Latest News

Why Chinese investment is booming

11 October 2016

William Shen, Director of the Asian Division at TGC

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, according to FIRB’s past annual report. 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. 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?

One of the best opportunities is Australia, which as a result 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 return on investment (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 versus residential property in Sydney

Commercial property is proving attractive to foreign investors for a number of reasons. For example, there can be a higher return on commercial 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%. 

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.

This is important as commercial property is often purchased with a strong emphasis on generating cash flow, whereas residential property is usually bought primarily with a view to capital growth.

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 foreign investors should know

Recent changes have been made 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 - $50,000 (USD) 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.

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.