Property prices in many Australian cities are clearly less than robust at the moment. Melbourne for instance is experiencing an unrelenting slump. Yet, for some, every cloud has a silver lining, as a growing cohort of overseas property investors, particularly those from China, take advantage of the soft local market.
As it turns out, real estate agents can market properties to pretty much anyone. However, there are laws and processes that restrict who can purchase some types of Australian property.
For instance established residential property cannot be bought by foreigners. This law, overseen by the Foreign Investment Review Board (FIRB) allows only Australian citizens, permanent residents or temporary visa holders to buy established homes.
Although it must be said there are a number of exceptions, particularly around commercial property, vacant land and property for redevelopment.
On the other hand, new residences and apartment buildings either ‘off the plan’ or recently constructed can be purchased legally by foreign nationals.
How many and how much
According to the FIRB, the number of foreign investment purchases receiving approval more than doubled from 3,897 in 2009-10 to 9,770 in 2010-11.
In terms of value, this was an increase from $20 billion to $41.5 billion. And more than 80 per cent of these approvals were for property costing less than $1 million.
Much, but not all, of this increase has been attributed to the reintroduction of screening of temporary residents and foreign non-residents. However this increase does sit within a a strong multi-year trend.
It’s probably no surprise to most Australians that the largest total number of FIRB approvals originated from China, with 5,033 in 2010-11. The next largest was from the UK with 1,004, followed by Malaysia 896, Singapore 536 and South Africa 347.
In regards to the total value of Real Estate approvals the UK topped the list at $4.61 billion, while China came in with a close second at $4.093 billion. The next largest expenditure was from the US at $3.404 billion, followed by Malaysia at $1.863 billion. Editors note: Treasury will not release application numbers, on a per country basis, for specific sectors. One can only assume that they are not happy for the public to know this data.
Top 10 FIRB approvals by country and value by industry sector
||Number of approvals (all sectors)
||Real estate (value)
Source: FIRB Annual Report 2010-11.
Interestingly, real estate seems to be the most problematic sector for applications received by the FIRB. Of the 5687 approvals granted, subject to conditions, all but four were for real estate sector. And of the 43 proposals declined all bar one were real estate transactions. Of the 390 proposals withdrawn, 67 per cent were real estate.
Why buy Australian
Due to traditional migration patterns and complimentary cultural, legal and business systems UK nationals have historically been the most prolific buyers of Australian real estate. But the rise of China has changed the whole outlook of the property sector.
A recent article in the Age described one of the biannual Beijing international property fairs, a vibrant, busy conference venue, where developers and agents spruik property from around the world.
“The drawcard, it seems, is more than property. One booth, which advertised property from all across the Australian east coast, prominently boasted: “Invest in property; speedy migration”. Over at the Sunland Group's booth, a sign read: “Buy Australian real estate; free migration.””
The Age article went on to report that "According to one patron of the fair Beijing property prices were too high and unstable, and that Australia offered a much more “socially stable” environment, and provided good opportunities for his 19-year-old son, who was studying mathematics at university.”
While America and Europe have stumbled and fallen, China’s economy has powered on. Yet with national policies drastically repressing interest rates, an average domestic savings rate just shy of 30 per cent and an increased fear that the local property bubble will burst there is a strong appetite for investment that is perceived to be both safe and that brings a reasonable return.
However it does seem that is not economic gain that is the key driver. A recent survey by Bain & Co and China Merchants’ Bank indicates that 46 per cent of China's 950,000 plus millionaires are considering emigrating, while 14 per cent have already completed immigration procedures for countries like the US, Canada, Singapore and Australia, or expect to do so soon.
In 2010 the Financial Times reported that Chinese buyers may now account for 20% of all property purchases over $1 million in Sydney, up from 14.0 per cent in 2009. And accordingly many new residences and apartment buildings in the principal capital cities, are being directly marketed to the Chinese market.
In addition many Chinese nationals who already have Australian visas or have joint residency, choose to buy established homes for the time that they spend in Australia. And due to business, study and family obligations, many split their time between their homes in China and Australia.
What does this mean for the Australian property market?
Well, if the Chinese economy does falter, then the Australian property market is going to take a hit. And it will be quite a big one.
Standard and Poor’s (S&P) data indicates that if the growth rate of the Chinese market drops below 8 per cent, then Australia can lop about 5 per cent off property prices. This, on top of an already stagnant market, would be problematic.
S&P goes on to state that, in the unlikely scenario that growth in China dropped below 5 per cent, then, real trouble would unfold. Based on their estimates, in this scenario, Australian property prices would plunge more than 20 per cent.
Yet for now, the marketing of new Australian properties that are FIRB approved continues into the Chinese market. Those who are eligible under Australian law, continue to buy established properties, essentially keeping some pockets of the real estate market afloat.
From here, like for many areas of the Australian economy, including mining, it’s a watching brief, and breaths are being held that the Chinese economy does not stumble.
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