On 18 February 2019, the Foreign Investment Review Board (FIRB) released its Annual Report for the year ending 30 June 2018, finding that foreign investment remains strong despite a decline in proposed investment from China as Chinese authorities tighten capital controls.

Rationale

Each year, FIRB prepares an Annual Report (Report) in accordance with its responsibility to advise the Australian Government on foreign investment matters. The Report helps publicise recent developments in foreign investment including the level and type of foreign investment into Australian, together with current areas of sensitivity or concern.

2017-18 Report Highlights

A copy of FIRB’s Report can be accessed here. Some of the key findings of the Report were:

Continued high levels of foreign investment despite decrease in applications

  • While approvals are down by both number and value, foreign investor interest in Australia remains strong. Like other similar economies, there has been a decline in proposed investment from China (as Chinese authorities have tightened capital controls), contributing to the current decline.
  • In 2017–18 the total number of proposed applications approved was 11,145 representing $163.1 billion of potential investment value. This represents a decline from the 14,357 approvals for proposed investment of $197.7 billion in 2016-17.
  • There were 1,024 business applications approved (worth $150.6 billion), being 125 fewer approvals (and around $17 billion less of proposed approved investment) that then previous year. This is largely attributable to a drop in the number of large proposed transactions (over $2 billion), which aligns with a decrease in sales of major energy and infrastructure assets.

Service sector rising, residential real estate declining

  • In 2017-18, the service sector (particularly in health care and the finance and insurance sector) attracted the highest value of approved investment, accounting for 39% of the share of total value of approvals, totalling $63.2 billion. However, as with sales of data centres, these types of acquisitions raise national interest factors associated with the protection of sensitive data (see below).
  • There was a significant decline of $17.5 billion for proposed investment in residential real estate in 2016-17 and 2017-18, following a peak in 2015-16 at proposed investments of $72.4 billion. This decline reflects the slowing in foreign demands for residential estate and new dwelling related approvals by property type, though China still accounts for a majority of residential real estate approvals.

National Security concerns – data security and critical infrastructure

  • FIRB is increasingly placing importance on the safeguarding of Australians’ personal data in its assessments. Conditions related to data security continued to be a key area of focus, including access of personal health data (as was the case in Permira’s acquisition of I-MED Radiology Network, Australia’s largest diagnostic imaging provider).
  • In response to national security assessment within the wider national interest focus, Australia also introduced the Security of Critical Infrastructure Act 2018, giving government greater visibility and oversight of critical infrastructure. The Telecommunications Sector Security Reforms were also introduced in 2018 to provide additional protection for Australia’s telecommunications sector.

US outstrips China as top investor

  • The United States and China continue to be the top two sources of proposed investment. For the first time since 2012-13, the United States surpassed China as the largest source country ($26.5 billion in 2016-17 to $36.5 billion in 2017-18) for approved proposed investment.
  • The decline in Chinese approvals was apparent from $23.7 billion in 2017–18 to $38.9 billion in 2016–17, and this is largely due to Chinese authorities tightening capital controls.

Two rejections and an increase in conditional approvals

  • Two applications were prohibited in 2017–18. One of these was in the residential real estate and the other one related to a proposed purchase of agricultural land for residential development practices.
  • The number of approvals made subject to conditions increased in total number (up by 3%) of applications to around 43% and over 75% of the total value of approvals, highlighting use of conditions to mitigate the potential risks associated with national interest concerns, such as tax risks.

Foreign investment outlook

  • The finance and insurance sector, and the health sector, are expected to experience significant activity over the next 12 to 24 months. Additionally, mining, transport and infrastructure, utilities, and media sectors are also likely to experience strong activity.
  • FIRB expects continued interest from the United States, the United Kingdom and China in advanced technology, health care and agriculture, but a softening of Chinese investment in real estate.

Key takeaways

It will be interesting to see the level of foreign investment into Australia over the coming year, especially in light of current international trading tensions, including Brexit. Either way, FIRB will continue to play a key role in our economic landscape and we expect to see continued scrutiny in sensitive sectors and a focus on safeguarding of the national interest.