Australia offers plenty of opportunities for foreign investors in terms or purchasing real estate and the Government is committed to strengthening Australia’s economy by welcoming foreign investment. A residential property investment in Australia is generally a safer investment compared to shares and in return can generate good and even high levels of income and capital gains if you buy in the right place at the right time.
Australia’s strong economy is a key selling point. Foreign investors including Chinese buyers are attracted to the lifestyle available here as well as its stable economy and the number of high level job opportunities, particularly within the financial services industry.
At the end of 2014, the total stock of foreign investment in Australia was almost $2.8 trillion, up from approximately 1.2 trillion a decade ago. Foreign direct investment accounts for roughly $690 billion and mainly comes from China, Japan, Canada, USA and the UK.
Foreign investment into real estate remains strong and was the largest sector for foreign investment approvals at $97 billion, accounting for approximately 50 per cent of the value of all approvals in 2014-15.
Within the 2014-15 period, 36,841 residential real estate proposals were approved, with the largest proportion of approvals from Chinese investors.
WHERE IN AUSTRALIA IS ATTRACTING FOREIGN INVESTORS?
Sydney, Melbourne and Brisbane as well as the Gold Coast have seen lots of attention from foreign investors over the years, and Melbourne is particularly focused upon due to it being the world’s most liveable city according to the Economist Intelligence Unit’s Survey which has named Melbourne the number one liveable city five years in a row. Melbourne is also growing at the fastest pace and set to overtake Sydney by 2056, according to predictions from the ABS.
Brisbane is also gaining more attention due to its affordability compared to Sydney and Melbourne and this is one city not to overlook.
So, if you have decided that Australia is the place you want to invest in property, what do you need to know as a foreign investor?
FOREIGN INVESTORS CAN ONLY PURCHASE NEW HOMES
The first thing that you need to be aware of is that foreign investors cannot buy all types of property. Foreign investors are only allowed to buy new homes such as off the plan property, newly-completed properties or house and land. You cannot buy an established residential property, either directly in your name or through a trust relationship or company structure. If you breach this rule, then strict penalties apply.
However, before you go ahead and purchase your brand new off the plan apartment, you must first be approved by the Foreign Investment Review Board (FIRB) and fees apply.
WHAT EXACTLY IS “NEW” PROPERTY?
To be considered a “new” residential property, it must either:
- Not have been previously occupied; or
- Have been previously occupied for no more than 12 months in total if it was part of a newly built development that was sold by the developer.
If an established residential property has been renovated or refurbished, then this does not normally count as “new” under the FIRB’s definitions. A single dwelling that has been built to replace one or more demolished established homes also does not count as “new”.
If you are a foreign investor looking to buy vacant land to develop, then you must complete the development within four years from the date the FIRB approves the purchase.
PENALTIES CAN APPLY
As a foreign investor, it is extremely important that you follow these rules. If any of these rules are broken, then you can face harsh penalties.
- Individuals – As an individual you may be forced to dispose of the property and can also face criminal penalties of up to $135,000 or three years’ imprisonment.
In some cases, civil penalties may also apply, with the maximum fine being the greater of:
- The amount of capital gain;
- 25% of the purchase price; or
- 25% of the market value of the property.
It is therefore extremely important as a foreign investor to seek advice from a reputable property expert to ensure you stay on the right side of the law and do not face strict penalties. At LT Pacific we specialise in selling property off the plan across Australia and we can show you available properties that you can legally purchase which will provide you with the greatest investment returns possible.
THE BEST PLACE TO BUY PROPERTY?
So now you know the type of property you are allowed to buy, the next question you will need to ask yourself is where in Australia should you buy? And more importantly, where is the best place to buy for investment purposes to see the greatest gains and growth?
Every capital city and suburb in Australia sits at a different stage of the property cycle and this can affect your investment strategy. Ideally you want to buy property at the bottom of the cycle as this is where the greatest amount of growth will be seen, whilst you should try to sell property at the top of the property cycle as this tends to be where property prices are at their peak.
Currently, both Sydney and Melbourne have boomed and were at the top of their property cycles late last year / early 2016, with property prices seeing double-digit gains. Prices are more expensive here compared to other capital cities; however, this does not mean they are a bad place to buy. Sydney and Melbourne are two of Australia’s strongest cities in terms of economy and growth and buying a property in either of these two cities will provide you with stability and good levels of capital gains, bearing in mind that you hold on to the property for the long term of at least 10 years.
Sydney and Melbourne offer fantastic job and lifestyle opportunities and the population of both cities are constantly growing. There is a huge demand for housing here especially in the next 20 years to cater for the increasing population, with Australia as a whole expected to grow by 6 million people by this date.
However, if you are looking for something more affordable then many local investors as well as foreign investors are turning their attention to Brisbane. This is Australia’s third largest capital city and the economy is starting to kick in with more infrastructure planned for the future and brand new developments underway across the city including Queen’s Wharf.
Unlike Sydney, there are still plenty of opportunities to purchase new apartments within the inner-city region under $400,000. And with many residents preferring to live in a commutable distance of the city for employment, this makes a great property investment opportunity.
Wherever you choose to buy it’s extremely important to do your due diligence and thorough research first. Buying in the right location can make a world of difference and you should look at factors such as supply and demand, low vacancy rates and future government spending which can affect how quickly a suburb will grow. Our Property Consultants at LT Pacific can help you with this research and they have access to the latest and most up to date information and statistics to help you make the best decision possible.
ADVANTAGES OF BUYING NEW OFF THE PLAN PROPERTY
Buying new and off the plan property has many advantages for foreign investors and local investors including tax deductions and even stamp duty savings which can save you tens of thousands of dollars every year.
There are many expenses that can be claimed to help reduce your taxable income including property management fees, interest on mortgages as well as maintenance costs. Depreciation is also a major benefit of new properties as you can claim the highest amount of money in depreciation in the first year.
Many people love new property due to it never been lived in and they are generally prepared to pay a premium to live in or rent a new property.
However, there are costs to consider and be aware of when buying new property as a foreign investor.
COSTS OF BUYING OFF THE PLAN PROPERTY
Buying a property off the plan has a number of costs associated with it which you need to be aware of. The first thing you need to ensure you have is a 10% deposit, as without this you are unable to purchase a property.
Property approval fee
Another upfront cost you need to be aware of as a foreign investor is that you must apply for approval from the FIRB to purchase property and also pay a fee. The fee differs depending on the property value:
- Property valued at $1 million or less: $5,000 fee
- Property valued over $1 million: $10,000, then $10,000 incremental fee increase per additional $1 million in property value
- New dwelling exemption certificates: $25,000 upfront, with a reconciliation of properties sold to foreign persons based on above rates.
Fees will generally not be waived or remitted following an unsuccessful attempt to purchase property or if there has been a change of mind to invest in the targeted property.
STAMP DUTY COSTS
One of the largest property costs you need to be aware of besides the property itself is the stamp duty. However, the cost of stamp duty differs depending on the property value as well as the location as each state has different laws for stamp duty. As an approximate guide, stamp duty could cost you tens of thousands of dollars. For example, in NSW, a property valued at $550,000 will cost you approximately $20,000 in stamp duty, whilst in VIC this is higher at around $28,000.
There are also a number of property related costs you need to be aware of. It is important to remember that these costs are tax deductible. These include the following:
- Strata: The more amenities your development has the higher the strata will be. So if you want to keep your strata fees down then be sure to buy a development with less amenities such as a development with no swimming pools and gyms.
- Council rates: You are also responsible for paying council rates which are used for the maintenance of the local community such as garbage collection.
- Water: Normally, the landlord is responsible for water bills. It can be passed to the tenant if water consumption is higher than normal though.
- Maintenance: You are also responsible for any maintenance issues such as repairs. However, as you are buying a new property, maintenance should be minimal compared to an established property.
Property Management Costs
Many investors prefer to use a Property Manager to look after the day to day running of the property, particularly if you live overseas as it is not feasible for you to look after this. It is also worthwhile using a Property Manager if you already have a number of investment properties, and don’t forget their fees are tax deductible. A Property Manager is responsible for finding and interviewing tenants as well as conducting household inspections, collecting rent and arranging any maintenance which might be required. Their fees can change depending on the services required so it is best to shop around first to get the best rate. Your Property Consultant might be able to help you with this.
FACTORS TO BE AWARE OF AS A FOREIGN INVESTOR
As a foreign investor, there are also a few factors that you need to be aware of and are generally out of your control. These include interest rates, currency and loans. Currently, the interest rate in Australia has reached a new record low of 1.75 per cent. This makes owning an investment property even more attractive with lower mortgage repayments. However, you should be prepared for the interest rate to rise and to assess your finances to ensure you will still be in a position to repay your loan if interest rates rapidly rise.
You also need to consider the exchange rate and how a fluctuating exchange rate can affect the total returns you receive in your own currency.
Banks and lenders are also becoming stricter with their lending to foreign investors. Typically banks require foreign investors to have 20% of the property purchase price, whilst there are some banks like Westpac that require you to have 30%. It is therefore important to know what the constraints are as a foreign investor and whether you can find a lender that allows you to borrow the amount that you require, otherwise you might not be able to settle on your property.