The headwinds imposed by
FIRB regulations on foreign investment

Foreign investment plays an important and beneficial role in the Australian economy because it helps drive economic growth, creates skilled jobs, improves access to overseas markets, and boosts productivity.

The Foreign Investment Review Board (FIRB)’s regulatory reform agenda have provided some headwinds for foreign investors. Here’s a summary.

Residential real estate measures

In last year’s budget, the Federal Government announced stronger rules for foreign investors who own Australian housing which aim to increase housing supply and affordability for Australians.

To discourage foreign owners of residential properties from leaving them vacant, an annual vacancy charge of 1% of the property’s capital improved value (CIV) will be applied if the property is not occupied or available to rent for at least six months of the year.

The Government has ensured that dwellings in new developments are kept available for Australians by introducing a 50% cap on pre-approvals of foreign ownership in new developments. This new cap builds on existing rules to ensure Australian purchasers have access to a greater pool of homes to buy in these new developments.

Foreign Ownership Registers

To provide greater transparency on foreign ownership of certain assets in Australia, the Government has established Agricultural Land and Water Entitlement Registers and is also introducing a Residential Land Register.

Agricultural Land Register

Foreign persons with an interest in agricultural land are required to register that interest on the Agricultural Land Register, regardless of the value of the land.

Based on registered properties, foreign investors hold 13.6% of Australian agricultural land. This is a slight reduction from 14.1% two years ago. The United Kingdom remains the largest foreign agricultural land holder (2.6%), followed by China (2.5%) and the United States (0.7%).

Foreign investment in residential real estate

The number of FIRB applications to purchase residential real estate in Victoria increased by a considerable 66% over 2014/15, strengthening further by 6% over 2015/16 to peak at 17,525 applications. However, over 2016/17, applications to buy residential real estate in Victoria declined by 69% to 5,394 applications.

Source: Foreign Investment Review Board

This reduction is attributed to:

  • The introduction of FIRB application fees in 2015, which changed investor behaviour by encouraging applications only for properties they intended to acquire, instead of making several applications when considering multiple properties;
  • Tightening of bank lending to foreigners and tighter Chinese capital controls;
  • Weaker market conditions as property price growth slows;
  • The Victorian Government more than doubling its foreign purchaser additional duty rate to 7% from mid-2016;
  • The introduction of a 50% cap on pre-approvals of foreign ownership in new developments, and;
  • Potential negative views of prospective buyers who believe there is an oversupply of apartments and thus a reduction in their returns.

Australia a top investment destination

Notwithstanding, Australia continues to be an attractive destination for foreign investment. In 2016/17, there was $168 billion of business-related approvals approved, only 4% below the 2015/16 level.

In 2016/17, China and the United States continued to be the top two sources of approved investment, although the total value approved fell in comparison to 2015/16 levels by $8.4 billion and $4.5 billion respectively.

This information has been sourced from FIRB’s 2016-17 annual report.