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How will the 50% foreign ownership limit affect developers?

As well as restricting supply to an already full rental market, the 50% foreign ownership restriction removes some of the competitive advantages overseas developers had over local developers.

Prior to this change coming into effect, overseas developers had a competitive advantage as they had no overseas sales limits whatsoever. Overseas developers using overseas banks could, if they so desired, have 100 per cent foreign sales, with 100 per cent en masse sales occurring overseas.

What Scott Morrison has done is even the playing field between local and overseas developers, with overseas developers now forced to generally work within the same FIRB sales metrics as local developers.

To commence a development, local banks require local developers to presell approximately 70 per cent of the apartments in a development and impose a 25 per cent Foreign Investment Review Board (FIRB) restriction on these presales. This means local developers require 52 per cent local sales prior to construction commencing.

Once the developer has achieved financial close with a local bank, they are free to sell the rest overseas. Meaning, under a 25 per cent FIRB presales limit, local developers using local banks can develop buildings with circa 48 per cent foreign ownership.

Banks are always looking at the FIRB presales limit and whilst many current developments are at 25 per cent, there is a more recent bank trend to constrict this further – more in the realm of 15 per cent. If this is the case, then locally banked projects can end up with 40 per cent foreign ownership.

It is also fair to say that overseas purchasers have settled better than local sales. Many pundits were nervous about large buildings settling this year, yet what we are seeing is that very few overseas purchasers are falling through when it comes to quality developments (just 1-2 per cent in fact), even against Australian Prudential Regulation Authority’s (APRA) headwinds of overseas purchaser mortgage finance.

With the 50 per cent FIRB restriction placed across the whole market, coupled with APRA’s new powers across non-bank lenders, it means that the metrics by which local and overseas developers, local and overseas banks, and local and overseas non-bank lenders are becoming converged.

As a flow on effect of the overseas sales metrics now being similar, this policy change will result in overseas developers using local banks and non-bank lenders more readily to avoid foreign exchange risk, again levelling the playing field.

Perhaps this new measure may even narrow the gap between what an overseas and local developer can pay for a site, which sets the market and ultimately gets passed onto the (local) consumer.

As an unintended consequence however, this change will further constrict supply to rental markets, thus driving rental and housing prices further out of reach of local first home owners and owner occupiers. It is only state planning ministers that can affect real change by encouraging the supply side of the housing economic supply/demand pendulum.

 

Point Polaris Director, Andrew Hogan, has penned the above piece in response to the 2017 Federal Budget where foreign ownership of new developments is expected to be capped at 50 per cent.

2 comments

George D's picture

If it means less competition for resident buyers, all the better.

If it means less supply, then the worse.

I suspect the outcome will be a mixture of these two.

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theboynoodle's picture

As an unintended consequence however, this change will further constrict supply to rental markets, thus driving rental and housing prices further out of reach of local first home owners and owner occupiers.

Woah, there.

We're making some big leaps here, and not providing any reasoning.

The rental supply will move dependent upon several factors:
1) overall number of units supplied
2) number of those that are purchased by investors
3) number of those purchased by investors that are actually put on the rental market (i.e. not left empty).

Reducing foreign ownership should mean a greater proportion of investment properties are actually on the rental market. Chinese buyers may be happy Aussie property as a capital store, but local investors want an income stream. So the third factor is positive for rentals.

If the balance between investment and owner-occupiers shifts towards the latter then it means less rental properties.. but it also means less renters, so there's no upwards pressure on rents from that (indeed, it's more likely to push average rents down because it is likely to be the higher-paying renters that are able to convert themselves into owners). So the second factor seems favourable to renters too.

We might expect the overall number of units supplied to fall by taking some unit buyers out of the market. But it ain't necessarily so. If I've got 100 foreign buyers but I can only sell units in my building to 50 of them then I'll have to try and find my other 50 buyers locally. If I can't find them then I can't build (supply decreases), if I can find them then I build (no change to supply), but maybe I'll find that I have 100 local buyers.. so I can build two buildings (and sort out my other 50 overseas buyers too).

So forcing all developers to address the local market might have positives on the supply side as well as negatives.

Either way, the assumption that this change will just make *everything* more expensive for local buyers is lazy, and rather ignores the fact that purchase prices and rental rates are set according to a market of the entire residential stock of Melbourne, and the funds available to buyers and renters operating in that market. I find it hard to see this change having a significant impact either way on that.

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