Investing in Australian Non-Residential Property

Australia actively promotes overseas investment, and unlike many countries it has limited barriers to entry into the market. This is evidenced by the large amount of capital inflows from overseas including Canada, Europe and Asia, due to the “safe haven” status of the Australian property market. However consideration should be given to the potential tax implications for overseas investors, investment vehicles, borrowing and local management to ensure the optimum return out your investment.

Why should you invest in Australian Property:

  • High population growth is one of the most important criteria in real estate investment.  With the population growth in Australia, especially in key cities like Melbourne and Sydney not likely to slow down anytime, it makes investing in these cities attractive to ensure a continuity of both capital and rental growth.
  • Australian property is often praised by investors for its ability to maintain steady rental yield while achieving positive capital growth.
  • As one of the world’s most consistent property markets for the past three decades, Australian properties see an average return on investment of 7% per annum, with lesser years of decline compared to almost any other property market in the world.
  • Low cost of debt, with many new lenders active in the market and increased liquidity.
  • week Australian dollar against the US Dollar, provides for future exchange risk upside.
  • Australian properties have enjoyed consistent capital growth over the last 100 years, with property prices doubling roughly every 7 to 10 years.
  • The Australian property market has also displayed resilience in resisting downward trends, giving investors the confidence needed to hold on to their investments for longer periods. The low volatility of the Australian property market has made it the preferred choice over stock markets and other property markets worldwide.

The Economy

The Australian economy, however, is not immune to the broader global economy, and while we have not experienced a recession in over 27 years, economic growth has slowed in line with other established world economies. Wage growth remains low, inflation remains below the long-term trend and GDP remains benign, prompting the Reserve Bank of Australia (RBA) to act by cutting the cash rate to 1% with further cuts expected to follow. A recent report released by Westpac Bank (major Australian Bank) provided the following forecast:

The above table, highlights Westpac’ views of a reduction in the cash rate from 1.00% to 0.5%, with some economists seeing rates heading to 0% and remaining low for a long period to come, which is in line with other central banks globally. A low interest rate environment will stimulate investment activity and consumer spending, however, it reduces greatly the returns investors have received from cash. Many investors are now searching for yield and with commercial property yields over 5% in Sydney, Melbourne and Canberra and over 6% in Brisbane, Adelaide and Perth, the asset class has become increasingly popular. Yields at this level are some 400-500 basis points  over the risk-free cash rate and with economic forecasts looking to a prolonged period of low rates we expect to see yields fall further thus increasing commercial property values.

Commercial Property Overview

The strong influx of foreign capital, and the ongoing appetite of major Australian investment funds looking to chase quality assets and yields, has added a great deal of liquidity to the market. Together when coupled together with highly attractive costs of borrowing continue to put downward pressure on cap rates and with rising rents capital values continue to improve. NSW and Victoria remain as the preferred destination for investment, however there is increasing transaction activity occurring in Brisbane and Adelaide.  The table below highlights average A grade commercial property yields across Australia:

Due to the underlying strength of the Sydney and Melbourne economies, Fidinam has active mandates in investing in both these markets on behalf of its clients. We are also seeing interest grow in the Adelaide market due to the higher income yields, a lower entry point to invest and the South Australian government undertaking a number in initiatives to promote South Australia as an investment destination, the largest of these being the removal of stamp duty for commercial property investments, saving some 5.5% of the property value when you purchase in Adelaide. As active investors and managers across all Australian markets the Fidinam team can assist your investment in any major capital city of Australia.

Investment Considerations for Overseas Investors

The Australian Government proactively promotes overseas investment within in Australia; however investors need to carefully consider their approach and be aware of ownership structures, federal and state-based taxes, and property types open for overseas investment  . Consideration should include:

  1. Ownership– You can own property in your personal capacity; however it may be more beneficial to own the property in an Australian domiciled company and or via a Managed Investment Scheme, these provide more flexibility when managing borrowings, capital gains and distributions.
  2. Government approval- Depending on the asset size you may require Foreign Investment Review Board approval; in many instances this is for assets of state significance and or over $150million AUD.
  3. Property Taxes- With the exception of Adelaide all states charge stamp duty at an average rate of circa 5.5% of the purchase price when you acquire a property and charge ongoing annual Land Tax, with Victoria and Queensland charging an additional “absentee Owner” Land Tax surcharge. This is where ownership structuring of your investment can require addition advice to mitigate risk around these surcharges. Other taxes to consider is the effect of Goods and Services Tax (currently 10%) and if the asset is sold the potential for Capital Gains Tax.
  4. Asset types- Overseas investors can acquire all types of non-residential property and are restricted to only being able to purchase new residential property.
  5. Borrowing- There is a strong banking and non-banking market that will assist with securing the right property finance. Borrowing for an overseas investor, while not difficult can be challenging due to Australia Anti Money Laundering laws and the “Know Your Customer” required by the lender to understand the ultimate beneficial owner of the asset.
  6. Australia’s legal system is based on the UK system just like Hong Kong or Singapore, so it’s familiar to many overseas investors, and property acquisition if one of the most transparent in the world with gstrong consumer protection.

Borrowing

Leveraging a property investment in Australia, is a prudent strategy for investors, as it allows you to hedge part of your investment, as you are acquiring in Australian dollars, and with local interest rates at historical lows can substantially improve you  cash on cash investment return, as example of this is as follows:

Adopting a leverage strategy can increase your cash on cash returns from 5% to 7%per annum or over a 28% per annum increase in investment return. However a leverage strategy needs to be carefully considered, as too much leverage can be risky if the market cycle changes and values fall.

As a broad overview of the debt market in Australia, and depending on the type of property acquired a typical mortgage facility would look like:

Mortgage (loan)40-50%
Interest rate2.75%-3.25%
Finance fees (establishment)0.3 to 0.5%
Covenants
Interest cover ratio2 times
Loan to value ratio50%

 

Local Management

Local management is an important part of your overall investment strategy. Local management will be well versed in what is happening within with the domestic property market, have strong and deep networks to assist in acquiring property, provide active management to ensure the successful financial performance of the asset and/or portfolio, work with the investor in developing and implementing prudent debt strategies, and advise on ownership structures to ensure maximum financial performance from the investment.

Fidinam is well positioned to assist, it current manages over $400m in assets for offshore investors and has ongoing mandates to acquire more quality investment property in Australia. Should you wish to learn more about investing in Australian property, please do not hesitate to contact our Managing Director at Fidinam Australasia Real Estate via email matthew.burrows@fidinam.com .

Matthew Burrows, Managing Director Fidinam (Australasia) Real Estate

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