The recent reduction in foreign investment from the Foreign Investment Review Board Report will have some interesting ramifications for both the residential and commercial markets of Australia.
Total approvals dropped 65% from $72billion for the 2015-2016 period to $25 billion for the 2016- 2017 period.
We have seen increased foreign buyer activity reverting from residential investment and entering in the commercial markets especially for good quality office buildings and industrial sites.
For the residential sector the reduced investment will impact a number of residential developers that have previously built these developments specifically for off shore investors.
Their ability to acquire funding and attain the required pre sales may even restrict the development from going ahead. Developers are now looking for mezzanine finance or private funding which increases the entire risk of the project.
For the savvy developers that were able to see the downturn occurring they have now shifted to building projects for local owner occupiers and investors. It’s going to be an interesting 2-3 years for developers that haven’t planned for the slow down though.
Some of the reduction has been driven by aggressive state and federal based taxes including the recent vacancy tax which was implemented to discourage foreign investors from buying residential properties and leaving these vacant. The Government will charge foreign owners an annual charge if the property is not occupied or available to rent for at least 6 months of the year. We see this as a positive as this is expected to increase the number of homes available to rent for the local market.
The recent change from the government to ensure that a 50 per cent cap is exercised on foreign ownership in new developments. This will be applied through conditions imposed on New Dwelling Exemption Certificates. The new 50 per cent cap builds on the existing rules to ensure Australian buyers have access to a greater pool of homes to buy in these developments. Developments have to be multi-storey and have at least 50 dwellings.
On top of this the Government has introduced reforms to reduce the avoidance of capital gains tax by foreign investors. It will stop foreign and temporary residents from claiming the main residence capital gains tax exemption when they sell property in Australia.
Increased stamp duty levies to foreign investors has also been a factor along with a slow down of capital outflow from China over recent years.
It’s not all negative though, the slow down in foreign investment is a positive for the Brisbane unit market due to the current over supply issues that have recently occurred. This has now dried up and Brisbane units are now the most affordable they have ever been. This could push the market back into a undersupply in the next 3 years. It is now cheaper to acquire these units than rent them, which will trigger first home buyers to enter the market again.
The impact to local owner occupiers could open up buying opportunities in areas that have traditionally been dominated by foreign investment creating less competition. Evidence of this is already occurring in areas in Melbourne and Sydney.
Australia will always require foreign investment but the slow down was always expected in our opinion and was not sustainable. Less foreign investment leads to less supply which is great for oversupplied markets like Perth and Brisbane but not so great for undersupplied markets such as Melbourne and Sydney that still have strong population growth from overseas migrants.
We expect this to reduce even further in 2017-2018 reporting year back to traditional long term investment levels.
For further information please contact us for a full explanation of the latest report.