Inquiry also noted there had been no court action by the Foreign Investment Review Board (IRB) since 2006 in relation to foreign real estate investment. The Australian Taxation Office has however moved since then to force the sale of a property bought by a foreign buyer without government approval.

The law prevents foreign citizens from purchasing established housing for their own homes or as investment properties, except for one or two narrow exemptions. Clearly there has been inadequate monitoring of purchases to enable this law to be enforced. However if the concern is about house prices and the effect on affordability, then the role of foreign purchases is not at all clear.

If foreigners buy a house to rent out to someone who is already in the housing market such as a non-citizen student in Australia, there is no net increase in the demand for housing and therefore no pressure on house prices. Nor is there any net impact on housing demand and therefore on prices if foreign buyers eventually become foreign sellers. And again, if foreign buyers eventually become permanent residents their purchases represent a shifting forward of housing demand rather than a long run increase in housing demand.

All of which is to say that simply looking at foreign purchases of real estate does not give us a very accurate guide as to the net impact on house prices.

Then there is the tenuous link from house prices to housing affordability. First home buyers generally purchase the cheaper dwellings and established rather than new dwellings, both of which are housing categories where foreign investment is less evident. In any case, other work by the Reserve Bank of Australia finds that house price growth over the past 30 years can be largely explained by fundamental factors such as financial deregulation, the ability of housing supply to respond to demand, and population growth driven by immigration. This suggests that foreign direct investment may have played relatively minor role in explaining house price growth.

If the public policy concern is more about housing affordability, then policies that aim to boost housing supply and that address tax and retirement income policies favouring housing over other asset classes would be more effective than a clamp-down on foreign real estate investment.

Some people seem to worry not so much about housing affordability but about foreigners gaining control over Australian real estate assets. This is hard to fathom because when foreigners buy an asset in Australia, whether it is a real asset like property or a financial asset like shares or bonds, there is no transfer of wealth to foreigners. Indeed quite the reverse – if foreigners are willing to pay more for our assets than any Australian citizen, this cannot be a loss of wealth to Australia.

Despite all of these qualifications and complications, we need to know more about foreign purchases of residential real estate. The Parliamentary Inquiry’s recommendation seems sensible: to establish a national register of land title transfers that records the citizenship and residency status of all purchases of Australian real estate.

Authors: Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University, Nicholas Rohde, Lecturer in Economics, Griffith University.

Treasury Releases Draft Of Foreign Resident Capital Gains Withholding Tax

The Government has released draft legislation for public comment. By way of background, on 6 November 2013, the Government announced that it would proceed with a 10 per cent non-final withholding tax on the disposal, by foreign residents, of certain taxable Australian property. The purpose of the regime is to assist in the collection of foreign residents’ capital gains tax liabilities.

Where the seller of certain Australian assets is a foreign resident, the buyer will be required to pay 10 per cent of the price to the Australian Taxation Office as withholding tax. This obligation will apply to the acquisition of an asset that is taxable Australian real property; an indirect Australian real property interest; or an option or right to acquire such property or interest.

This withholding obligation will not apply to residential property valued under $2.5 million. The purpose of this exclusion is to minimise compliance costs and ensure that the amendments are clearly inapplicable to most residential property sales conducted between Australian residents. This alleviates the need for purchasers to undertake the preliminary compliance obligation of determining the residency status of the vendor.

In October 2014, the Government released a discussion paper consulting on the design of the measure.

Closing date for submissions is Friday, 7 August 2015.

Implementing Foreign Investment Reforms – The Treasury

The Treasury released the exposure draft of legislation designed to tighten foreign investment rules, including those relating to residential real estate. This follows on from the announcement on 2 May 2015, when the Government announced a package of reforms to strengthen the foreign investment framework, including:

stronger enforcement of the foreign investment rules by transferring all of the residential real estate functions to the Australian Taxation Office;
stricter penalties that will make it easier to pursue court action and ensure that foreign investors are not able to profit from breaking the rules;
application fees to improve service delivery and ensure that Australian taxpayers no longer have to fund the cost of administering the system;
increased scrutiny around foreign investment in agriculture;
increased transparency on the levels of foreign ownership in Australia through a land register; and
a more modern and simpler foreign investment framework.

These reforms will be given effect by the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015, the Register of Foreign Ownership of Agricultural Land Bill 2015 and the Foreign Acquisitions and Takeovers Fees Imposition Bill 2015.

The Government is now seeking input from stakeholders on the two substantive Bills (the Fees Imposition Bill is a standard tax imposition Bill) and their explanatory materials.

The Government has also released draft Foreign Acquisitions and Takeovers Regulations 2015 so that stakeholders understand how the new legislative framework will operate (the Regulations contain key provisions such as the definition of agribusiness, definitions and rules around foreign government investors and the specific rules for free trade agreement partner countries).

Closing date for submissions is Friday, 17 July 2015.

Perspectives on the Housing Debate

Last week amongst all the noise on housing there were some important segments from the ABC which made some significant contributions to the debate. These are worth viewing.

First Lateline interviewed the Grattan Institute CEO on the social and political impacts of housing policy, and also covered negative gearing.

Second The Business covered foreign investors, restrictions on investment lending and the implications for non-bank lenders who are not caught by the APRA “guidance”.

Third, a segment from Insiders on Sunday, dealing with both the economic arguments and the political backcloth.

Next a segment from Australia Wide which explores the tensions dealing with housing in a major growing city, Brisbane. No-one wants building near their backyard, so how to deal with population growth.

NAB Validates DFA Research On Property Investors

The recently released Quarterly Australian Residential Property Survey Q1 2015 from NAB, included some data which chimes with DFA research (and highlights again that the FIRB do not have their figure on the overseas investor pulse).

First, with regards to First Time Buyers, NAB says that the say that around 1 in 4 purchases are being made by first home buyers (FHB), both as “owner occupiers” but also as “investors”. FHB going direct to the investment market was a theme we covered on the blog.

First homebuyers (FHBs) still account for around 1 in 4 of all new property sales, but the share of demand from FHBs owner occupiers fell to 14.7% while FHBs investors rose to 10.1%. Owner occupiers were broadly unchanged at 33.1%, while local investors were down slightly to 24.1%.”

Second, Foreign buyers were more active in new housing markets, accounting for 15.6% of demand.

“There was however a notable shift in activity by location with the share of foreign buyers in NSW rising to a new high of 21% and falling to 20.7% in Victoria (from 33% in Q4 2014)”

In contrast, foreign buyers were less active in established housing markets, with their share of national demand inching down to 7.5% (8.7% in Q4’14).

Foreign buyer demand fell notably in Victoria (8.6%) and to a lesser extent in Queensland (5.1%), but increased slightly in WA (6.1%) and was broadly unchanged in NSW (11.2%).

Nationally, 53% of all foreign purchases were for apartments, 30% houses and 17% for re-development. The bulk of foreign buyers (41%) spent between $500k to <$1 million, with 30% buying properties less than $500k and 5% buying premium property in excess of $5 million.

Once again, this chimes with our research, when we showed a similar level of activity below $1m, and significant foreign investor activity in Sydney and Melbourne.

Owner occupiers are still dominating demand for established property with a market share of 42.4% (42.6% in Q4’14), followed by local investors with a 21.6% share (22% in Q4’14). Property professionals estimate FHBs (owner occupiers) accounted for 15.8% of total demand for established property in Q1’15 (16.1% in Q4’14), with FHBs (investors) making up 10% (9.3% in Q4’14). Foreign buyers were less active in this market in Q1’15, with their share of national demand inching down to 7.5% (8.7% in Q4’14). Foreign buyer demand fell notably in VIC (8.6%) and to a lesser extent in QLD (5.1%), but increased slightly in WA (6.1%) and was broadly unchanged in NSW (11.2%).

At the national level, capital growth expectations for the next 12 months have strengthened in all price ranges in both the housing and apartment markets. Capital growth expectations are assessed as “good” for all houses below $2 million and for apartments below $1 million. Expectations for capital growth at all other price points are assessed as “fair”. By state, expectations for capital growth continue to be strongest in NSW at all price ranges in both the housing and apartment markets, and significantly stronger for apartments valued at below $ 2million. In contrast, capital growth prospects are clearly lagging in WA at all price points, but especially at price points above $2 million, where prospects are considered “poor”

Government Strengthens the Foreign Investment Framework

The Government today announced details of the changes which will be brought in on 1 December 2015, to clamp down on illegal foreign property purchases. Fees will be introduced for foreign investment applications. Since the measures were mooted, about 100 cases of potential illegal purchase are being investigated at the moment. For example, one case in WA involved a property of around $800,000. People have until 30th November to come forward to avoid prosecution, but will have to sell. The release follows:

The Commonwealth Government is taking action to strengthen the integrity of the foreign investment framework. Foreign investment is integral to Australia’s economy and we welcome all investment that is not contrary to our national interest. After extensive consultations on our Options Paper, we are announcing important reforms to foreign investment that will help to demonstrate that it is for our country’s benefit.

We will ensure stronger enforcement of new and existing foreign investment rules by transferring all residential real estate functions to the Australian Taxation Office. The ATO will use its data-matching systems to identify possible breaches and the Commonwealth will pursue those foreign investors who break the rules.

Australia’s foreign investment regime generally does not allow foreign investors to purchase existing residential properties. There will now be stricter penalties to make it easier to pursue foreign investors who breach the rules. Criminal penalties will be increased to $127,500 or three years imprisonment for individuals and to $637,500 for companies. Divestment orders will be supplemented by civil pecuniary penalties and infringement notices for less serious breaches.

The Government will also ensure that people who break the rules do not profit by introducing a civil penalty to capture any capital gain made on divestment of a property. Third parties who knowingly assist a foreign investor to breach the rules will also now be subject to civil and criminal penalties, including fines of $42,500 for individuals and $212,500 for companies.

Australian taxpayers will no longer foot the bill for screening foreign investment application applications. Fees will be levied on all foreign investment applications. For residential properties valued at $1 million or less, foreign investors will pay a fee of $5,000. Higher fees will apply to more expensive residential properties as well as business, agriculture and commercial real estate applications.

Australia’s foreign investment policy for residential real estate is designed to increase Australia’s housing stock, but lack of enforcement over recent years has threatened the integrity of the framework. We will enforce the rules, ensuring that all foreign investors follow the rules and don’t profit from breaking them.

The Government will introduce legislation into Parliament in the Spring Sittings to ensure that the reforms will commence on 1 December 2015.

There will also be increased scrutiny around foreign investment in agriculture and increased transparency on the levels of foreign ownership in Australia through a comprehensive land register.

Foreign Property Investment Up – FIRB

The Foreign Investment Review Board recently published their annual report for 2013-2014. Whilst we question whether they capture the full picture, the report shows that real estate and services related applications accounted for around 76 per cent of the value of approvals in 2013-14. China was the largest investor in 2013-14 in terms of the value of all approvals (17 per cent of the total value), followed by the United States and Canada. Three (yes three!) proposals were rejected in the year.

In 2013-14, 24,102 proposals received foreign investment approval, compared with 12,731 in 2012-13. The real estate sector had a significant increase in approvals with 23,428 approvals in 2013-14,compared with 12,025 approvals in 2012-13.

Approvals in 2013-14 were given for $167.4 billion of proposed investment. This represented a 23.4 per cent increase on the $135.7 billion in proposed investment approved in 2012-13. In real estate, approved proposed investment was $74.6 billion in 2013-14, compared with $51.9 billion in 2012-13. Proposed investment in commercial real estate increased, from $34.8 billion in 2012-13 to $39.9 billion in 2013-14. Proposed investment in residential real estate also increased, from $17.2 billion in 2012-13 to $34.7 billion in 2013-14.
In 2013-14, three proposals were rejected (compared with no rejected proposals in 2012-13). Of the three proposals rejected, two related to residential real estate and the other related to the rejection in November 2013 of Archer Daniel Midlands Company’s proposed takeover of GrainCorp Limited.

The real estate sector was the largest destination by value, with approvals in 2013-14 of $74.6 billion (an increase of $22.7 billion from 2012-13). In 2013-14, the other major sectors were: services (excluding tourism), with approved proposed investment of $53.4 billion (an increase of $27.5 billion); and mineral exploration and development, with approved proposed investment of $22.4 billion (a decrease of $23.1 billion).

Real Estate accounted for 44.6% ot the total value. Here is the more detailed breakdown.

For the first time China ($27.7 billion) was the largest source country for approved proposed investment in 2013-14, overtaking the United States ($17.5 billion). Other major source countries of approved proposed investment in 2013-14 were Canada ($15.4 billion), Malaysia ($7.2 billion) and Singapore ($7.1 billion).

On 25 February 2015, the Government released an options paper on Strengthening Australia’s Foreign Investment Framework. The paper is available on the Treasury website. The Government has announced that a $15 million cumulative threshold will apply to acquisitions of interests in agricultural land from 1 March 2015. More announcements are expected very soon on how the regime will be reinforced, with fines for potential investors who flout the rules, professionals who assist them, and rules to stop investors from profiting from any potential capital appreciation if they are found out, and forced to sell.

More Than 5% Of Property Is Owned By Overseas Buyers

The vexed question of how many foreign buyers are in the Australian residential property market, continues. The Master Builders of Australia estimated that foreign investors account for 5 to 6 per cent of the Australian housing market. Meriton said overseas buyers represented closer to 2.5 per cent of annual sales. The Foreign Investment Review Board figures show for the year from July 2013, $24.8 billion in foreign investment was approved, 44% higher than the prior year. But no one really knows. The FIRB data does not jive, the mortgage lending data does not take account of foreign funding, and we know that the current approval processes are being flouted – see the recent parliamentary review. There is no good source of truth. Here at DFA, we like a challenge, so we turned our household surveys to the problem.

DFA recently highlighted data from our first time buyer surveys, which showed that about 4% of all first time buyers and 9.2% of investor first time buyers were overseas, which is more than enough to more than move the dial, especially given the concentration in Sydney.

We have been looking at the data in our broader survey, and we have been able to make an estimation of the penetration of foreign buyers by post code. In this more extensive data set, we look beyond the mortgage, (as many fund from overseas) to the question of ownership. From our survey, we can draw some relevant conclusions. First, we think that of the nearly $6 trillion of residential real estate in Australia, certainly more than 5% is owned by overseas buyers, which is worth more than $300 billion in today’s terms. More than half of the property is in Sydney, a quarter in Melbourne, and the rest spread across the other states.

However, one of the most interesting elements in the data is the concentration in specific post codes. We have geo-mapped the data for some of the major centres. In Sydney, the hot spots were Millers Point, Surry Hills, Hurstville and the inner East. The average purchase price was around $400,000 and was most likely a unit (some purchased some time back, when prices were lower than today). Actual prices ranged from more than $1m, down to below $250k. Almost none of the properties were mortgaged to an Australian bank. In these contested areas, prices will be pushed higher.

In Brisbane, the hot spots were McDowall, Oxley (Qld), East Brisbane, Fortitude Valley and Wavell Heights. The average price was $325,000, with again a focus on units.

In the west, in Perth, the favoured areas were Mount Claremont, Nedlands, Subiaco and East Perth. Average price was $497,000 and a larger proportion of purchases were houses than in the eastern states.

In Melbourne, favoured areas included Hawthorn, Melbourne, Maribyrnong, Brunswick, Kew, Richmond, Footscray, Fitzroy and St Kilda. Average value was $312,000, and was biased towards units.

Finally, in Canberra, the average was $580,000.

We can drawn some general conclusions. The argument that most overseas buyers are buying multi-million dollar properties so there is no contention with first time buyers will not wash. They are competing for similar properties. Many are temporarily in Australia, but are using money from foreign sources, often family funds. Next, they are buying in areas adjacent to the CBD and are happy to purchase high density units (many will be familiar with this style of living from their own cities). These are also the targets of onshore investors, another reason why prices are rising. Finally, we found that many were looking to hold the property for capital growth (rather than rental income). About one fifth of the property was currently vacant. This hints at a worrying trend, are some investors just letting the property stand idle and empty? What does this do to the area, and other units in the block. Is there a case for an occupancy test? Given the rise in the number of property inactive Australians and the rise in people wanting to rent, is there a way to make these vacant properties more accessible to potential tenants?