By Tom Hedditch, Seasonal Clerk and John Turnbull, Partner
On Monday this week, the Foreign Investment Review Board (FIRB) altered how foreign buyers will be allowed to purchase an off-the-plan property when another foreign buyer has failed to reach settlement. Prior to the introduction of the FIRB recommendations, foreign investors were restricted to only buying off-the-plan developments and not off-the-plan apartments from second hand sales.
The FIRB is a non-statutory body established to advise the Federal Government on foreign investment policy and its administration. The FIRB examines proposals by foreign investors to ensure they are in the best interests of Australia, and makes recommendations to the Government on policy strategies. The FIRB recently made a recommendation to the Federal Government to allow foreign investors to purchase on-sale off-the-plan properties to ensure the stability of the housing market remains.
The total stock of foreign investment in Australia at the end of 2014 was almost $2.8 trillion, up from about $1.2 trillion in 2004. Around $690 billion of this is foreign direct investment. As the Government cares strongly about foreign investment the FIRB recent announcement further strengthens the ability of foreign investors in Australia to enter the housing market, with the Governments ultimate goal of securing housing affordability by supply. The Government will still review foreign investment proposals on a case-by-case basis to ensure that they are not contrary to the national interest.
The Government has responded to developers who have experienced a rise in the default rate for settlement of off-the-plan property sales. This triggered a concern with the Government who fear a glut of apartments in Melbourne and Brisbane may send apartment prices to fall by 6 per cent in 2017. The FIRB announcement alleviated the concerns of developers who were left in the ‘lurch’ after initial foreign investors default. The decision appeals to the lucrative Chinese middle class who are increasingly investing in off-the-plan developments in Australia.
The decision follows from a clamp down from the big four banks to grant loans for foreign investors following several cases of fraudulent claims of income. Domestic banks are unwilling to give loans for the complete purchase price of the off-the-plan dwellings. This decision had a large impact on foreign investment in Australia as foreign purchasers were left scrambling in an attempt to secure a loan, ultimately leading to off-the-plan contracts being rescinded with developers losing significant income, further threatening an already vulnerable market.
The Real Estate Institute of Australia responded positively to the policy changes, with President Mr Neville Saunders commenting that “This is most welcome news and will minimise the negative impact of off-the-plan sales to foreign purchasers not being completed.” The REIA approved the Governments prompt response to developers’ concerns following the release of the default rate for settlement of off-the-plan housing.
Treasurer Scott Morrison commented that “It is common sense that an apartment or house that has just been built, or is still under construction and for which the title has never changed hands, is not considered an established dwelling.” In the event of failure to complete settlement, the property will revert back to its original status as a new dwelling – therefore allowing for on-sale of foreign investment.
The changes will apply immediately and regulation change will be made as soon as possible to enable developers to acquire New Dwelling Exemption Certificates for foreign buyers of these recycled off-the-plan homes. These Certificates will enable foreign investors to purchase off-the-plan apartments from ‘second hand’ sales.
The policy implementations will attempt to ensure that housing prices in cities remains affordable by controlling supply. The Government’s foreign investment scheme ensures that developers will remain solvent and continue strong apartment building growth.
This is a positive development to the rules governing foreign investment as it now opens the marketplace to foreign investors where foreign purchasers have defaulted on settlement, whereby previously this type of sale was only open to domestic purchasers.
Obviously, Estate Agents should check that “off-the-plan” authorities adequately cover them in this situation.
If you have any questions related to the recent developments announced by the FIRB, please don’t hesitate to contact Mills Oakley for tailored Estate Agency and Industry Advice.