Media | [+] Incentives Urged to Drive Overseas Investment in Off-the-Plan Projects

This article was originally published in www.theurbandeveloper.com exclusive by Marisa Wikramanayake

That Australia has a housing crisis is not new.

But industry leaders are claiming incentivising foreign investors to send their dollars Australia’s way and pump up housing stock could help to address the endemic problem.

Hamton Property Group chairman Paul Hameister broached the topic at The Urban Developer’s Melbourne Long Lunch event this month.

“Historically, we have been able to deliver above supply because we have been able to give an incentive to purchasers to buy off the plan,” Hameister says.

But Hameister says there is currently a disincentive for foreign buyers to buy off the plan, as they are slugged significantly more than domestic purchasers.

Currently in Victoria, homebuyers pay 5.5 per cent in stamp duties for properties up to $2 million in value for off-the-plan homes.

That increases to 6.5 per cent for properties over $2 million—but foreign buyers are required to pay an extra 8 per cent.

“As a build-to-sell developer, you might have a permit but the only way you can put the presales in place to draw down on your construction funding is to sell off the plan.

“And unless [the taxes are] fixed, it doesn’t matter how many permits you put in place, there is no big change in our state in my opinion.”

Buyers, presales and getting projects up

It’s not a new idea: foreign investors buy into Australian property and act as landlords, increasing the amount of housing available to rent.

This would also allow developers more wiggle room in making projects more feasible and profitable.

Foreign investors may have more purchasing power and capacity, and therefore are able to purchase property outside the average aspiring Australian homeowner’s means.

It means homes are sold, especially in projects that need presales to win construction loan approval.

UDIA WA executive director Sarah Macaulay says apartment developers are finding it increasingly difficult to make projects stack up financially given escalating materials costs, skills shortages and the high cost of infrastructure upgrades and provision.

“If … developers can attract more buyers to the projects they already have under construction, they can then use that capital to move on to their next project and get that moving,” Macaulay says.

“We desperately need that to happen so that we get more apartment projects delivered to the market across Perth.”

Financing project is challenging without pre-sales and projects are simply failing to get out of the ground. These funding shortfalls and feasibility challenges are constraining the supply of more affordable housing typologies.

Who’s buying?

The idea has merit—the Foreign Review Investment Board’s most recent report said that in the 2022-2023 financial year there were 6576 investment proposals put forward for residential real estate worth $7.9 billion.

All foreign buyers go through the board to buy property in Australia and for the 2022-23 financial year, Chinese buyers topped the list with 1775 proposals approved worth $3.4 billion.

International real estate agency Juwai IQI Co-founder Daniel Ho says Chinese buyers are taking advantage of reopened borders after the pandemic slowed down opportunities to inspect and purchase property.

“Chinese homebuyers went on a spree and engaged in some revenge buying after three years in which it was complicated for them to travel to Australia,” Ho says.

“Buyers from mainland China account for 57 per cent of all approved for in-home purchases and that rises to 67 per cent when you include Hong Kong buyers.”

Buyers from Hong Kong brought in $600 million in investment for the year with Vietnam-based buyers next with $400 million.

Residential investment by foreign buyers

Country of origin	Approved proposals to buy residential real estate in 2022-23	Value of proposals in 2022-23 (billions AUD)
China	1775	$3.4
Hong Kong (SAR)	467	0.6
Vietnam	333	0.4
Taiwan	220	0.3
India	335	0.2
Singapore	335	0.3
Nepal	193	0.2
Indonesia	193	0.2
United Kingdom	172	0.2
Malaysia	156	0.2

^{Source: Foreign Investment Review Board, Australia}

But Ho says migration is a key part of that decision-making process.

“Few of these buyers are investors,” Ho says.

“Most Chinese are purchasing for their use and are on the path to becoming Australian citizens.”

What’s driving that is not just the push to study in Australia after several years of being unable to do so but also what is happening in the property sector in mainland China.

Housing is an expected purchase in China, often with family members assisting each other to purchase property.

But the recent collapse of developers and builders in China has shown a cyclical pattern of using deposits and presales to get loans not for construction but for designing and marketing the next project, leaving entire ghost towns of unfinished and empty construction sites with apartment and housing delivery dates missed.

Australia may seem like a safer bet for investors from the Asia-Pacific region including Japan.

And Ho agrees, saying the amount of money coming into residential real estate from overseas will increase and pointing to the fact that many such buyers paid more than 40 per cent over what they would have paid in the previous year to secure property.

“The big question is whether this pace of purchasing can continue in the year ahead,” Ho says.

“Juwai IQI believes the growth rate will slow but the aggregate dollars invested will increase in the current financial year.”

 

Ho also says there is room for growth with other factors around travel still in the mix.

“Chinese buyers aren’t done yet—the border has only been open for nine months,” he says.

“Flights have not gotten back to their pre-Covid levels. There are delays obtaining passports and visas.

“Many Chinese holding Australian permanent residency still have not yet made the move.”

And where they are buying is also key—if they are buying to occupy then this increases housing supply issues for Australian residents in those locations.

“Melbourne and Sydney are the two big destinations for Chinese buyers,” Ho says.

Victoria pulls in a third of all Chinese buyer enquiries while NSW gets 30 per cent and Queensland and WA get 20 per cent each.

Dangling carrots

So, how does Australia get more overseas buyers into its property market.

For Hameister it’s straightforward: increase incentives so that more foreign investors find it easier to buy off the plan.

“Without a change to the transfer duty system, we are going to have a lot of permits and no change on the ground,” he says.

“The biggest policy change the Victorian government can make is to create an incentive for people, including foreigners, to buy off the plan.

“At the moment, there is none and in fact, there is a disincentive for foreigners to do so.”

Time & Place founder Tim Price said changing off-the-plan duties was “a big one”.

“I endorse the stamp duty exemption for off the plan. It’s probably been the same conversation for 10 years, they are not missing out on revenue because people are not buying,” Price says.

“That has got to be an obvious solution.”

Hameister may be just talking about Victoria but across the Nullabor in Western Australia, others are lobbying for the same policy change.

Rothelowman principal Kylee Schoonens says just two residential projects have begun construction within the past six months in Perth.

The WA government has announced an expansion of a stamp duty concession for homebuyers purchasing off the plan but Schoonens thinks the changes can go further.

“It is a really positive move and is one lever that can be pulled to encourage the commencement of build-to-sell projects,” Schoonen says.

“Another lever that should be considered is the removal of the foreign buyer duty.

“Removing this surcharge will encourage more off-the-plan sales from overseas investors, which will significantly boost developers’ ability to achieve their pre-sale commitment targets much quicker.

“Prior to the foreign buyers duty being introduced, developers relied on overseas investment to boost the pre-sale commitment but since it has been introduced the level of off-the-plan sales has dipped significantly.”

In WA, foreign buyers are charged an extra 7 per cent in stamp duty.

Schoonens also points out that although overseas investors can wait for homes to be built, local buyers need confidence that a project is going ahead and have less time.

“Traditionally, overseas investors had the luxury of time, they were able to wait for projects to commence whereas local buyers need a more immediate or achievable timeline,” she says.

“Without the initial investment from an overseas buyer to help developers meet the pre-sale commitment target, there is a greater sense of uncertainty among locally based buyers.”

In Queensland, similar calls for stamp duty to be removed to increase housing affordability and ownership are being made.

“Stamp duty thresholds have remained static for more than a decade and First Homebuilders Grants rarely apply to the regions,” Real Estate Institute of Queensland chief executive Antonia Mercorella says.

“All this while the stamp duty revenue taken by the state has almost tripled.”

JLL Victoria capital markets director Josh Rutman proposed this year that an annual tax could be more effective than stamp duty.

“With costs for businesses and investors on the rise, such as financing and construction costs, it is prudent to lighten the cash-flow impacts on investors by making these changes,” he says.

Rutman believes moving away from stamp duty would make Victoria more competitive globally.

“We are a highly taxed economy compared to other western nations and costs such as these are material decisions for global investors looking to optimise their returns,” he says.

This article was originally published in www.theurbandeveloper.com exclusive by Marisa Wikramanayake