REAL ESTATE INVESTMENT ALERT NO. 7
In this Alert:
- In a Nutshell – 2017: A challenging year for real estate; and
- Matters to watch in 2018.
IN A NUTSHELL – 2017: A CHALLENGING YEAR FOR REAL ESTATE
The year 2017 is likely to be remembered as one which significantly changed the real estate investment landscape in Australia.
Over the last 4 -5 years, investment in Australian real estate substantially increased year on year, driven largely by foreign investors. An accommodating banking sector and regulatory regime added to the momentum which saw prices increase and yields drop.
A number of domestic and offshore events, commencing in the latter half of 2015 and gaining significant momentum in 2016, started to noticeably affect all Australian real estate markets in 2017.
In this article, we summarise these events and indicate how they have affected the market.
Although not intended to be a complete list of these events, some of the more significant ones were:
- Introduction of a Capital Gains Withholding tax in respect of foreign vendors of real estate;
- Changes to the Foreign Acquisitions and Takeovers Act and Regulations (and the release of Guidance Notes) on 1 December 2015, including the introduction of (a) application fees for seeking FIRB approvals; and (b) the concept of sensitive land resulting in lower thresholds for approvals, leading to substantial uncertainty and greater costs in relation to seeking FIRB approvals;
- Increased or additional foreign purchaser surcharges in Victoria, NSW and Queensland (subsequently followed by South Australia) as well as land taxes in NSW, Victoria and Queensland and Vacancy Taxes in some jurisdictions, resulting in additional costs for not only individual purchasers but also potentially for developers;
- Massive infrastructure expenditure in NSW, Victoria and some other States;
- Greater restrictions by banks on property lending, including development finance;
- Increasing prominence of non-bank lenders;
- Imposition by the Chinese Government of restrictions on Chinese entities investing in foreign property;
- Stronger tax compliance conditions in FIRB approvals and further changes to the Foreign Acquisitions and Takeovers Regulations and Guidance Notes as from 1 July 2017;
- Continuing concerns relating to housing affordability and the needs of our ageing population; and
- The changing global political landscape leading to uncertainty as to how these events will impact on markets, including real estate markets.
These events have led to changes in the Australian real estate market, including:
- Greater complexity associated with investing in and owning Australian property;
- Increasing difficulty in obtaining finance for development projects;
- Slowing of property prices in some major Australian real estate markets;
- Continuing housing affordability issues;
- Greater focus on Build to Rent as a way of alleviating the housing affordability crisis;
- Increasing interest by foreign investors in the aged care sector;
- Developing trends towards living closer to cities and in smaller dwellings; and
- Potentially greater regulation of non-bank lenders.
All of these events highlight the importance for investors to seek appropriate advice on relevant issues well in advance of signing any documents and committing to a transaction. This is particularly important for offshore investors making their first investment in the Australian market. It is also relevant to domestic investors seeking to be involved in more complex transactions than that which they have been used to, for example, joint venture or co-ownership arrangements or dealing with foreign investors for the first time.
MATTERS TO WATCH IN 2018
Given the above, we are of the view that the following matters will influence the Australian real estate market in 2018:
- Changes (if any) in the Chinese Government’s restrictions on investors acquiring foreign real estate;
- The appetite of other offshore investors for investment in Australian real estate, including in the build to rent and aged care sectors;
- The degree of regulation of non-bank lenders and its impact, if any, on the willingness of investors to be involved in this type of investment;
- Changes in bank appetite for real estate lending and its impact on the non-banking lender sector;
- The willingness of Federal and State governments to provide concessions needed to facilitate a build to rent market;
- Possible changes in the regulation of the aged care sector ;
- Whether any further infrastructure projects are proposed and their impact on relevant real estate markets;
- The impact on global capital flows if the tax changes proposed by Donald Trump are implemented;
- The outcome of the Brexit discussions between the UK and Europe;
- Unforeseen economic shocks and their impact on employment;
- The direction of interest rates; and
- Further regulatory and tax changes which impact real estate.
No doubt 2018 will be another interesting year for real estate and we look forward to assisting you to understand the issues you need to know to protect your interests before committing to a transaction.
In keeping with our aim to assist investors to minimise the stress involved in Australian property transactions, we trust you have found the above information useful. Please feel free to share this email with your business network and to contact us to discuss how we can work with you to improve your investment outcomes.
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Peter Faludi Consulting
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