The property market in Australia has been extremely hot for a very long time, but that doesn’t mean a cool change is on the way.
If you go by the headlines in the press every couple of months, Australia is looking at a fall in property prices on the residential side of things, due mainly to tightening by the Chinese authorities on Chinese individuals taking funds out of China.
Are these residential market ‘fears’ also being expressed on the commercial side? Not really. The tightening by Chinese authorities had a short-lived impact on the residential market, but it is not really going to dampen the enthusiasm for Australian real estate by foreign investors.
Overseas investors acquired AUD $26.6bn of Australian commercial property on a net basis over the last 10 years, according to a JLL report. While we have seen a drop in transaction volumes from the heights of 2016, there is still significant inflows of capital. The biggest challenge for investors is to find the A-grade quality buildings with quality tenants and returns that they’re looking for. We have seen a recycling of assets with Chinese groups such as CIC (China Investment Corporation) snatching up a number of these assets.
A shortage of commercial office stock - new or recycled - has resulted in ‘cashed up’ foreign investors needing to look to different asset classes, or be prepared to pay high prices for those quality assets. While we see the strong desire for commercial offices in Sydney or Melbourne continuing, some investors are happy to look beyond these traditionally popular destinations to Brisbane, Canberra and even Perth.
Other asset classes
We have also seen the rise of fund managers taking a specific focus on logistics, warehousing and data centres as they hunt for returns. Student housing as a specific asset class has become very popular with overseas investors over the past 3-4 years. Hotels have always been of interest and are recycled fairly regularly for the low to mid-market but not so regularly for the top end hotels. Of course in Australia we are still seeing movement in many funds that look at specific classes such as infrastructure and agriculture. The Australian Superannuation Funds are responsible for the deployment of a significant amount of capital in Australia. With 2008 still fresh in their minds, these funds have been reticent to look overseas, and so they have invested – and continue to invest – locally. The exception is the top three, and our Future Fund which are looking very much outbound as well as locally.
MIT tax structures – a problem or opportunity?
While Australia’s reduced withholding tax rate of 15% on distributions from Managed Investment Trust (MIT) structures is advantageous, MITs can also prove to be a pain point for foreign investors. They add layers of administration – and therefore costs – to a structure, and the Investment Manager or the Trustee is required to hold an Australian Financial Services License.
However a one-stop shop – such as the one provided through TMF Group’s alliance with Evolution Trustees – provides global investors with a streamlined administrative solution right up the chain of an investment structure to, for example, a Luxembourg fund. Working with specialised and global providers allows investors to avoid excessive liaison and oversight.
Where to from here?
Australia is still seen as a highly preferred destination for investors. They get what they expect here; a very stable economy with a reasonable return on investment with the ability to repatriate these returns out when needed.
So how can buyers be maximising their Australian property investment opportunities?
- Good network and connections into the property market makes a big difference to get access to the right assets – potentially even before they come onto the market.
- Be prepared! Having the tax and structure advice settled (and the structure set up) means the fund manager can move quickly when the desired asset is identified. We’re seeing an increase in potential buyers taking the time to get this advice and the structure properly established so that they don’t miss opportunities.
- Have trusted advisers and service providers with good and relevant experience, such as TMF Group with our 10+ year history working with real estate clients. We sometimes see, and have to deal with, the results of fund managers cutting corners to cut costs so it is important to do your homework and get references if need be.
- Know what is going to take time and could potentially impact settlement ie. if FIRB (Foreign Investment Review Board) approval is required, setting up a bank account or other options to effect settlement and tax registrations, assuming that the structure is already in place.
The Australian property investment market remains hot, and contrary to frequent reports there are no tangible signs of it boiling over or slowing down.