FTA for China & Australia spells opportunities
China and Australia’s new Free Trade Agreement, inked in November 2014, could have lucrative ramifications for the property sector in both countries, as Cityscape discovers.
In November 2014, China and Australia entered into a Free Trade Agreement (FTA) set to have huge financial implications for a wide range of industries, including real estate and infrastructure development.
Ten years in the making, the FTA is a natural step in what is already a lucrative trade relationship between the two countries. With AUD 150 billion in annual trade, China is Australia’s largest trading partner.
However, the FTA opens the door further, giving Australia free access to China’s AUD 10 trillion economy, which is growing at 7.4% annually and is poised to become the largest in the world in the near-term future.
The FTA has been touted as ‘the deal of a lifetime’ by the Australian press and it is easy to see why. China has emerged as an economic superpower whose overseas direct investment is expected to overtake inbound foreign investment. ‘Chinese money’ is looking for a home and Australia could well be it. However, on the flip side, Australian businesses also look set to gain from an FTA that will enable free and easy export of goods into the world’s fastest growing economy.
Australia’s trade agreement with China will see an unprecedented rise in the number of Australian companies purchasing usage entitlements over Chinese commercial property, while relaxation of investment rules will encourage further Chinese property investment in Australia, according to Savills Australia.
According to Savills’ Insight paper – China: At Home, Abroad and in Australia – Australia’s tourism and health sectors could seize on opportunities to build and operate hotels, restaurants, hospitals and aged care facilities in China. The state owns all land in China; however, land usage can be purchased on a long-term lease, typically 40 to 50 years for commercial property and 70 years for residential. It is these leaseholds that could provide lucrative capital gains for Australian developers and investors alike.
“China’s ageing population is acknowledged as one of its biggest problems. According to the China National Committee on Ageing, the elderly currently number more than 200 million, a figure that is expected to jump to more than 300 million by 2025 and by 2050 closer to 500 million people, or 35% of the population.
“That is extraordinary growth in anyone’s language. Under the new FTA rules Australian companies will be able to construct and operate health and aged care facilities. While they will have no freehold ownership of the land the 40 to 50 year usage ownership is nevertheless an investment capable of offering significant returns.
“The agreement also suggests that current limitations on foreign ownership of commercial property may be relaxed and we expect that legal entities, such as joint venture partnerships between Australian and Chinese concerns, will be the beneficiaries,’’ explained Tony Crabb, National Head of Research, Savills Australia and co-author of the Savills Insight paper, with Savills’ Head of Research in China, James McDonald and Head of Research Asia Pacific, Simon Smith.
The FTA also means that restrictions have been lifted on private Chinese investment into Australia, which could encourage more investment into Australia’s property market.
“One element of the new FTA agreement with China proposes inbound private Chinese investment proposals with a value below AUD 1.08 billion will no longer require Foreign Investment Review Board (FIRB) approval. This clears an element of red tape from Chinese inward investment from Australia and eliminates an area of uncertainty. This should encourage more investment into Australia and see more investment into real estate,” said Crabb.
According to Crabb, housing will continue to be a popular investment for Chinese investors.
“The Australian population is growing, housing is undersupplied, Chinese face heavy investment restrictions at home and Australian housing fundamentals are attractive. Chinese investors (funds, insurance companies, conglomerates) will continue to be attracted to Australian property because it diversifies their portfolios into stabilised, core, mature western markets away from Asian emerging markets,” he said.
The Chinese residential property market is highly regulated with substantial restriction on both supply and demand. The country boasts a high level of home ownership – in excess of 85%. However, there are restrictions on second homes and multiple home ownership.
According to Savills, the current restrictions require a minimum down payment of 30% on the first property. A second property must receive a down payment of around 60% with no redraw on the first property permitted. According to new mortgage policy, buyers who have fully repaid mortgages are treated as eligible for first-home status, so qualify for a down payment of 30%. A third property can be purchased and must be paid for with no debt and no redraw on the previous purchases.
Currently, higher tier cities have a healthier balance between demand and supply than lower tier cities. As such, it is easy to see why Australia’s property market is much in demand by Chinese investors.
However, not only are the Chinese looking at buying property in Australia, they are also developing it.
“Chinese developers have already arrived on our shores and are building high-rise residential towers in our major cities. These developers have different financial models and are pushing Australian developers from the CBDs to the suburbs in search of profitable developments. Chinese developers have less debt (or none) and have a long list of potential buyers of Australian apartments in China – these two factors alone (where Australian developers cannot compete) gives Chinese developers a distinct advantage,” Crabb said.
AUSTRALIA’S BUILDING BOOM
According to Australia’s Federal Government Intergeneration report, the country will require a population of approximately 35 million people by 2050 in order to cope with skill shortages and eroding tax base as the population ages. It is expected that a large proportion of this skilled migrant intake will come from Asia. Amongst the 3.5 billion people living in the region, 10 million will make it to Australia. That means Melbourne and Sydney are expected to grow to become cities of nine million people by 2050. This growth in the population can be expected to result in the need for a further 1.6 million dwellings in both cities.
According to the Savills Insight report, this means there is a need for almost half a million apartments alone. The forecasts of Australia’s Department of Transport, Planning and Local Infrastructure (DTPLI) lead to a requirement of 13,700 apartments to be built every year for the next 35 years in Melbourne. A further 9,000 dwellings will need to be added every year for the next 35 years in the CBD and central city suburbs, Savills predicts.
With development and investment ripe in both destinations, the FTA looks like a win-win scenario for all concerned, and Crabb and his team expect sizable investment from China in the years ahead.
“It is our thesis that Chinese overseas direct investment (ODI) is just beginning and for decades to come will influence global investment markets due to its sheer size. There are varied players and different reasons for investing overseas – it is not as simple as saying ‘this is Chinese money’ – there are high net-worth individuals, private enterprises, conglomerates, developers, insurance companies, investment companies, banks and state owned enterprises amongst the many types of Chinese investors. There are billions of dollars being invested in Australia from China across a range of industries – the new FTA encourages more investment and Savills believes there will be more and larger investment into Australia over coming years,” Crabb concluded.