Benefits of foreign investment in real estate (2017)

Overview

Foreign investment is vital to the strength of the Australian economy. Australia depends on international capital to finance the pool of investment that underpins its economic growth. Over the past 25 years, the gap between Australia’s domestic savings and its investment needs has been around 4 per cent of GDP. International capital has made up the difference, filling the gap between what Australia saves and invests every year and allowing Australia to have higher rates of economic growth than would otherwise be possible.

However, the value and significance of foreign investment, particularly in real estate, are poorly understood. There has been limited analysis of the role of foreign investment across the whole property industry, and this type of investment is often viewed solely through the lens of the residential property market. Against this background, the Property Council of Australia (Property Council) commissioned ACIL Allen Consulting (ACIL Allen) to undertake this research.

Geographical scope

Australia

Non-quantified impacts

Australia’s foreign investment framework for real estate is more stringent and has higher levels of scrutiny than other countries with which Australia competes in the market for global capital. This is especially prevalent with regards to residential investment.
China is the largest source of foreign investment approvals in real estate (including commercial and residential real estate), while the major source of investment in commercial real estate is the United States.
While the actual number and value of dwellings purchased by foreign persons in Australia is unknown, the number of approvals to purchase residential properties are estimated to be around 9 per cent of the total residential properties sold in Australia (and around 13.5 per cent of the value of total dwelling turnover). A significant portion of this relates to pre-sales of off-the-plan developments which moves projects from conception to completion and accelerates delivery of new supply into the market. The definition of foreign person includes skilled workers, students and other foreign nationals who are temporarily living in Australia.
Foreign investment in real estate is important because it increases the amount of capital available for investment in the construction of new dwellings and commercial buildings. Australia benefits from this investment because it: i) helps fund investments and projects that Australia could not support purely with domestic savings; ii) increases the demand for, and supply of, housing stock. This produces benefits for the construction industry, employment and economic growth; iii) increases the number of providers of goods and services which encourages competition and boosts housing supply; iv) enables domestic firms to diversify their portfolios by purchasing or developing buildings in other regions or sectors; v) contributes to increased capital values through strengthened demand for commercial real estate (which provides further support to the financial position of domestic developers, REITs and investors); vi) increases innovation through the transfer of skills and experience from overseas markets to Australia; vii) enables Australian commercial property and development companies to utilise their skills and resources across more assets; viii) increases government revenues in the form of stamp duties and other taxes from the overall higher economic growth that flows from the additional investment. This increases funds available to support essential Australian services.

Quantifiable impacts

Over the past 25 years, the gap between Australia’s domestic savings and its investment needs has been around 4 per cent of GDP. In 2015-16 alone, this represented a shortfall of AUD 67 billion.
Foreign investment in real estate contributes to Australia’s economic prosperity. Without it, Australia would be worse off.

- A 20 per cent reduction in foreign investment for development of new commercial buildings would: i) reduce Australia’s real GDP by a cumulative total of AUD 21.4 billion over 10 years; ii) reduce annual real GDP by 0.13 per cent or AUD 3.2 billion once the impact had wound through the economy. This is equivalent to almost the total gross value added (GVA) of Australia’s coal-fired electricity generation industry (AUD 3.4 billion).
- A 20 per cent reduction in foreign investment for development of new residential dwellings would: i) reduce Australia’s economic output (i.e., real GDP) by a cumulative total of AUD 14.8 billion over 10 years; ii) reduce annual real GDP by 0.09 per cent or AUD 2.3 billion once the impact had wound through the economy. This is equivalent to more than three times the GVA of Australia’s renewable electricity generation industry (AUD 706 million).

Foreign investment makes an important contribution to government tax revenues.

- A 20 per cent reduction in foreign investment for development of new commercial buildings would result in a cumulative loss of AUD 8 billion in Commonwealth Government revenues and AUD 2 billion in state revenues over the 10-year period from 2017-18 to 2026-27.
- A 20 per cent reduction in foreign investment for development of new residential dwellings would result in a cumulative loss of AUD 5 billion in Commonwealth Government revenues and AUD 1 billion in state revenues over the 10-year period from 2017-18 to 2026-27.

Foreign investors provide a significant share of the funds directed towards commercial real estate in Australia and are an essential driving force for new-builds. Indeed, foreign investors currently directly fund around AUD 20 billion of Australia’s commercial real estate.
In 2015-16, foreign investors received approval to fund up to AUD 7 billion in residential development.
Foreign investment adds between AUD 80 and AUD 122 to the price of a dwelling per quarter in Sydney and Melbourne, respectively (Australian Treasury 2016b). Compared to an average quarterly price increase of AUD 12,800, the amount that foreign buyers add to prices is minor.

Reference

Find this article at: https://acilallen.com.au/projects/other/benefits-of-foreign-investment-in-real-estate

Region

Australia

Study type

Market Analysis

Economy sector

Real Estate and Land Administration