Chinese buyer's Strathfield house purchase plans blocked

A rare Australian federal government Treasury refusal to an intending overseas buyer has emerged in a recent Sydney auction offering.

The attempt by Zhixiong Hua to purchase the Strathfield home was deemed contrary to the national interest under the Foreign Acquisitions and Takeovers Act 1975 in an April 7 order under subsection 21A(2).

The possible knockdown 1920s house, with lovely polished floors, at 86 Nicholson Street, Strathfield sold for $1.8 million at its March 28 auction through LJ Hooker agents David Pisano, who is currently holidaying overseas, and Jeffrey Wan, who said he was unaware of the actual sale details. The 902 square metre holding was being offered to the market for the first time in over 43 years in a highly multi-cultural inner west locality. About a quarter of the street is owned by families of Asian descent, mostly Vietnamese.

And local agents tell Property Observer the offshore Chinese buying presence has been limited around Strathfield during 2014 given currency fluctuations, other than off the plan offerings mostly elsewhere in the inner west, especially Burwood.

The Treasury departmental rejection has been quickly suggested as a sign Treasurer Joe Hockey was prompting a new direction in government policy. No property purchase proposals were rejected in 2012-13, compared with 13 in 2011-12, as the Labor government moved to its conclusion.

While the FIRB approval process is wrapped in secrecy, it is most likely the refusal relates to the buyer's intent and the issue of foreign buyers purchasing existing houses, demolishing them and rebuilding new, bigger homes when they are deemed liveable already.

The offshore Chinese buying presence has been limited around Strathfield during 2014 given currency fluctuations.

This is against Foreign Investment Review Board policy aimed at seeking increased housing stock that directs foreign buyers away from existing homes, typically allowing them to buy and demolish existing houses if they subdivide the block and build two or more dwellings. They may only knock over houses that are “derelict and uninhabitable”.

It is however the first known refusal since the Rudd government crackdown on overseas buyers which got underway in 2010-2011 which stopped more than 43 transactions, when the government was feeling the backlash of the electorate.

Back then three knock backs were in Sydney, with other sales thwarted in the Byron Bay district, the Gold Coast, Melbourne and Perth.

The most expensive halted acquisition was a $6.4 million house on Victoria Road at Wayne Gardner. The proposed acquisition by Jun Qiu was blocked in early 2011 by the compliance and real estate screening unit of the Treasury's foreign investment division. The Wayne Gardner house was listed with $7 million expected, having last traded in 2003 for $3.95 million, and eventually sold at $5.715 million.

There was also the planned purchase of a $2.3 million house at South Golden Beach, near Byron Bay, by an English couple, David and Angela Wright, which was also not given approval.

On the Gold Coast, the sale to overseas buyers of a vacant block at Paradise Point, was stopped in 2010.

Less expensive sales of a $550,000 house at Seven Hills and a unit at Sefton were also halted in the prior crackdown.

The Department of Treasury is likely to have rejected other through the interim, but typically the proposed residential real estate purchasers have quietly withdrawn voluntarily to avert the ASIC gazette spotlight. In 2012-13, some 446 proposals - with 76% involving real estate - were withdrawn typically because applicants submitted concurrent applications and didn't need to proceed after their initial purchase. 

Under the current FIRB rules, temporary residents have to seek approval to buy real estate in Australia.

Under the current FIRB rules, temporary residents have to seek approval to buy real estate in Australia.

Overseas-based investors are encouraged to buy newly built real estate, such as off-the-plan apartments, and must start construction on vacant land within two years.

The last crackdown under the Rudd government which moved to introduce laws to restrict rapid house price increases.

It also set up a 1800 hotline aimed at trying to stop people buying real estate outside the foreign investment laws.

The hotline received 131 calls in the first few months after the assistant treasurer Nick Sherry announced it and other measures aimed at cooling fears that foreign buyers were driving prices up.

The compliance hotline, 1800 050 3771800 050 377, and an email address, FIRBCompliance@treasury.gov.au, remains for people wanting to raise potential compliance issues. 

Nick Sherry also announced a monitoring system, piloted in Sydney and Melbourne, to match records from the Foreign Investment Review Board with state land title offices and visas from the Department of Immigration to track who was buying what.

There has been little transparency since which has triggered the current federal government to set up its own parliamentary inquiry headed by politician Kelly O'Dwyer who recently wrote "the only thing that has grown faster than Australian housing prices has been the rate of articles about foreign investment in residential real estate."

O'Dwyer added "unfortunately, most of the commentary was built on the back of anecdotes because useful statistics are limited."

The House Economics Committee announced an inquiry into Australia’s foreign investment policy in the context of residential real estate which will be headed by O'Dwyer.

The committee has invited submissions by 9 May, 2014, and is expected to report later this year.

Of course currently ‘national interest’ is not defined in the FATA 1975, and the Treasurer has the power to decide what constitutes the national interest in relation to each particular proposal on a case-by-case basis.

The policy identifies relevant factors, and the FIRB recognises that the relative importance of these factors will vary depending on the nature of the target enterprise and the impact of the investment, having regard to widely held community concerns. The policy states that an investment that enhances economic activity (e.g., developing productive capacity or new technology) is less likely to be contrary to the national interest.

Picture: The federal government's notice blocking the sale of 86 Nicholson Street, Strathfield.

Just before the decision to hold an inquiry the FIRB released details on overseas buying activity.

Temporary residents allowed to buy one property to live in numbered 5,091 last financial year.

A further 4,499 approvals were granted for foreign individuals to purchase a new dwelling.

However no divestiture orders were made, continuing the trend set in 2010-2011 and 2011-2012.

Property Observer noted it had been aware that there had been earlier orders where the buyers failed to undertake its development undertakings, but not for several years.

Kelly O'Dwyer has noted from 2011-12 to 2012-13, Foreign Investment Review Board approvals for foreign investment in developed residential real estate grew by 29% in number and over 50% in value terms (mostly for temporary residents).

Approvals to develop new residential housing grew less strongly in number, up 13%. However, there was a dramatic slump in value for this category, driven by a $5 billion fall in “off the plan” pre-approvals.

"But we don’t know how much of the newly developed housing stock is re-sold or rented to locals – or conversely, how much stays empty for vast periods and is used simply as a store of value or an occasional holiday home," O'Dwyer said.

"The lack of information on this front is surprising.

"After all, Australia’s foreign investment policy as it applies to residential policy is intended to boost the supply of new housing, and thus provide both economic and social benefits.

"Foreign investors cannot generally buy established dwellings as investment properties or homes." - Kelly O'Dwyer

"Foreign investors cannot generally buy established dwellings as investment properties or homes.

"Temporary residents can apply to purchase one established place to live in, but are expected to sell it when they leave Australia."

O'Dwyer stressed the inquiry was not focused on investors from any given country.

"It is taking a holistic approach to examining if current policy settings deliver the best outcomes for Australia.

"The clear policy objective is to ensure foreign investment drives an increase in housing supply.

"It’s too early to judge what areas will receive the most attention and scrutiny.

"But it is fair to expect that transparency and compliance will make the short list.

"For instance, are requirements for temporary residents to sell properties when they leave Australia, being observed and enforced," she queried.

The relevant penalties are hardly intimidating, she added.

"If caught, offenders retain the post-tax proceeds and face a maximum financial penalty of $85,000.

"Given the rapid growth in house prices in Sydney and Melbourne in particular, and given Australia’s safe-haven status, it’s easy to see the fine becoming the “cost of doing business” for many," she said.

The latest refusal was under the Foreign Acquisitions and Takeovers Act 1975 section 21A which reads:

Acquisitions of interests in Australian urban land

             (1)  In this section:

foreign person means:

                     (a)  a foreign corporation in which a natural person not ordinarily resident in Australia or a foreign corporation holds a substantial interest; or

                     (b)  a foreign corporation in which 2 or more persons, each of whom is a natural person not ordinarily resident in Australia or a foreign corporation, hold an aggregate substantial interest.

             (2)  Where the Treasurer is satisfied that:

                     (a)  a foreign person proposes to acquire an interest in Australian urban land; and

                     (b)  the proposed acquisition would be contrary to the national interest;

the Treasurer may make an order prohibiting the proposed acquisition.

Note: For the criminal liability of an officer of a corporation if the corporation contravenes or fails to comply with an order under this subsection, see sections 30 and 31.

             (3)  Where the Treasurer makes such an order in relation to an interest in Australian urban land, he or she may also make an order in relation to:

                     (a)  a specified foreign person; or

                     (b)  a specified foreign person and specified associates, or the persons included in a specified class of associates, of that person;

directing that that person shall not, or none of those persons shall, whether alone or together with any other or others of them, acquire:

                     (c) any interest in the land or other thing concerned; or

                     (d)  any such interest except to a specified extent.

Note: For the criminal liability of an officer of a corporation if the corporation contravenes or fails to comply with an order under this subsection, see sections 30 and 31.

             (4)  Where a foreign person has acquired an interest in Australian urban land and the Treasurer is satisfied that the acquisition is contrary to the national interest, the Treasurer may make an order directing the foreign person to dispose of that interest within a specified period to any person or persons approved in writing by the Treasurer.

Note: For the criminal liability of an officer of a corporation if the corporation contravenes or fails to comply with an order under this subsection, see sections 30 and 31.

             (5)  Before the end of the period specified in the order or of that period as extended under this subsection, the Treasurer may, by writing signed by the Treasurer, extend or further extend that period or that period as so extended, and in that event the order has effect as if the period as so extended or further extended had been specified in the order.

             (6)  For the purposes of subsection (4), but without limiting the generality of that subsection:

                     (a)  a foreign person shall be taken to have acquired an interest in Australian urban land if the person becomes, with or without the knowledge of the person, a beneficiary in a trust estate (other than a deceased estate) that consists of or includes an interest in Australian urban land; and

                     (b)  where paragraph (a) applies and the trust estate is a discretionary trust estate—a reference to the disposal of the interest of the foreign person is a reference to the disposal of such assignable benefits in relation to that trust estate as may ultimately vest in that foreign person.

             (7)  The Treasurer shall not refuse to approve a person for the purposes of subsection (4) unless the Treasurer is satisfied that the person is a foreign person and that it would be contrary to the national interest for that person to acquire the interest concerned.