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Chinese investment starting to wane

3 August 2017

By William Shen, Director, Asian Division at TGC

Chinese investors invested $31.9 billion in Australian real estate last year which is the highest level since the global financial crisis.

Despite this, it appears that the Chinese investor interest in Australian property is starting to wane.

Over the last three months, I’ve seen Chinese investors shifting their focus from residential to commercial, or withdrawing from the Australian property market entirely.

Why the new trend?

1. Limited flow of currency out of China

Until recently, China was one of the world’s fastest-growing major economies, with growth rates averaging around 10 per cent. However, much of this growth is now fuelled by credit.

In a bid to limit capital leaving the country and stabilise GDP, the Chinese government has set up strict policies for banks to limit and often block foreign transactions.

As a result of these measures, Reserve Bank Board Member and Treasury Secretary, John Fraser, noted that foreign investment applications have fallen sharply over the past year.

2. Increased taxes for foreign buyers

The NSW State Government recently increased the foreign investors’ stamp duty from four to eight per cent and the annual land tax surcharge from 0.75% to 2%.

NSW Premier Gladys Berejiklian stated that the increased charges were not put in place to deter overseas investment, however the extra taxes are certain to have that effect.

3. Banks halting foreign lending

Buying off-the-plan is popular amongst foreign investors. However, to mitigate risk the major Australian banks have stopped lending  to foreign property buyers. The result? A 43% drop in demand from Chinese investors in off-the-plan properties.

4. Other factors

  • Seasonality – investment tends to slow down during winter
  • New fines of up to $5,000 for properties that remain vacant for more than six months
  • Some inflated prices which is negatively affecting rental yields.

Also there are many property owners who are yet to adjust to these changes and have very high price expectations which are unlikely to be met by the market.

All these factors combined are contributing to a lack of confidence, making Australian property purchases less attractive, especially for long-term investments.

The upsides

While the residential property market is more vulnerable to the decline in investor sentiment, particularly off-the-plan developments, suburbs with large Chinese communities (such as the Sydney CBD, Chatswood, Hurstville and Burwood) continue to see growth.

Australia also remains a safe haven for commercial investment. There is a growing trend towards Chinese buyers shifting their attention to offices, retail and industrial property investments.

Indeed, according to a recent KPMG report commercial real estate is still the preferred place for Chinese to invest, making up 36% of direct investment in Australia.

Commercial properties can offer much better yields, particularly in places such as the Sydney CBD and fringe suburbs, where rents have increased by up to 20% due to limited availability of stock.

What does the future hold?

The current slowdown is not a result of a shift in mentality, but a consequence of strict government policies and a tightening of lending.

Australia will continue to be a popular place for Chinese to buy property, especially those looking to live here. Our stable economic and political environment, clean air, quality food and sound education system, make it a desirable destination to relocate.

For commercial property, high yields will continue to entice foreign investors, despite a shortage of stock driving prices upward.

Whilst a property price adjustment looks very likely, Australian property has the strength the climb higher in the long term.