The Australian economy has been facing mounting headwinds in recent months due to the marked slowdown in China and suppressed commodity exports. Interest rates have been decreased to stimulate weakened business and consumer confidence, meanwhile the Australian dollar has depreciated to its lowest level since 2010. After commodity prices and demand have slumped, and with mining investment nearing a peak, the government has extended efforts to shift growth to non-mining sectors including property and construction.

 

The Australian property market has seen burgeoning investment in recent years both in the residential and non-residential sectors. Chinese buyers snapping up residential property has spurred the entrance of Chinese developers constructing projects in most major cities. Chinese investor activity in the commercial sector pales in comparison but is quickly gaining traction. More than one-third of total investment volume in Australia involved foreign capital in both 2011 and 2012, making it one of the most active offshore markets in APAC. The proportion of Chinese capital increased from less than 3 percent in 2011 to around 5 percent in 2012.

 

Chinese homebuyers have long viewed Australia as a ‘safe haven’ with a more mature and transparent market. Residential property is generally freehold as compared to leasehold in China. Further, residential buyers see Australian purchases as a means to diversify their assets by shifting capital offshore. For residential property only those properties which increase the supply of new housing can be approved by the Foreign Investment Review Board (FIRB). Therefore, a Chinese developer can purchase and develop vacant land or purchase property for redevelopment.

Individual investors are purchasing everything from one to two-bedroom apartments to let out or for their children studying in Australia to luxury waterfront homes.

 

The Australian government has welcomed these investments with open arms, and recently to further enhance foreign individual investment, they have introduced the Significant Investor Visa.

The SVI allows high net worth individuals to obtain a four-year visa in exchange for a A$5 million investment into government bonds, ASIC regulated managed funds or direct investment into Australian propriety companies, which can hold or invest into property.

Residential developers have simply followed buyer demand to Australia and are being met with few barriers to entry. Chinese developers are second only to their Singaporean counterparts in terms of residential construction. While Sydney and Melbourne remain a focus, major developments are underway in smaller markets like Adelaide, Brisbane and the Gold Coast. As property market tightening policies remain in place in China, domestic developers are demonstrating a growing interest to expand overseas not only to mitigate risk but to follow the current trend of strong overseas buyer demand. Developers can turn this investor appetite into easy cash with many projects directly marketed in China and units sold ‘off the plan’.

Recently Greenland Group, the Shanghai-based developer, committed to investing A$480 million to redevelop a residential project in Sydney’s CBD. The project is the developer’s first in Australia and at 240 metres tall, the project will become the tallest residential block in Sydney. Other developers with major projects include the Zhuhai Ridong Group, which is constructing a A$1 billion luxury hotel and residential complex in the Gold Coast. Ridong has also been shortlisted to construct the Gold Coast cruise ship terminal.

The foray into commercial property by Chinese developers and investors is smaller in scale. Regulations are slightly more stringent, whereas purchases of commercial properties above A$54 million require special approval by FIRB. Only several en bloc purchases of office blocks by Chinese investors have surpassed this threshold. The most prominent deal was the purchase of 1 York Street in Sydney CBD by HNA Group, which owns Hainan Airlines, for A$117 million in mid-2011. Later that year, China Southern Airlines purchased a small project on Clarence Street for A$10 million. In Melbourne, the Chinese developer Shandong Hengyi purchased an office block for A$45 million and is converting the property into serviced apartments.

Retail investments have been fewer in number, but are also growing. Currently, Chinese investors typically target strip retail property or smaller-scale shopping centres in areas with larger Chinese populations. One recent purchase includes Kings Cross Centre, a 48,000 sf suburban shopping centre in Sydney, for A$24 million and with a yield of 7percent. Commercial property investors can benefit from fairly high yields in Australia as compared to those on offer in more mature APA markets. These attractive returns are giving way to growing competition among both offshore and domestic investors, including funds and A-REITS eager to deploy capital into commercial property.

 

Chinese property investment in Australia is likely to accelerate in the medium-term. The government has preferential policies in place which will continue to attract homebuyers, developers and commercial investment. Declining interest rates and a depreciating dollar will also spur more capital inflows. Residential prices will remain elevated despite emerging risks of a China slowdown and lower domestic consumption. Sustained demand for core commercial assets will buoy prices even as leasing demand remains soft, and limited supply of core assets will funnel demand into secondary and non-core areas.  ■

 

*Randall Hall is a Director with AustCham Hong Kong and Macau and the Executive Managing Director – Greater China at Cushman & Wakefield in Hong Kong.

To learn more about AustCham Hong Kong and Macau, visit: www.austcham.com.hk