Why do foreign sovereign funds, investment groups, corporates and high net worth individuals want to invest in Australia? Common, reasons include:
- Stability of government and supporting institutions thus diminishing sovereign risk
- A legal framework that is comprehensible and equitable
- A stable, resilient and robust economy which continues to avoid recession, and maintain employment, inflation and interest rates within acceptable benchmarks
- Proximity to Asian markets (where stability of government, economy or the law may not always exist)
- A prosperous population and educated workforce enhanced by an aggressive immigration policy
- Cultural improvements in adoption of Environmental, Social and Governance (ESG) considerations
- Other factors including English being the primary language, AAA credit rating and favourable exchange rates
And why would they not invest in Australia? My top reasons are:
- Insufficient rates of return noting some investors require a return premium to invest away from their home markets
- Preferred opportunities in other jurisdictions – because Australian deals are too small to warrant their requisite internal investment infrastructures, noting that a number of investors have regional rather than single country mandates
- Punitive taxes on foreign investors which may reflect real or perceived prejudices
The Treasury is Australia’s foreign investment policy advisor and regulator. It administers the foreign investment framework. However, it is the Australian Taxation Office (ATO) that assesses residential real estate investment proposals and ensures any investment is not contrary to the national interest or national security.
I do not intend to replicate charts and graphs in this article, but readers will find Treasury’s statistics on applications and approvals helpful and accessible. The information extends to informing the reader about the numbers of proposals approved or rejected but not to disclosure of applicants, projects, or reasons.
Of particular interest is Treasury’s quarterly data on the value of foreign investment in Australia which varies significantly when comparing approved commercial investments and approved residential real estate investments. In the January to March 2023 report:
Top 10 approved commercial investment proposals:
- United Kingdom
- Netherlands
- USA
- Malaysia
- Canada
- UAE
- Japan
- NZ
- Singapore
- Germany
Top 10 approved residential real estate proposals:
- China
- Hong Kong
- Vietnam
- Taiwan
- Singapore
- India
- United Kingdom
- Nepal
- Indonesia
- Malaysia
These numbers are distorted by individual home purchases and whether Build to Rent (BTR), Commercial, Mixed Use, Alternate Uses are categorised in whole or part as ‘residential’.
Still, we currently rely on Asian investment for the pure residential sector. Is part of the solution to our housing undersupply to attract foreign investment from countries in the Commercial list above?
Luke Billiau, Head of Capital Markets, Australia and New Zealand at JLL shared his and JLL’s recent experience:
“Regional capital continues to remain active with Japanese and Singaporean investors leading deployment with A$2.5bn and A$1bn respectively this year. For Japanese capital, hedging costs will continue to temper cost of capital until the Bank of Japan follows other central banks, however Australia’s strong population and GDP growth is underpinning their focus.
We may well be nearing the ‘peak’ of debt costs with the recent pause from the RBA, but it remains and investors are cautious.
Capital is more transient than ever, and we’ll likely see more investment activity in Australia as a result of active capital management, greater pricing conviction, and a re-allocation between sectors.
We continue to see active engagement from capital across sectors such as Alternative Investments, Logistics & Industrial and Retail, which is pointing towards a stronger end to 2023.
Despite the ongoing global headwinds, the Office sector remains of focus in the core markets for regional investors from Singapore and Japan in particular.”
The purse size of foreign investors is hard for Australian developers to compute. In today’s dollars, a Eureka Tower project would approach a $700m development cost and would likely require an equity slice of close to $200m. These are big numbers for our development community.
Blackstone, a very large USA property investor, values its Global Real Estate portfolio at US$585bn! It holds US$333bn in property investor capital as part of a US$1 trillion management portfolio. In June 2022 it acquired the business and real estate of Crown for $8.9bn.
These numbers are mind bending to Australian developers but visit the United Arab Emirates or Saudi Arabia and it will be very apparent that their access to development capital is beyond immense.
Could a few tax reform levers be adjusted to entice more of this capital to our shores?
I sought insight from Tax Partner, Pitcher Partners Melbourne, Craig Whatman. He informed me that:
“All of the Australian states now impose a stamp duty surcharge of 7% or 8% on acquisitions of land by foreign persons or entities for residential development. Several states and the ACT also impose a land tax surcharge on certain land owned by foreign persons or entities and represents a significant additional cost for offshore investors and therefore acts as a barrier to them directing their capital to Australia.
Given the current push by governments at all levels to increase the supply of housing in its various forms, it would be a good time for state governments to rethink their foreign surcharges and either significantly reduce the rates or abolish them altogether.
In Victoria, the stamp duty off-the-plan concession used to facilitate investment in the apartment market by allowing investors as well as home buyers to access the concession.
The restriction of the concession to principal place of residence purchasers has had a significant impact on the apartment market and the participation of offshore developers who have traditionally marketed a substantial portion of their developments to investors.
Once again, given the critical shortage of rental housing in Victoria, as well as elsewhere in Australia, the reintroduction of the off-the-plan concession for investment purchases would provide a valuable shot in the arm for the industry.”
Wayne Lasky, founding partner and Executive Chairman of MaxCap Group has recently partnered with USA giant Apollo Global Management and was kind enough to provide some profound insights.
He pointed out that no two foreign investment houses have identical views on risk, return, acceptable volatility or credit and equity appetites.
The more I spoke to Wayne and others in this space the clearer it became that those investment houses assess and price similarly to Australian capital sources.
Just because they have larger wallets does not mean they are happier with lesser returns. It does mean they can play longer terms and ride out bumps without changing course.
Utilising local experienced conduits before creating local presence is a logical course as we have seen with Singaporean powerhouse GIC who utilise houses such as Qualitas and Gresham and have now established a direct presence.
Wayne observed the thematic nature of the foreign investment groups, most notable recently being BTR, logistics and data centres. Healthcare, lifestyle communities, hotels, self-storage, student accommodation and ‘prime living sectors’ are also high on wish lists.
He, and others, noted the acceptable return varied from 8% to 18% annual Internal Rate of Return (IRR) but some of these investors are prepared to retain developed assets. Appetite for projects without planning approval is minimal and there has been a strong trend to stretch credit as opposed to substantive equity.
The introduction of the foreign investor balance sheet greatly assists the obtaining and pricing of the first secured tranche which, if possible, is still sourced from a major bank lender.
Andrew Clugston, a Business Advisory and Assurance Partner at Pitcher Partners Melbourne has extensive experience in assisting foreign capital to partner with local developers.
Andrew informed me that, “whilst the likes of GIC, Blackstone and Apollo have been well publicised, there are a growing number of private groups from Southeast Asia who are making their mark on the Australian development landscape. We continue to see private groups from Singapore, Malaysia and Hong Kong entering the Australian market either directly or, increasingly, via joint ventures with local developers.
The founders of such groups are often Australian educated, particularly from Melbourne, which enhances the foreign investors’ confidence and reduces the cultural challenges of joint venturing with a local developer”.
On a micro and macro level, the gravitational pull of foreign investment capital to the Australian residential market is strong.
The need for these investments to enable us to meet housing and rental demands is beyond debate.
The injection of foreign investment funds will turbo charge the developer eco-system and generate jobs, wealth and confidence.
Our political and industry leaders should welcome and embrace ethical and transparent investment from appropriate sources.
Photo by Iliya Jokic on Unsplash
Benni Aroni is a Client Director - Property with Pitcher Partners.
