The 2013-14 financial year saw China overtake the US to become Australia’s leading foreign investor. In the 2014-15 fiscal year, Chinese investors pumped over $24.3 billion into the Australian Real Estate market. This was more than triple the amount attributed to US investors. A few months ago, however, Chinese presence in the Australian Real Estate market declined. This was thanks to changes made to the rules of the Foreign Investment Review Board (FIRB).
Based on the activities of Chinese investors in the Queensland Real Estate market in the past few weeks, however, the Chinese investors are back.
These investors have bought two prime properties in a matter of days:
i. An FIRB approved Chinese buyer bought an architect-designed mansion at Cronin Island for $6.95 million.
ii. In Calamvale, a Chinese buyer just recently bought an acreage property for $7 million.
Chinese investors have proved to be particularly resilient in their pursuit of Australian properties. Scott Morrison, the Australian Treasurer, outlined restrictions for foreign buyers of Australian properties in the Federal Budget 2017. Foreign investors now must work around these restrictions before they can, legally, own Australian Real Estate. Some of the litigations set forth to hinder the overwhelming presence of foreign investors in Australia include;
i. Steeper Charges on Purchases.
It is now more expensive than ever, for foreigners to own property in Australia. This has, however, done very little to moderate the interest of Chinese investors.
ii. Unfavourable Tax Returns.
Temporary and foreign tax residents are to be excluded from capital gains tax exemptions. Investors who had bought properties before May 9, 2017, with the exemptions will have the privileges grandfathered until the month of June 2019.
Foreign tax residents have also had their CGT withholding tax rate lifted from 10% to 12.5%. Their CGT withholding threshold has also been dropped from by $1.25 million. It has been dropped from $2 million to $750,000.
iii. Penalisation of Empty Properties.
Properties that will remain unoccupied for periods of up to six months will incur an annual charge. The charge will be equal to their initial foreign investment application fee. The move seeks to force foreign investors to rent out their properties. This would go a long way in decongesting, the already tight, Australian rental market.
iv. No More than Half of a New Development may be Sold to Foreign Investors.
Foreign investment is to be maintained at no-more-than 50% on all new developments. This is now a condition on New Dwelling Exemption certificates. These (New Dwelling Exemption Certificates) are documentations availed to developers as pre-approval for foreign buyers.
All this restrictive legislation has, however, not interfered with the international demand for Australian Real Estate.
Chinese investors also face challenges from home. By law, Chinese investors can only move the equivalent of $US 50,000 out of China every year. State-owned banks also delay, or outrightly block, large sums of money from being transferred to overseas accounts.
Some time ago, a property was returned to the market after a, $19.8 million, Chinese buyer defaulted citing difficulties in getting funds out of China. Many Chinese investors, however, continue to beat the cash outflow restrictions of China and, Australian foreign investment restrictions.
Australian properties continue to attract Chinese investors. The trend is not limited to the Australian market only. Chinese investments globally are projected to double or triple by 2021.
Interestingly, the increased may just end up encouraging Chinese investment.
Research has shown that Chinese investors place more confidence in markets with a lot of regulations. Therefore, they have always preferred the US over Australia.
Another factor favouring the increasing influence of Chinese investors all over the world is the economy. China is the fastest growing economy on the planet. This means that every year, China produces more millionaires, and billionaires, than any other country. The search for investment opportunities soon follows the increase of wealth. Therefore, more and more Chinese are buying property all over the world.
The number of potential investors in China, who are yet to think of purchasing foreign properties, is great. As the trend spreads, it may just reach a tipping point and jam the world real estate markets with Chinese owners.
Nothing seems to stop the Chinese. In fact, China’s move to restrict cash flows into foreign markets triggered a notable increase in the presence of Chinese investors in the globally. This resulted from the fact that the media coverage of the issue made more potential investors think about foreign investments.
If these trends are maintained, the recent presence of Chinese buyers on a spending spree in Queensland is just the beginning.
The Australian Real Estate market is especially attractive to the Chinese for two main reasons:
1. It is Cheap
It may not seem to be so from the eyes of the average Australian but, in comparison to China, Australian properties are cheaper. To put that into perspective, consider the median value of a two-bedroom house in Shanghai and Sydney.
In Shanghai, the median price is about $US 900,000.
In Sydney, the median price is about $US 705,000.
The difference is such that, even with financial restrictions imposed on Chinese investors, it is still cheaper to buy Australian property. Even with the increased levies, Australia remains cheaper than other Pacific Rim destinations like Hong Kong, Singapore, and Vancouver. In Hong Kong, for example, the summation of Stamp Duty and Buyer Tax amounts is as high as 37%.
2. Australian Properties are High Yielding Investments.
The rental yield averages at 1.5% in China. That is about half of what the property owners in Australia would get from their investments. The new millionaires that China makes annually, therefore, find Australian properties more profitable than similar local investments.
No matter how much litigation is passed to restrict Chinese investors, chances are, the Australian Real Estate Market will be seeing them for many more years to come.
There is even talk of China relaxing their restrictions on cash outflows. This is after many foreign investors continue to raise concerns over the easy-in-hard-out financial policies governing the Chinese market. If this were to be realised, the Chinese presence in the global Real Estate markets, and especially in Australia, would undergo exponential growths.
Considering that China is currently said to account for 80% of Australia’s foreign demand; interesting times lie ahead.