The FIRB reveals a nearly $50bn drop in foreign investment approvals for Australian residential real estate
Foreign investment approvals for Australian residential real estate dropped by $47bn this financial year to $25bn, according to the Foreign Investment Review Board’s 2016-17 annual report.
The FIRB report says this was likely a spill over from the introduction of application fees in 2015, tighter Chinese capital controls reducing the outflow of cash and state-based taxes on foreign investors.
But it might also demonstrate a “weakening in underlying foreign demand” with banks tightening lending to foreigners and weaker market conditions, the report stated.
Tana Xuren, managing director of Victorian-based brokerage uBroker, says her team has observed a large portion of investors who once showed interest in buying Australian property changing their plans, investing in Malaysia, Thailand, Japan and some European countries instead.
For brokers who used to regularly work with foreign buyers, it was a challenging year. "Most lenders have closed the doors to non-residents borrowers. It was not uncommon to hear some foreign investors who purchased Australian properties not being able to borrow money from Australian banks as they originally expected before the policy changes, and they ended up losing their initial deposits when they missed settlement."
Carrie Law, CEO of Chinese real estate website Juwai.com, said the first and second half of the last financial year were like “night and day” for Chinese investors.
“In the second half of 2016, Chinese investors were investing in Australian real estate at an almost irrational pace. It was like money falling from heaven for vendors and developers. In early 2017, capital controls, financing restrictions, and foreign buyer taxes reduced Chinese investment to more reasonable levels,” she said.
The Australian government has outlined in recent budgets strategies that attempt to funnel foreign investment in real estate into creating more housing stock. According to the report, that was the case this financial year with 85% of approvals being for new dwellings or vacant land for development.
Last year’s federal budget outlined a new rule that restricts the number of dwellings that can be sold to foreigners to half of all dwellings in one development, among other stipulations.
Approvals for commercial real estate also dipped from $50bn in 2015-16 to $44bn this financial year. The FIRB explains that this was likely due to the China-Australia Free Trade Agreement which only requires Chinese investors to obtain investment approval before purchasing developed commercial property valued at $1bn.
Where’s the money coming from?
China outpaced the U.S. and Canada in both value and number of foreign investment approvals. In 2016-17, 9,714 Chinese applications were approved for a total of $38bn across various sectors, including mineral exploration and manufacturing, compared to 316 approvals from Americans for a total of $26bn.
China was also the leading source of approvals for residential real estate, accounting for $15.3m compared to $7.3m from Canada and $6.8m from the United States.
According to Law, the environment is changing again with the Chinese government hinting at reeling in capital controls.
“Buyers are beginning to anticipate a time, perhaps this year, when investing overseas again becomes easier,” she said.
Regardless of the tighter constraints now, real estate remains the most popular asset class among foreign investors, she added.
What should brokers who work with foreign buyers do?
To embrace the changes, Xuren's team has engaged and assessed over 30 new lenders onshore and offshore that will help them seek lending solutions for the foreign investor market.
Her brokerage also reorganised its team structure, setting up a new role called "non-resident lending specialist".
This employee provides extra care and services to overseas borrowers.
Her brokerage provides services such as non-resident loan product comparison and analysis; documentation translation; after hours communication, as well as more streamlined multi-channel communication via popular Asian social media platforms, such as Wechat and Line.
Her team also held seminars with potential and existing clients, as well as referral channels to promptly explain the new changes in the Australian property market and lending market.
"At this stage we are happy to see that more mortgage funds are coming into this sector to cover the gap. With the increase in competition in the market, the interest rates offered to the clients are being lowered down over time. We believe it won't be long before Australian property market will draw back more attention from the overseas market," she said.
