RESIDENTIAL PROPERTY

Don’t panic, Chinese dragon will reawaken

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THE decline of Chinese investment in Australia’s residential property market is only temporary and demand will bounce back, experts told LMW’s Victorian Luxury Property Seminar.

Kay & Burton’s joint managing director Ross Savas, DLA Piper partner David Leggatt and LMW director of prestige in New South Wales Peter Raptis were responding to this week’s Foreign Investment Review Board report, which revealed foreign investment in Australian residential real estate fell from $72.4 billion in 2015-16 to $25.2 billion in 2016-17. That was underpinned by Chinese purchases tumbling from $31.912 billion to $15.253 billion.

Leggatt said Chinese investors are not just targeting Australia, but are investing in other countries also.

He added that investment comes in ebb and flow, responding to changes in the market, and experience around the world shows that rules introduced by governments to restrict foreign investment had dampened demand temporarily, before activity rebounded.

Leggatt said that had been the experience in Singapore and Hong Kong.

“It will be a blip,” he added.

In Hong Kong, despite imposing a 30% stamp duty on foreign buyers and Beijing’s capital crackdown, property sales jumped by 14.8% to 83,815 units in 2017, according to the Land Registry. The sale of apartments soared by 32.3% to HK$566.3 billion (US$72.4 billion) over the same period. At the same time, JLL predicts HK house prices will increase by another 10% to 20% in the year ahead.

In Singapore, the city state introduced a 10% foreign buyers stamp duty in December 2011 and lifted it to 15% in 2013. Combined with soaring property prices – up 60% between 2009 and 2013 – the government cracked down on the market, introducing a series of restrictions which saw transactions fall.

Data from URA Realis show home sales to foreigners averaged 3,600 per year between 2010 to 2013. After the stamp duty measures, transactions declined to around 1,000 in 2014 and fell under 1,000 in 2015, but picked up in 2016 to more than 1,000 and then 1,600 last year.

In 2018 foreign interest is expected to increase further in Singapore, as investors now consider Singapore a bargain when compared to Hong Kong, which is the world’s most expensive city, according to Forbes.

Earlier this year, AMP Capital global head of listed real estate James Maydew said the Singapore residential market offers opportunities for investors.

Maydew said valuations have soared in global cities from Shanghai to Stockholm as well as the most global of all; New York and London.

“We believe that Singapore residential values are now in the early phase of a multiyear recovery trend following the easing of the two major headwinds that have held back the market since 2013 and a better balance between supply and demand.

“Firstly, the government (through the Monetary Authority of Singapore – MAS) has eased some of its macro prudential measures, implemented to curtail both speculation and to support affordability in the housing market. Secondly and most importantly, the domestic economy is now looking far more robust than it has for many years, with household balance sheets at their strongest position in twenty years. We think this creates a fantastic opportunity for residential developers in Singapore that have been sitting on sizeable land banks and are now pushing inventory into a rising market,”

Maydew said residential developers are in fact holding inventory releases back, very likely because they see greater value tomorrow than they do today.

“The relative price attraction of Singapore residential property compared to other world cities is driving investor demand and multiple expansion in those residential developers that are listed companies, as the growth realisation begins to get priced in.” Maydew said.

Meanwhile the Canadian government increased its foreign buyer tax from 15% to 20% and introduced a speculation tax in March this year. However, a survey by Juwai reveals Canada remains the fourth most popular destination for Chinese buyers.

According to VICE Money, Vancouver home prices averaged $1.03 million in August 2016 before the 15% foreign buyer tax was introduced. Whilst values dipped following the implementation, prices had increased again by February 2017, and are currently averaging $1.43 million, according to Zolo.

Savas said the feedback from Kay & Burton’s regional contacts across major mainland China cities such as Shanghai, Beijing and Shenzhen, is that Australia remains a favoured destination.

In the top end of the market, Savas said high net worth individuals (HNWI) continue to favour Australia because buying a house is not a matter of “making money”, but rather it is seeing as a “preservation of their wealth”.

Savas said in China, land is sold with 70-year leasehold, so a buyer may purchase an apartment but control reverts back to the government at the expiry of lease, which may or may not be renewed at the end of the term.

In contrast, Australia offers Chinese families the ability to pass on their wealth through generations.

“Chinese buyers are not looking to make money when they buy a home in Melbourne, it is about the flight to safety,” he said. “They want to be able to pass it down to their children and their children’s children. It is about the preservation of wealth.”

Despite the measures and taxes introduced by the federal and state governments in the past year, Savas said 70% of luxury and prestige residential property sales by Kay & Burton still come from foreign buyers, 80% of which are based in China and Asia, whilst 20% are expats.

“50% of what we do is off the market. HNWI like to do deals quietly and this trend will continue,” he added.

“And if we think this is it, we haven’t seeing anything yet.

“India hasn’t come online yet,” Savas said.

However, not all experts agree.

A UBS survey of mainland Chinese investors released this week, UBS Evidence Lab: Chinese buying abroad, said the high volume of foreign buyer seen from 2012 until recently is unlikely to be repeated.

“For Australia foreign buying activity peaked in 2016, moderating further into 2018, suggesting foreign buyers are unlikely to step-up and provide an offset to slower domestic demand as credit conditions tighten,” it said, adding that stamp duty and similar costs typically do not deter Chinese buyers up to around 5% of the purchase price.

Last year, Victoria introduced a foreign investment surcharge of 7%, followed by NSW bumping its own up from 4% to 8%. Earlier this month, Western Australia announced it would increase the foreign buyer surcharge from 4% to 7%. The 7% rate brings WA in line with New South Wales, Victoria and South Australia, all of which currently levy their surcharges at 7% or 8%, and Queensland, which will increase its rate to 7% from July 1, 2018.

The UBS report said there has been “growing interest in Japan and south-east Asia, specifically Thailand, with our channel checks suggesting Vietnam is also on Chinese buyers’ radar”.

Australian Property Journal

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