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ESSA

Safe as houses: the international appeal of the Australian property market


Aristidi Armstrong

By

September 23rd, 2013


Why have Asian investors flocked to the Australian property market? Aristidi Armstrong dissects the reasons we should expect a lot more foreign capital.


It’s no secret that the Asian dragon has an insatiable appetite for Australian raw minerals, and that the foreign capital which has flowed from it has been a pivotal factor ensuring the steadfastness of the nation’s economy. However, Asian investors have also taken a particular interest in another sector of the lucky country: the property market. Investors from Singapore, Malaysia, Hong Kong, Indonesia and China have been buying up Australian land in record numbers for a while now. A research report from Knight Frank released late last year, has stated that Asian buyers, particularly Chinese, accounted for 50% of the demand in the Australian property market. However, the demand has become much more intensified of late and the evidence of this is ubiquitous. Last week Hiap Hoe, a large Singaporean property developer, bought a Lonsdale Street property for a whopping $43.8 million, smashing records for price per square metre rates for any CBD property.[1]

It’s not just Melbourne that’s attracting overseas investors either. The city of Sydney is redefining the meaning of ‘hot property’. In what has been described as ‘the mother of all housing booms’,[2] investors and prospective owner-occupiers have witnessed worrying upward trends in house prices. Interestingly, it is west Sydney that’s the driving force behind the rise, and much of this is driven by foreign capital.[3] The suburb of Fairfield has seen a year-on-year growth of 7%, whilst Auburn median house prices were up 6%, with Merrylands growing 5.2%. Knight Frank sales consultant, Dominic Ong, states that a significant portion of this is driven by Chinese investors. ‘With the recent Sydney purchases of the Sydney Water Board site ($100 million), 231 Elizabeth Street ($201 million), 1 York Street ($117 million), 10 Barrack Street ($62.5 million), 333 Kent Street ($48 million), 80 Alfred Street ($49 million) and the Palazzo Versace Hotel in Queensland ($68.5 million), Chinese investors are becoming even more prominent on our local shores,’ Ong says.[4] The worry about a potential boom has become so rampant, that multi-millionaire developer Harry Triguboff, or ‘High-rise Harry’, is selling off a portion of his portfolio of over 5,000 Sydney apartments, just to stave it off.

Sydney’s median house price trend. Source: domain.com.au

Sydney’s median house price trend. Source: domain.com.au

However, for the Asians though, they are only just dipping ‘their toes in the water’, according to Peter Aige, Associate Director of Research and Consultancy at Cushman & Wakefield.[5]  A new report from Cushman & Wakefield titled Capital Flows: How Heavy is the Weight of Money, claims that over 50 overseas firms are waiting to buy into the local real estate market, with a combined budget of over A$18 billion.[6] It states that Singaporean investors are leading the charge, with the Chinese not far behind. Earlier this year Knight Frank created a special sales team specifically targeting wealthy Chinese investors, following the introduction of the significant investment visa (SIV). The 888 visa, colloquially known as the ‘Golden Ticket’ for Chinese investors, is allowing Chinese investors to invest in unlisted managed funds which hold Australian property assets.[7] Such are the tactics to circumvent government prohibitions and limitations on the amount of overseas investors buying local real estate. The limitations imposed by the Foreign Investment Review Board (FIRB) seem to be the only bastion preventing Asian investors from dominating the local demand for suburban and inner city residential properties.[8]

It begs the question: why Australia? What makes little Australia so attractive to the oriental financiers? The reasons are numerous. Firstly, purely from a legal perspective, Australian property provides higher returns because when you buy a residency in Australia, you purchase the fee simple estate, which means your interest in the land exists indefinitely and can be passed on to heirs. The Chinese legal system, by contrast, only allows for ‘99-year leases’ from the government, so property cannot be bought outright. This obviously gives rise to concerns about the finite returns an investor can have in a Chinese property. Furthermore, the land-plots in Australia are on average larger than those in Singapore for example. China is also experiencing an unprecedented growth in its upper class,[9] and these high-earners are increasingly becoming investors who are looking for safe, high-yield property investments.

However, perhaps the biggest reason for Australia being the real estate destination of choice is stability, especially with memories of American and Irish housing market crashes so fresh. Many Asian developers have declared that the Asian property market is too volatile, especially in Hong Kong.[10] The Hong Kong Government has recently placed a 15% buyers’ tax on offshore purchasers to assist in cooling the Hong Kong market.[11]

Foreign capital inflows.

Foreign capital inflows.

However, local purchasers and prospective owner-occupiers needn’t worry too much. FIRB laws prohibit foreign investors from purchasing in established markets, and Tony Abbott confirmed that the Coalition government would reduce the FIRB threshold for scrutinising foreign acquisitions of agricultural land from $248 million to $15m.[12] Besides, Australia is going to need to beef up the influx into its capital account, to reduce our public debt and to weather the turbulent global economic times going forward.

 

References

[12] http://www.theaustralian.com.au/national-affairs/opinion/rudd-wants-to-be-leader-again/story-e6frgd0x-1226717191042

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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