In this edition we comment on the following:
- political and topical global issues
- Australian economic issues
- property market overview
- foreign investment in Australian real estate
- terrorism financing in Australia.
Political and topical global issues
Don't mention the war
As highlighted in our June edition, Iraq has erupted with sectarian violence. However since then, ISIS' activities have prompted a show of force resulting in the creation of a US-led coalition of some 20 countries who are prepared to take action to remove ISIS as a political force in Syria and Iraq. As we go to press, some 400 Australian armed services personnel and equipment are departing for Iraq to be held on standby to assist in the implementation of strategic bombing and other efforts to disrupt and hopefully remove ISIS as a political force in that region.
Australia's terrorism alert was lifted at the same time and an alleged major plot by local ISIS connected sympathisers has been uncovered during extensive raids that took place in Sydney and Brisbane last week.
The recent video executions of a number of US and British hostages have focused the West's attention on ISIS and the need to assist Iraq in removing this force. Although the Coalition has the support of the Opposition the country's involvement is not without controversy.
How long Australia's involvement is likely to be required is unknown although there has already been anticipated a huge budgetary cost to fund Australia's involvement.
War in the Ukraine
Since the downing of flight MH17, increasing global sanctions against Russia have caused Russia to retaliate by imposing sanctions on Russia's major trading partners, including Australia.
It is also becoming highly likely air crash investigators will never be able to determine with any certainty exactly who was responsible for firing the missile on MH17, although it appears without much doubt that the missile was Russian-made and Russian-supplied.
Victorian State election
The Victorian State election continues to make the local news with each party's infrastructure agenda being front and centre of the debate ahead of the polls. Of concern are some recent suggestions from the Labor camp that any contracts signed for the East West Link toll road project may not be honoured despite previous assurances from the leader of the Opposition that this would not occur. One can only imagine the damage this would do to the prospects of future foreign investment into major infrastructure projects in Victoria at a time when such investment and expertise is sorely needed.
Experienced commentators have expressed major concerns that the delivery of major projects in Victoria has become highly politicised and calls for an independent infrastructure body to oversee the delivery and implementation of projects with real powers to do so are growing louder by the day.
While both parties promote the idea they have a long term vision for the State and the delivery of key projects that will deliver productivity gains, the problem is both hold strong views that 'their' option is the best.
If the plans are dependent on the current political cycle then it is hard to see how a long term vision can be implemented for the benefit of current and future generations and it is the authors' view that the case for bi-partisan agreement and an independent body are compelling.
(Maddocks was recently involved in acting for the construction joint venture that was part of the underbidding consortium for the East West Link project).
The budget crisis
In our last edition the budget crisis was very much the centre of attention, however since the winter parliamentary break, the budget 'crisis' appears to have gone off the boil. It is understood there are still many proposed budgetary cutbacks yet to be passed through Parliament. The Business Council of Australia has been very vocal that this uncertainty has stalled the Australian economy and promoted the current lack of both business and consumer confidence.
Palmer United Party
Recent revelations indicate the party appears to be far from united. Particularly with Tasmanian senator Jacqui Lambie being quite outspoken in relation to the extent to which she believes Clive Palmer is able to directly control her agenda. Her recent comments promoting a banning of burquas in reaction to the raids in Sydney last week are the latest example.
The Australian dollar
While maintaining a stubborn high level against the US dollar for most of 2014, in the last few days the dollar has dropped to its lowest level since April 2014 and ANZ economists predict that by end of December 2014 the dollar will have dropped to $0.88 against the US dollar and will settle at about the mid-80s into mid-2015. This is where commentators consider the value of the dollar should rest.
The state of the economy
It is arguable that the economy is going to sleep with full year GDP running at approximately 3.1 percent with growth trending down over recent quarters. More importantly the gross national income per capita fell for the second successive year being the first time since the 1990s recession which means on comparison, Australian living standards are falling.
Interest rates remain on hold and the Reserve Bank of Australia faces a dilemma as to whether it should further reduce rates to stimulate the economy and lower the exchange rate further, or raise rates to take the heat out of the investment-led housing price boom.
Property market overview
At a recent property seminar conducted at Maddocks, Robert Papaleo (Director Strategic Research from Charter Keck Cramer) provided an overview of the property market with a particular focus on the Melbourne apartment sector. The outlook for Melbourne is summarised as follows:
- commercial offices: the trend is improving, particularly with international interest in prime grade offerings
- the retail sector is weak especially with e-commerce forcing changes in retail operations and overall consumer demand is low. For example, note the substantial recent drop in Myer's performance
- the industrial sector is improving with the differential between prime and secondary stock widening
- the market for new residential townhouses is strong
- the market for new residential apartments is at its peak, particularly noting increased international interest which has forced local developers to retreat to the suburbs
- one key issue which was noted in the Australian Financial Review on Wednesday 17 September was the emergence of sub-prime residential apartment stock particularly on the basis that there is a pending oversupply and market concentration in several areas which could lead to low demand for purchasers and lower rents - which will have an adverse effect on the value of those apartments. The rush of offshore south-east Asian-based developers to acquire sites and build large high-rise residential towers is continuing at a frenetic pace which is causing commentators to express concerns of oversupply. In contrast, Maddocks' experience is that the inner residential market - now the domain of the local developers - remains strong with high demand for high quality owner-occupied apartments
- residential greenfield sites: trend is improving with decreased developer rebate.
Foreign investment in Australian real estate
The press has been continuously reporting on the ever-increasing level of foreign investment in Australian real estate especially in the residential apartment market.
The Foreign Investment Review Board (FIRB) has determined that 35 percent of all foreign investment in Australia is in real estate which is ahead of mineral exploration and development at 30 percent. As a consequence, the Federal Government has set up an inquiry in relation to the operation of FIRB to examine, amongst other things:
- the economic benefits of foreign investment in residential properties
- whether such foreign investment is directly increasing the supply of new housing and bringing benefits to the local building industry and its suppliers
- how the Australian foreign investment framework compares to international experience
- whether the administration of FIRB related to residential property can be enhanced.
There has been concern expressed in the media that the increase in demand from foreign purchasers, especially from Chinese investors, is creating a 'housing bubble' and is pricing many Australian buyers, particularly first homeowners, out of the property market. On the other hand, offshore investors especially the Chinese who do not propose to migrate to Australia, are only permitted to buy newly-constructed residential real estate and not established homes.
As a consequence, Chinese investors are continuing to fuel the apartment market especially in Sydney and Melbourne and this trend is certainly reflected in the legal work we have been involved with in this space over the past 18 months.
It was reported in a Credit Suisse report issued March 2014 that Chinese nationals were expected to invest about $44 billion into the Australian residential real estate market over the next seven years. The report estimates this investment was running at about $5 billion per annum and that Chinese buyers are currently purchasing about 12 percent of new homes in Australia. As a result, Australian residential real estate is now considered the second most expensive in the world based upon a new survey focused on incomes against the cost of housing and provision of other services.
The benefits of this investment on the positive side means the apartment construction activity is set to substantially increase particularly given the number of Australian apartment approvals is forecast to reach about 100,000 apartments by 2015.
The only country Australia ranks behind as a desirable destination for Chinese immigrants is Canada where new restrictions have now been placed on foreign investment and immigration.
The existing regulation administered by FIRB restricts non-residents to new properties. There have again been allegations in the media that FIRB, certain real estate professionals and service providers such as lawyers, are allowing or facilitating illegal acquisition by foreign investors of existing Australian property.
It will be interesting to monitor developments in the market over the next period as there are strong attitudes for and against such a trend. Those in the pro camp argue that this is good for the Australian real estate market and the economy generally to stimulate construction activity where the mining resources boom has left off. Those in the anti camp say this is creating a housing bubble which, when it bursts, will have a severe impact on the housing market overall.
Terrorism financing in Australia
Australian Transaction Reports and Analysis Centre (AUSTRAC) recently issued a paper on Terrorism Financing in Australia 2014. The report can be found here.
The report is very topical at present particularly given the recent raids by the Australian Federal Police (AFP) on suspected terrorists in Western Sydney and South East Queensland.
AUSTRAC prepared the report to raise awareness and strengthen the national response to the threat of terrorism financing.
The report states that terrorism financing poses a serious threat to Australians and the Australian interests at home and abroad. At its most damaging, it can fund the activities of domestic extremists including attacks on Australian soil and more commonly, terrorism financing raised in Australia can help sustain terrorist groups overseas and support foreign attacks and insurgencies. Further, terrorism financing poses a threat to the credibility of Australian financial institutions and our financial system which can also harm Australia's global image.
Raising funds to finance terrorism
The report indicates that terrorism fund-raising will vary on the sophistication and aim of the terrorist group. Smaller groups and individuals may require only modest amounts of money which are difficult to track through the National Anti-Money Laundering and Counter Terrorism Financing (AML/CTF) transaction monitoring systems. Groups with a larger support base require larger amounts of funding to support more sophisticated activities and ongoing operational costs.
Key channels to raise funds in and from Australia include:
- charities and not-for-profit organisations
- self-funding from legitimate sources
- fraud, theft and drug trafficking
- ransom payments.
How does AUSTRAC combat terrorism finance currently?
This is done in two ways through the AML/CTF Regulations and the Australian Financial Intelligence Unit (FIU).
A recent example of AUSTRAC exercising its powers occurred only last week where it has suspended a Lakemba money transfer business owned by the sister and brother-in-law of a convicted Sydney terrorist Khaled Sharrouf. This was over concerns it was sending millions of dollars to the Middle East to finance terrorism (The Age, 17 September 2014).
The release of this report is very timely for reasons mentioned earlier and in particular the current conflict in Syria and Iraq dealing with ISIS. It makes interesting reading and at least to the lay reader highlights that the risks of terrorism financing occurring in Australia are as high as in any other country.
No doubt there will be much more on this topic to be released in the foreseeable future.