Why invest in Australia?
With international transactions amounting to over half of direct commercial real estate investment worldwide, global investors are eyeing the Australian commercial property sector for its strong investment fundamentals, a falling dollar, strategically targeted taxation concessions and a reduction in domestic competition for primary assets.
Factor in the end of the mining boom, the restructuring of the economy and the restriction on obtaining debt finance domestically during the Global Financial Crisis; and this has left a space in the property development pipeline where existing projects were put on hold unless they were substantially pre-committed to blue chip tenants. In addition, Australian financial institutions’ current approach to the property sector is more subdued now than before the GFC, requiring higher equity to debt ratios, causing investors and developers to seek funding offshore-particularly from Asia.
Yet some experts argue there is still considerable appetite from Australian financiers for investment in Australian real estate – a case of the right projects and the right developers attracting the finance. Overall, the upside is that domestic restrictions have created significant buying opportunities in the market for investors with foreign sources of capital, including pension funds and sovereign wealth funds. The attractive opportunities are also aided by taxation concessions for certain foreign investors, under the Managed Investment Trust (MIT) regime, which make the taxation of rental income and capital gains from real estate investments in Australia competitive in a global market.
Global investors can enter the Aussie commercial property market through direct or indirect investment schemes. Direct investments usually occur through an existing or newly established Australian investment entity such as company limited by shares or a corporate trust. Corporate trusts are preferable rather than through a company structure, because a trust that invests in real estate can, subject to certain requirements, be treated as a “flow-through” entity for taxation purpose, provide asset protection, and attracts the significant capital gain concessions at the time of divesting the asset.
Flow-Through Entity’s (FTEs) are considered non-entities for the reason that income “flows through” the entity and is treated as the income of the investors or owners, avoiding dividend tax and double taxation because only owners or investors are taxed on the revenue rather, than the entity holding the Real Estate. Common types of FTEs are general partnerships, limited partnerships and limited liability partnerships
Indirect real estate investments can be made through the acquisition of units in an existing private unit trust or acquire units in a real estate investment trust (or REIT). Australia has a mature and sophisticated REIT market; they are well structured as trusts and are governed by a rigorous legal and regulatory framework. REITs can be listed on the Australian Securities Exchange (ASX) or remain unlisted. Wholesale property funds are one type of unlisted REIT.
Besides the capital gain tax concessions, global investors can additional benefits if the trust qualifies as MIT offering flexibility to return capital to investors. Obtaining capital gains tax treatment is valuable for foreign residential investors, as they may obtain the benefit of the foreign resident capital gains tax exemption upon distribution of the capital gain if the asset disposed of by the MIT is not “taxable Australian property”. It is also valuable for Australian investors, who can offset such capital gains against their capital losses, and may claim the capital gains discount to reduce the amount of their taxable capital gain.
In conclusion, foreign investors who are seeking to invest in Australian real estate through an MIT should carefully structure their investments to ensure that the relevant trust qualifies as an MIT. These requirements include that the trust must be an Australian resident; a substantial proportion of the investment management activities of the trust for its Australian assets must be conducted in Australia; the trust must not fall within certain “concentration of ownership” exclusions that prevent trusts from qualifying as MITs if a particular number of persons hold specified percentages of the trust; and if the trust is not a registered managed investment scheme, the trust must satisfy certain Corporations Act financial services licensing requirements.
Overall the Aussie economy is going through a cyclical change, yet with strong fundamentals, new opportunities for export growth, a reforming tax system, and with five of the top ten liveable cities in the world, there’s potential to create wealth and great lifestyle to match.
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