Why China still loves Australian property
New regulations on foreign property purchases, aimed in part at Chinese buyers, are viewed as largely token and unlikely to deter still strong Chinese demand
Australia’s property market needs Asian investors to remain buoyant, and reciprocally Asian investors love Australian property. Property developers and construction firms are winners in the growing relationship, as are local investors who have seen their own investments rise in value.
For Asian investors, Australia is a safe haven with the rule of law. Australian property also gives them good capital gains, solid yields, and a country where dual citizenship is common.
In the commercial property space, Australian yields are at historic lows of around 6%, but this is still attractive for many institutional investors whose alternative is the underperforming bond market.
As Frank Allen, director of property markets at Westpac, puts it: “With the low cost of debt, this has driven capital returns, so total returns are in the double digits at around 13% or 14%.”
Allen says that offshore investors comprise around 40% of commercial property sales, with Chinese investors accounting for 12% of that total.
Investor interest from unlisted private funds in Hong Kong, Singapore and Malaysia is strong in the office market, where Sydney and Melbourne are now in the global top tier, as well as for other assets such as shopping centers, hotels and to a lesser extent industrial property.
While politics and regulatory risk has not been an issue in commercial property, populist politics occasionally rears its head in the residential market, with calls to slap restrictions and more taxes on foreign investors in retail property.
Despite the regulatory noise, data shows that the measures are seen largely as token and investors so far undeterred.
Much has been made of New Zealand Prime Minister Jacinda Ardern’s decision to prevent foreigners from buying existing dwellings. Australia has had this rule on the books for several decades and it has done little to stem the flow of money from Asia into the domestic retail property market.
Total Chinese property investment in Australia rose from around A$1 billion (US$752 million) in 2008/9 to almost A$32 billion (US$24.1 billion) in 2015/16.
According to investment bank Credit Suisse, more than a quarter of new homes built in the state of New South Wales in September this year were purchased by foreigners, with Chinese buyers comprising 90% of all foreign investors.
ANZ Bank estimates that foreign investors purchased between 35,000 and 60,000 dwellings in Australia in 2015/16, accounting for between 7% and 13% of all property transactions. Altogether, the bank estimates foreigners own up to 400,000 Australian homes.
Risk, up until now, resides on the investor side, particularly in China. Beijing seized on outbound investments in so called “trophy assets” in the months leading up to the November Communist Party Congress, slowing outflows into both residential and commercial property.
A report from real estate firm Cushman & Wakefield and Real Capital Analytics showed that while mainland China’s third quarter total outbound real estate investment plunged 51% to US$2.5 billion, Australia jumped into first place as an investment destination with US$783 million worth of deals for the quarter.
Even if Chinese investment slows, the report says there is renewed interest in Australia from Singapore, Hong Kong and Malaysia.
One risk in the Australian market is in settlement defaults on new apartment buildings, with fears that capital clampdowns and high debt levels in China could prompt an epidemic of defaults which would be catastrophic for local developers.
This has had an impact in the overbuilt Brisbane market, where UBS estimates that one in five foreign buyers are failing to settle. Prices in Brisbane, however, are softening and the default issue is yet to emerge in other stronger markets such as Sydney and Melbourne.
On the Australian side, housing affordability for locals is an increasingly sensitive political issue, with regular anecdotal reporting of first-time home buyers being squeezed out of the market by higher prices supposedly fueled by rising foreign demand.
In response, stamp duty and surcharges on overseas buyers were increased in July to 7% in Victoria and 8% in New South Wales, up from 3 and 4% respectively. This still compares favorably, for example, with the 15% levied in Vancouver, Canada – another popular destination for Chinese property investors.
On a typical Sydney apartment worth A$750,000 (US$565,000), the increase equates to another A$30,000 (US$22,584) in stamp duty, but this is not expected to be a significant deterrent.
The federal government has also slapped an annual charge on foreign owners who buy residential property and leave it vacant, and has put a 50% foreign ownership cap on new multi-story developments with at least 50 dwellings. There is also some pressure to ban foreign students from buying homes in Australia.
As temporary residents, students are able to buy existing homes unavailable to non-residents, and there are claims that families offshore, including from China, have discovered this loophole and are funding the purchases.
Industry Super Australia (ISA), a pensions provider historically linked to the union movement, recently called for a ban on foreign students buying homes, claiming they are pushing up prices in key markets and undermining affordability for local buyers.
“Whilst foreign investment inflows to build new apartments are always welcomed, purchase of existing properties often just add to overheated property markets in the most highly desirable locations,” the ISA report said.
Any changes to foreign ownership rules on residential property are still likely to be at the fringes, and are unlikely to make regulatory risk a major deterrent for prospective investors.
Of more concern is the high level of housing debt held by Australians, which some pundits believe is a bubble waiting to burst. But with strong population growth driving demand, it seems more likely that prices will plateau rather than fall, waiting for the next surge in the market.