Foreign investors’ love of Australian real estate is well known. But less publicised is their increasing taste for Australian commercial property.
New research by the Reserve Bank of Australia sheds some new light on the sharp rise in foreign investment, but it remains unclear how beneficial this shift has been for the Australian economy.
In Australia, foreign investors are allowed to purchase existing commercial buildings and vacant lots. However, much like residential real estate, the investor must obtain approval through the Foreign Investment Review Board. Approvals are necessary if the land is vacant, if they are a government investor or if the existing building is worth $54 million or more. Investors from New Zealand and the United States are subject to less stringent rules.
According to the FIRB, the value of commercial property approvals has increased sharply to nearly $35 billion in 2012-13. Foreign investors are primarily interested in existing property.
But the data itself is a poor measure of foreign investment. According to the RBA, "vendors often require interested foreign buyers to obtain foreign investment approval before bidding". As a result, several approvals may be granted to different investors for the same property or vacant lot.
It’s also worth remembering that investors do not require approval to invest in properties that are valued under $54m. For investors from New Zealand and the United States, the limit for seeking approval is $1,078 million.
The FIRB also does not provide information on the type of properties for which approval is sought, the type of foreign investor of the country in which they are based. Unfortunately they monitor the commercial property sector with as much accuracy and vigour as they do residential real estate (The RBA homes in on foreign investment, June 19).
Luckily there are a number of real estate service firms that collect more accurate and detailed data. The private sector data captures purchases valued at more than $5m, identifies the location of the investor and identifies whether the transaction relates to offices, shops or industrial properties.
Until the mid-2000s, foreign purchases of Australian commercial property were largely offset by foreign sales. That has since changed, with foreign investors accounting for around one-third of transactions since 2008 and about 40 per cent during the first half of 2014, though at a level that remains well below the FIRB data.
Growth has been centred on office property, primarily in New South Wales. Foreign investors have been more active in both the retail and industrial sphere but it remains a small share of total foreign activity.
According to the RBA, foreign investors have accounted for 40 per cent of the value of commercial property purchases in New South Wales, compared with around 20 per cent of turnover in Victoria, Queensland and Western Australia. Demand in New South Wales has been largely concentrated in the Sydney CBD.
The sharp rise in foreign investment has been driven by investors from Asia and North America and has largely been concentrated within listed trusts, investment firms and developers.
Based on the data, foreign investors have a clear preference for investing in existing property rather than new developments. According to the RBA, this "reflects foreigners’ desire for commercial buildings as passive investments, valuing both their relatively predictable income stream and the low correlation between their prices and those of other assets".
As a result, it is unclear whether foreign investment in Australian commercial property has helped boost the productive capacity of the Australian economy. Obviously we cannot discount the possibility that foreign investment has indirectly contributed to construction by sellers 'recycling' their capital into new developments.
But if the main effect has simply been to increase property prices, then foreign investment has simply raised the fixed costs for Australian businesses and made those businesses less competitive abroad.
In recent years there has also been a shift towards buying run-down office buildings and converting them into apartments. Given the considerable spare capacity throughout the economy, conversions are potentially a better use of those resources.
The risk of foreign investment in commercial property is much the same as it is for residential property -- it increases our exposure to economic developments abroad. This can be beneficial during the good times, but we run the risk of a significant price correction if an overseas shock encourages investors to divest their Australian property portfolio to cover other liabilities.
Finally, the RBA notes that these investment flows may have put some upward pressure on the Australian dollar. However, in saying that these flows are only a small share of total capital inflows, which totalled $93bn in 2013.
Foreign investment in commercial property certainly doesn’t get the same attention as residential real estate. But foreign investors have been active, increasingly so, and continue to underpin property prices during a reasonably weak period for the commercial sector. Nevertheless, the jury is still out on the overall benefits of this shift and whether it has boosted Australia’s productive capacity.