Releasing the budget 2017/18 on Tuesday (9 May), the Treasurer of the Commonwealth of Australia, the Hon. Scott Morrison MP, said that the government would be bringing in “even tougher rules on foreign investment in residential real estate" and "removing the main residence capital gains tax exemption, and tightening compliance”.
He added: “We will also apply an annual foreign investment levy of at least $5,000 on all future foreign investors who fail to either occupy or lease their property for at least six months each year, and we will restore the requirement that prevents developers from selling more than 50 per cent of new developments to foreign investors.”
“Together, these measures represent a comprehensive package that can make a difference,” he said.
However, CoreLogic’s head of commercial research has stated that, when viewed in tandem with the recently-released Foreign Investment Review Board’s (FIRB) 2015-16 report (which was also made publicly available on Tuesday), “it becomes clear that there is no intention to reduce foreign investment in Australia”.
Instead, Ms Eliza Owen argued, the policies aim to divert foreign investment to “more productive sectors”.
She commented: “The budget was dripping with rhetoric of prioritising Australians and Australian ownership, especially in housing.
“New residential developments will have a 50 per cent limit on the dwellings that can be sold to foreign investors. A finer point of this policy - not highlighted in Morrison’s speech - was that in order for the 50 per cent limit to apply, the development would have to be multi-storey, and [have] over 50 dwellings."
Ms Owen suggested that this was a meaningless figure as “it is widely unknown what portion of the residential market is made up of foreign investment in the first place”.
According to CoreLogic, of the 15,481 new apartment projects expected to be completed in the next two years, only 9.4 per cent have 50 or more dwellings. However, the 9.4 per cent of projects represent 57 per cent of the total number of individual units that are expected to be completed.
As such, the announced limit on foreign investment for “new developments” could likely be a small percentage in reality.
Looking at the FIRB 2015-16 report, Ms Owen said that foreign investment had been “positively framed”.
She said: “In the 2015-16 financial year, approximately $248 billion in foreign investment proposals were approved by FIRB, across 14,445 proposals. This represents approximately 18 per cent of GDP over the year. It also represents a 30 per cent increase on the value of foreign investment applications on the previous year.
“The report also indicated that of the 41,450 foreign investment applications considered, five were rejected, suggesting no shortage of appetite for foreign investment.”
Ms Owen highlighted that, in the residential real estate space, foreign investment applications made up a combined value of $72.4 billion [however, not all applications result in a transaction]. But, while the residential real estate segment was the largest asset to attract foreign investment applications at $72.4 billion, commercial real estate had a faster year-on-year growth at 37.3 per cent (compared to residential application values growing by a fifth).
As such, Ms Owen concluded: “The budget was less likely to cover commercial real estate because commercial real estate is not as sensitive as housing. Whereas housing represents a complex spectrum between a well-performing financial asset and a necessary social good, commercial real estate largely speaks to the former.
“Furthermore, investment in commercial real estate is more productive for the economy as a whole: it facilitates trade and business. The more commercial real estate is available, the more property managers must provide incentives or innovations in the space to attract tenants.
“With the budget outlining higher barriers to foreign investment in residential assets, foreign capital is more likely to divert to alternative assets,” she said.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.