Offshore investment is essential: Peter Chittenden
For what seams a long time we have been in the midst of a debate about the impact of offshore investment into our domestic residential property market, both private buyers and now increasingly developers. Revelations that FIRB regulations appear not to have been enforced for some years has as fuelled the idea that offshore buyers are driving up local prices and as a result locking some buyers, in particular first time buyers, out of the market.
However I think it’s important to acknowledge that this is not a new trend, offshore investment into Australia has been going on now for a very long time. Currently there appears to be a particular focus on Asian buyers, and this was a topic of a recent breakfast presentation I was involved in.
The breakfast presentation was hosted for a very interested audience by Coco Republic at their Sydney flagship store. The event has helped focus my views about this important debate, and so I am recounting some of the key points from that presentation.
There’s a Lot of Wealth in Asia
We need to remember that these buyers have very deep pockets, in some cases very deep and this extends to high net worth individuals (HNWI). While Asia is generally considered to rank third in number of HNWI after Europe and the USA, Asian numbers are growing rapidly, and will soon overtake the USA. Wealth also creates mobility and Asian buyers have always been happy to travel and invest in other countries, this mobility is often overlooked.
For these wealthy buyers as well as for a rapidly growing middle-class across the region, Australia is seen as a safe investment destination that also comes with a great lifestyle. Political stability and our property laws are also positives. Because of the current restrictions most offshore investment is naturally focused on new apartments, but within that market activity is generally spread across diverse areas, it’s not only CBD centric and I think that investment growth should be welcomed.
To say this is pushing up prices is too simplistic, prices are increasing, but it’s because of a combination of factors. Above all it’s tied to supply problems and poor delivery of infrastructure to enable a free flow of new stock and problems with supply are not new, we’ve know about problems with supply for years.
The supply side is also now being influenced by the direct development involvement of Asian investors into our markets, and so they are helping boost supply.
What we are seeing is the offshore investors/developers being very competitive in the market. They move quickly, they bring new ideas and we have to also keep in mind the impact of the local currency. Local and state governments with a development focus are looking for investment and many Asian investors have a critical level of expertise and access to capital that will only see this trend strengthen as more sites are acquired.
Lifestyle a Key Factor
One key point I made during my presentation is that offshore buyers are not coming here to play cricket in the streets, they are anxious to engage in every aspect of society and they take a long-term and very considered view of what and where they buy. Many buyers also have long term existing family connections here.
The flow of Asian buyers and the number of Asian students is one key example that has had a marked impact on some areas of the market in Sydney, and Melbourne and other cities. Big student numbers help drive demand for accommodation, and Sydney’s Broadway/Ultimo area is a dynamic example.
Largely because of student numbers and associated development, the area is heading for a true ‘downtown’ feel with 7-day a week activity. Because of its direct impact on residential property, it’s worth looking in more detail at the impact of the education sector. Figures show that in 1994 total student numbers were less than 100,000, by 2000 that had grown to 150,000.
However in 2009 numbers last peaked at around 620,000 students, numbers then fell away until 2012 and but since then numbers have been on the increase again and in 2014 were heading back towards 590,000, and the biggest sector is students in higher education. Although there’s growth in numbers also attending, and paying to do so, at the primary and high school level. There’s a direct link with more offshore buyers as some apartments are purchased for investments to cater for this demand, or parents buying to directly house their kids.
I think from a marketing perspective this has helped create more vibrant areas, and is a progressive development across several sectors and it is a big boost to economic activity; it’s a good example of why offshore direct investment into residential property is a positive trend. Education is a key part of the service sector economy and growth is required to help re-balance the economy as we exit the mining boom.
Helping to Revive the CBD
And while we have a strong in-flow of funds this is also helping to further shape core CBD residential markets, and is driving demand that will see more and more B & C grade office buildings converted for residential use.
As the CBD evolves it can also be seen that offshore buyers are also having an indirect influence in a more subtle way. For example planners looking to change our local dependence on cars can have apartments with no parking and they can influence demand and size of apartments, all deriving from the fact that offshore buyers take a different view of these two sometimes touchy areas for local buyers, this helps to create diversity of product and supply.
This trend of re-developing secondary office stock will go on and motivate demand for new office inventory for example in Sydney in areas like Barangaroo.
Such investment activity has a deep and powerful impact on our cities, it helps make sure they are ever more dynamic places, and that’s important if Sydney’s continued ambitions of being a major international city are to be realised. We cannot have that ambition on the one hand, and then on the other restrict or shackled offshore buyers, we have to have an open (if regulated) approach.
We are Not Creating ‘Little Asia’
A question I was asked at the Coco Republic event was centred on the idea that some buildings or projects might be focused just on offshore or Asian buyers.
In reality this is not the case, really it is just the opposite, as might be expected in an open market, buildings vary with the buyer profile they attract. Just what might be seen as Asian facilities I am not sure, but as far as design and interiors and common areas are concerned, projects are being built to meet the general demands of the market, we are not setting out to just accommodate Asian buyers.
What is true is that just like any local buyer, offshore buyers do put a lot of energy into selecting the right home or investment. They don’t just rush in and buy anything. They may appear to be dominant in particular areas but this is more as a result of where supply happens to be. Most offshore buyers are astute buyers – they express 5-10 year plans, and re-sale is the key concern.
Like all investors, they also focus on the potential of capital gains in later years and so they look for apartments that have strong appeal to the local market, after all it is often said you can’t exactly pack up an apartment and ship it off in your luggage on the next Qantas flight.
There are some location specific buyer profiles, but again that is not a unique factor, local buyers will be attracted by access to a particular university or school or shopping centre or business park, the same applies to offshore buyers.
I think it’s also worth acknowledging that the big four banks are looking at buyer profiles and they can put a cap on lending to the sector, however offshore buyers can access external funds.
ATO Takes on Part of FIRB Role
The recent changes to FIRB merit some comment. From my experience over the last few months, the government changes have not had any significant impact. Most buyers accept that there is a need to enforce the current laws, the ATO is now checking and perhaps it’s more a failure of policy and not an attempt to contravene the laws that really reflects market sentiment.
As I suggested earlier, the rule of law is important to offshore buyers, this helps make our market attractive alongside the fact that title is secure, here in Australia. I see constant evidence that these buyers never take anything for granted and so they are happy to work within the rules.
The Federal Government is also taking up the benefit’s Free Trade Agreements, and Significant Investment Visas as ways of boosting economic activity and investment, and so I do not think that residential property can sit outside these sorts of policies.
Suggesting that offshore buyers are the main cause of higher prices and tight markets is counter productive. Offshore buyers are looking for a full cultural involvement with Australia and that extends beyond the apartments themselves, they go on and buy furniture, cars and services and so that filters into the economy. If you look at the education sector again, and were to remove foreign students then the sector starts to look pretty poor. I think offshore buyers can do much the same for the housing market, helping to sustain activity and also directly boosting supply via direct development and sizeable investment as is already happening.
Given the existing FIRB rules, it is not reasonable to suggest that offshore buyers are having any more than a marginal impact on the local market, and while that may be more apparent in some pockets, I think it’s a distraction from the failure of long-term policy, that all levels of government need to take responsibility for. This include the chronic neglect of infrastructure, neglect that we are now being reminded of almost daily.
Peter Chittenden is managing director for residential of Colliers International. He can be contacted here.