Blog - Commercial
A CHINESE INVESTOR’S GUIDE TO SYDNEY’S COMMERCIAL REAL ESTATE
Chinese investment in Sydney’s property market continues to soar year on year. Why is it so popular? What do investors need to be wary of? And where can you find the most value in 2016 – the Year of the Monkey?
It’s no secret that the Sydney property market is ripe for investment. Despite notoriously high prices, both the demand and the potential for growth are there to sustain it.
Chinese buyers spent $24.3 billion on Australian property in 2014-15, more than three times that of the next biggest investor, the USA. With increased savviness and competition among investors, here’s what prospective buyers should know.
WHY ARE CHINESE INVESTORS INTERESTED IN AUSTRALIA?
First and foremost, the policy of state owned land in China doesn’t offer much scope for local investment. All properties are lease-held, so when a term expires, it’s often unclear what will happen in terms of ownership. It will either be renewed at a high rate, or taken back by the government without compensation to the occupants. Chinese property hunters are seeking long term investment for financial stability.
Therefore, many Chinese people have significant wealth and nowhere to safely invest it locally. In order to get on the property ladder, investors must look overseas. The question is: where are the opportunities?
Close neighbours Japan and South Korea obviously make sense in terms of proximity. But Australia is experiencing a boom period for Chinese investment.
Part of that is fuelled by strong Chinese migration. More Chinese-operated businesses are opening on Australian shores – leasing to tenants without a language or cultural barrier is usually preferable. But beyond that, Australia offers opportunity, both in terms of development and ROI potential.
Chinese buyers prefer free-standing buildings with scope for redevelopment – something that Australia can offer, albeit in shorter supply these days. Though market growth has slowed in Sydney, there are gains over the long term. Interest rates remain low and the growing population means that property demand consistently outweighs supply.
COMMERCIAL VS RESIDENTIAL PROPERTY IN SYDNEY
Sydney property prices are the source of ongoing local debate. The imbalance of supply and demand has priced many Australian buyers out of the market. Along with the relatively weak-performing dollar, this acts as a strong incentive for foreign investors.
Earlier in 2016, the Australian dollar dropped to its lowest rate since 2009. Keep an eye on trends in the lead-up to any purchase to maximise immediate value. Subsequent fluctuations in the dollar will also be reflected in the returns on your property.
While 5% per annum is considered a strong return on residential property, commercial investment (office and retail) has the potential to earn 7-8% pa. Making commercial property even more attractive is the fact that a lower percentage of returns go towards things like council rates, repairs, maintenance and insurance. With commercial property, the tenant pays a larger portion of these fees, providing a higher yield for owners.
Residential property is usually bought with a view to capital growth, whereas commercial property is more effective at generating cash flow.
Expanding infrastructure in the form of freeways, tunnels and rail links means that western Sydney suburbs are hotting up for development. However, the CBD remains a strong performer in terms of demand and ROI.
WHAT INVESTORS SHOULD KNOW
With frustration simmering among prospective Australian buyers, the spotlight is very much on foreign investors. As a result, recent changes have been implemented to protect local interests. Potential obstacles for Chinese buyers include:
- Additional 4% stamp duty for overseas buyers.
- 10% withholding tax on properties over $2 million.
- A crackdown from the big four Australian banks on loans based on overseas income.
- Stronger enforcement of restrictions on moving money out of China ($US 50,000 per year).
Foreign buyers are also limited to purchasing new property with permission from the Foreign Investment Review Board (FIRB), a government agency. This means only new development projects which are under construction or those which have not been previously occupied. Existing commercial space can be purchased, on the condition it has undergone extensive refurbishment. Failure to gain requisite permission, or buying an off-limits, established property carries the potential penalty of $134,000 or three years in prison.
Claiming ignorance of these rules is not an option. There is very low tolerance for breaking foreign investment rules in Australia. It’s absolutely vital to have an experienced local agent with in-depth knowledge of the local market, property laws and regulations.
Foreign investors must pay tax on income and capital gains earned in Australia. However, expenses such as property management fees, maintenance and interest on mortgages can be deducted from the taxable income to reduce the amount owed.
What is Crown Land?
Crown land is any property that is owned by the State Government. In New South Wales, Crown land makes up more than half of the state. Bear in mind that Crown leased land cannot be purchased for private investment. Instead, you should be looking for freehold title property.
What is Torrens Title?
Torrens Title refers to a system where land ownership is transferred via registering the title, rather than the deeds.
Under Torrens Title, you own both the house and the land on which it is built. This is in contrast to Strata Title, under which you own the interior of the property (as with apartments) but have co-ownership of the exterior and shared space, and therefore shared responsibility.
Torrens Title saddles the property owner with greater responsibility and potential financial outlay. Typically, Strata property is easier to sell.
FINDING THE RIGHT SOLICITOR
If finding the right real estate agent is important, it’s doubly important to secure a good solicitor. Conveyancing contracts are convoluted things. It helps to have someone in your corner who’s fluent in fine print.
Considering the hefty penalties on the line for breaches of foreign property investment laws (not to mention standard leasing responsibilities), sourcing a qualified solicitor is a priority.
Try to find a solicitor who has direct experience in property investment, or whose day-to-day specialty is conveyancing. Make sure everything is above board and any contract breaches can be called out and dealt with correctly. A skilled, trustworthy solicitor will conduct thorough due diligence to protect you and your investment.
Despite tightened restrictions, there’s still plenty of value to be found in the Sydney market. Commercial property remains a viable source of cash flow for Chinese investors.