The doubt sucking value from investor visas

In November last year, the Significant Investor Visa came in to operation. The purpose of this visa is to provide a boost for the Australian economy and to compete effectively for high net worth individuals seeking investment migration. Migrant investors are required to invest $5 million into complying investments for a minimum of four years before being eligible to apply for a permanent visa. Qualifying investments include:

– Commonwealth, state or territory government bonds.

– ASIC regulated funds with a mandate for investing in Australia.

– Direct investment into Australian proprietary companies carrying on an eligible “business”.

On the surface the new SIV would appear to be a fantastic opportunity for real estate investors seeking to attract offshore capital for their property investments and developments.

However, uncertainty about what investments comply with visa rules have accountants and migrant agents concerned that applicants are opting for more passive investments, namely government bonds, at the expense of more high-yielding assets such as property stocks.

The SIV is a streamlined visa under the business and innovations stream. In effect, migrant investors are treated as VIPs in the application process. There is no English language threshold requirement for applicants, nor is there a need to satisfy the innovations points test which apply to normal business innovations visas. There are no upper age limits and the migrant investor must simply reside in Australia for a minimum of 160 days over four years at which point a permanent visa can be applied for.

The majority of interest has come from China initially, although interest from other Asian countries is developing.  

SIV and property

While a direct investment in property is ineligible for the visa, there are a couple of options for investors seeking exposure to passive property or development opportunities.

A number of our Australian clients with Australian Financial Services Licences are in the early stages of establishing managed funds mandated to invest in Australian property. Such funds would be marketed to investors seeking a passive investment.

Another angle we are exploring with our property clients is the option of establishing a proprietary limited company that will carry on the business of developing property. This would involve the investor subscribing for shares in the company to form the equity required to acquire and develop the site.

Both structures seek to match local property expertise with the supposed flood of capital from Asia seeking a qualifying investment in Australian property.

So where’s the money?

To date the majority of applicants have selected state government bonds as their investment of choice.  The Immigration Department cannot provide a breakdown of what investments the 171 applicants to date have made but Victorian figures disclosed at an information session in March showed that of about 80 expressions of interest made by would-be applicants, as many as 75 said they intended to invest in bonds. Three were in managed funds and just two proposed direct investment in companies.

Migration agents site a lack of clarity around what investments comply with the visa rules as not only making would-be applicants opt for more passive investments, but as also holding them back altogether.

While the SIV is a national initiative, each state government is responsible for reviewing the investment and deciding whether they will sponsor the applicant. Investing in state government bonds is viewed as the safest option to secure the sponsorship of the relevant state government. Yet the governments' position is a little unclear when it comes to assessing other forms of investments. In Victoria for example, when selecting investments other than government bonds, the nominated private company or managed fund must state the economic benefit that will be delivered to Victoria as a result of the applicant’s proposed investment. However, it has not yet been established just what level of economic benefit must be demonstrated.

Furthermore, property developers and fund managers are not only competing against the Commonwealth and state governments for investors funds, there is significant international competition. This table details a number similar visas offered by other countries.

Pitcher Partners sees this lack of clarity as a real roadblock to attracting investors into the property industry. We will be approaching the various state government authorities to raise this issue and to seek clarity around the types of investments that may qualify.

There is speculation that once their visa is approved, many investors will switch from government bonds to a higher yielding asset. Such a move is not without risks. It will take a brave investor who is willing to risk their visa by moving to an investment that has not been officially reviewed and approved by the government. However, the nature of the scheme is that pre-approvals should be able to be obtained. Given the aim of the program is to attract additional investment capital to Australia the use of that capital to produce long term property assets should be encouraged.

John Ross and Andrew Clugston are directors at accountancy network firm Pitcher Partners Sydney and Melbourne respectively.