Overseas enquiries in relation to purchasing Australian property have increased sharply over the past couple of years. This is at least partly due to the continuing outperformance of Australia's property market vis-ŕ-vis other developed nations.
But growing international interest in the sector also correlates with policy changes that are leading to a more transparent and certain investment environment for overseas investors.
AUSTRALIA'S FOREIGN INVESTMENTS REVIEW BOARD
Broadly speaking, any overseas investor who proposes to purchase urban land in Australia must first seek approval by making an application to Australia's Foreign Investments Review Board (FIRB).
The FIRB advises the Treasurer on foreign acquisitions of Australian assets, particularly in relation to whether the acquisition is in the national interest.
In the past, the Review Board has been criticised for a lack of transparency and consistency in its decision-making. However, over the last couple of years there has been a significant push to provide greater certainty for overseas investors by explaining more of the FIRB's work and how it makes its determinations. (Refer to Corrs' article New Rules for M&A in the PRC, 30 September 2011).
The new FIRB chairman has announced he intends to open the Review Board to greater scrutiny. More information is to be published about how the FIRB treats different industries and there will be more communication with groups affected by the Review Board's work.
Meanwhile, in an international context, Australia's property market remains relatively robust (and thus attractive) in the midst of an uncertain global economy. The Australian real estate trusts sector posted a healthy 7% return for the March 2012 quarter and in Victoria, property is the state's largest industry, contributing 12.2 per cent to a gross state product of $301.4 billion.
Against this backdrop of a resilient property market and improved certainty for investors, it is unsurprising that overseas interest in Australian real estate has escalated. The following discussion provides a snapshot of the current legal requirements and related commercial factors for foreign investors to consider when acquiring Australian real estate assets.
APPROVAL REQUIRED TO ACQUIRE CERTAIN REAL ESTATE ASSETS
The Foreign Acquisitions and Takeovers Act 1975 governs the foreign acquisition of real estate in Australia. Any foreign person that proposes to acquire an interest in Australian urban land must first seek the Treasurer's approval by making an application to the FIRB.
The requirement to seek approval is subject to certain thresholds and exemptions which are discussed below.
Failure to obtain approval before acquiring urban land can result in significant penalty fees and compulsory disposal of an interest already acquired by a foreign person.
Foreign persons include persons not ordinarily resident in Australia and corporations or trusts substantially owned by persons not ordinarily resident in Australia. Substantial ownership means 15%, or greater, control by any one person or 40%, or greater, control in aggregate by two or more persons.
Australian urban land comprises all land situated in Australia other than land used for agricultural purposes. This encompasses a wide range of property from commercial office buildings and shopping centres through to residential homes in metropolitan areas.
An interest in Australian urban land includes an interest in a corporation or trust that holds greater than 50% of its total assets in Australian urban land.
As an example, consider a company which has been incorporated in Australia but its shareholders are foreign residents. If this company wants to purchase units in a REIT which has an investment portfolio comprising 60% in Australian office buildings, then the purchase would require approval by the Treasurer.
In the vast majority of cases, applications by overseas investors to purchase property are approved. However, the Treasurer does have the power to prohibit, or impose conditions on, an acquisition if the Treasurer has determined it is contrary to Australia's national interest.
The 'national interest' test is the key consideration in the approval process. Thus, it is unusual for an application to be challenged unless the purchaser is government owned or controlled or the land in question is a high profile site or includes major tracts of agricultural land.
The approval process itself is quite efficient with the Treasurer generally required to make a decision within 30 days of receiving an application. The applicant is then notified of that decision within the following 10 days. There is some scope for the Treasurer to obtain an extension of time of up to 90 days.
All overseas investors are generally required to obtain approval before purchasing any Australian real estate, however some exemptions are available. Common exemptions are summarised in the table below:
|Type||Conditions of exemption|
Existing developments that are (for non-US persons):
|"Off the plan" sales||Land to be developed where the Treasurer has pre-approved a specified real estate developer to sell that particular interest in Australian urban land to foreign persons|
The acquisition of shares or units where:
|All land other than Australian urban land||Total assets of the primary production business conducted on the land are less than $244 million*|
|Existing dwelling||The Treasurer has certified an existing dwelling for residential purposes as not contrary to the national interest|
|Visa||The individual is a permanent visa or special visa holder|
|Spouse||The individual is the spouse of an Australian resident and the property is to be held as joint tenants|
*There has been a recent push to reduce this threshold and exercise greater scrutiny over proposed acquisitions by entities related to foreign governments.
Property owners in the Australian investment market prefer overseas buyers to have Treasurer approval in place prior to entering into sale contracts for real estate. In a competitive sale process, this is usually a requirement. However, it is not uncommon for sale contracts to be conditional on Treasurer approval where an approval cannot be secured in time. At the very least, property owners will usually want engagement with the FIRB to have commenced.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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