Australia still attractive to international property investors after federal budget withholding tax increase

While industry leaders are set to lobby the government to reverse the doubling of the withholding tax in this week’s budget, not all have voiced dire consequences arising from the decision.

International players use management investment trusts to hold their real estate acquisitions, so the twofold increase in the withholding tax from 7.5% to 15% will have an impact, but Simon Garing of Merrill Lynch noted the higher rate will shave half a per cent off the investment return from an asset.

The recent 200 basis point fall in the 10-year Treasury yield is far more significant to offshore players, he notes.

“You can now get 3.6% from a government bond or buy a 10-year lease on property leased to the government with the same credit rating and receive a yield of 8 per cent," Garling says.

CBRE senior managing director Rick Butler told Fairfax Media that some property groups would be affected, depending on how their investments were structured.

He added offshore groups often use shareholder loans to finance their investments but said the change may affect asset values as foreign groups are significant buyers.

Colliers International has found that since the government lowered withholding tax to 7.5% in 2007-08, foreign investment in Australian commercial property markets has increased from $1.2 billion in 2008 to $5.5 billion in 2011.

Colliers International’s national director for capital markets, James Quigley, says Australia is still an attractive market for real estate investing.

"I don’t think that it will leave them ruling out Australia,” he says.

On budget night Property Council chief executive Peter Verwer was the first see the decision in the budget fine print, saying it “shredded Australia’s ambition to become the leading funds management hub for the Asia-Pacific region”.