Australian property in a 'perfect storm' for offshore investors

With stamp duty escalating at a much faster pace in Singapore and Hong Kong than in Australia for local and foreign buyers alike, and the Aussie dollar at a 10 year low, the perfect storm for offshore investors has been created.

That’s the view of a Singapore-based expert in foreign investment in Australian residential real estate who spoke with API Magazine during an interview in the affluent city state.

In a broad-ranging interview, Darien Bradshaw, Executive Director of property specialists Aussie Desk, Asia, described the range of properties Asian buyers are focusing on, from budget-priced to luxurious, the lure of a weak currency, and the motivations to buy Australian property.

API Magazine: How active in Australian property are Singapore, Hong Kong, Chinese and other Asian buyers compared to 12-24 months ago?

Darien Bradshaw: Activity levels are up substantially as we head into Christmas 2023. This is being driven by the high volume of tourism, education and immigration numbers reported after the pause during Covid.

Supporting investor confidence is the widely reported historic low levels of rental vacancies and limited new build supply pipeline in the residential sector, underpinning capital growth forecasts in major cities of double-digit growth over the next 12 months and beyond.

It’s a major mismatch between demand and supply driving up prices.

API Magazine: Why is off-the-plan property the focus of overseas buyers and what sort of budget are they spending?

DB: Expats are always nibbling away looking for opportunities but, in most instances, have a family home already, so they also are looking off-the-plan options.

Foreign buyers are limited to residences that have never been sold before without special government approval, so we concentrate on projects we believe are best suited for both groups and most importantly should deliver strong rental and price growth over time.

The least risk we see is where the supply is limited in the better locations of major capital cities for boutique apartment and townhouse projects.

Most of the buying activity is between $500,000 and $2 million, although we have sold apartments for up to $12 million.

There is a strong component of Asian cash buyers for blue chip suburbs like Toorak and Vaucluse with government approvals at $10 million-plus but this buying activity happens on the ground in Australia rather than from abroad.

API Magazine: What property types are proving most popular?

DB: The affordability of most major capital cities in Australia compared to Asia is the lure, in addition to the safety net of a highly regulated real estate framework in Australia.

In the last 12 months we’ve noticed investors looking for cash flow have been lured into low priced one-bed apartments in Perth where major stamp duty concessions are being offered for off-the-plan and projects under construction up to $1 million in value.

Yields as high as 5 per cent can be achieved and the whole taxation system with negative gearing is very favourable. Parents buying for kids studying tend to want two- and three-bed apartments so their kids can live with a friend and so they have a room when they visit.

Expats tend to also want larger apartments or townhouses.

Perth and Melbourne have been the highest volume cities by sales for us, with Sydney the best performer over time, however, affordability has driven buyers to other markets and Brisbane is now getting a lot of attention.

With limited supply and a high number of builders collapsing in Queensland, as well as in other states, there remains caution from all buyers both locally and overseas.

It’s essential buyers do their due diligence on the agents they work with as well as the vendors and have a good support network including an accountant and conveyancing representative.

API Magazine: Do fees applied to foreign purchasers influence their buying decisions?

DB: We have really noticed that Asian buyers are very sensitive to the Foreign Investment Review Board (FIRB) fee.

Just under $1 million or $1.5 to $2 million is where there is the strongest interest, because the fee is applied in million-dollar increments.

Buyers cannot justify in their minds paying $28,200 to get something priced just over $1 million. The fee is not very well thought out!

We also have been getting complaints recently that buyers are having issues with the FIRB website application process. The Government needs to get on top of this quickly. With the housing crisis dominating headlines, the off-the-plan buyers from overseas do rent out their properties if not required for self-use.

They understand negative gearing and the taxes for leaving their properties empty for more than six months of the year. Foreign buyers are part of the solution of the housing crisis and need to be embraced.

API Magazine: Does the volume of developers heading north to pitch at Asian audiences offer a sign of the stronger Asian interest in Aussie property?

DB: Compared to the mid to late 2000s and mid-2015 period, there is a much lower volume of Aussie developers hitting the road in Asia.

Some of this is linked to how construction finance operates, evaluating the risk of offshore sales versus domestic very differently.

Brave is the developer hitting the market with a 1,000-unit tower or masterplan community in Melbourne, where defaults have been terrible offshore from Chinese buyers during Covid and the valuers have been very challenged seeing eye-to-eye with purchase prices and developers.

There has definitely been a shift in the mindset of buyers and vendors supporting smaller more boutique projects of apartments and townhouses close to infrastructure that creates value into the future.

And with the supply chain at about 25 per cent of 2016 across most capital cities, the domestic market can largely support the developers’ pre-construction finance targets.

There is still also a lot of caution around interest rates and builder defaults among off-the-plan buyers. Developers don’t want to blow marketing money chasing sales in Asia unless they feel they have an experienced agent supporting them.

API Magazine: How big a lure for Asian buyers is the weakness of the Australian dollar?

DB: The AUD is down 30-40 per cent over ten years. It’s a huge opportunity and a key driver.

I’ve been overseas since 2001 and I’ve seen the shift in value of the AUD from around 50 cents, up to $1.10 and then back to today’s values.

If buyers have done their research and believe in the Aussie economy, real estate capital growth forecasts and that the Aussie dollar is perhaps at a cyclical low, then medium term, investing now would seem a conservative play.

Despite this, buyers still remain very cautious around global jitters.

API Magazine: How well informed are south east Asian buyers?

DB: The digital age has been a blessing for the residential sector. Much of the education process we would need to provide has been filled by independent research online.

Our sales tend to be dominated by buyers who have lived in an Australian capital city, either for education or their profession and tourism does help too. The desire to send their kids for study for future immigration is a major pull factor and often a repeat generational cycle within a family.

We also know in this cycle, for offshore buyers it’s critical to take their Asian thinking cap off around high-rise city towers.

Repeat buyers understand that high rise towers of varying quality in the CBDs or surrounding areas have underperformed the suburbs. Exploring locations that have limited supply is critical for future growth and buying from the best developers is essential.

API Magazine: How do Asian buyers finance their Aussie property purchases?

DB: There is ample choice for offshore buyers depending on their personal circumstances. Many Asian banks will lend on Aussie property and there is also a plethora of excellent licensed mortgage brokers.

With another interest rate hike on Melbourne Cup Day in November, it’s unlikely interest rate options are much less than 6.5 per cent but it’s important to also understand that refinancing is a terrific option.

I’ve seen investors in Singapore refinance their properties recently at 3 per cent to access funds for an Aussie property and are cashflow positive on new investments in Australia.

Of course, there is that currency risk but it does seem attractive in the current environment. Also, it saves all the hassle of applying for a new mortgage.

For further insight into the Australian property market from an overseas investor’s perspective, watch the live seminar delivered by Steve Douglas, Chairman of SMATS Group and Managing Director of Australasian Taxation Services.