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Australia – Learnings From FIRB’s Annual Report And Upcoming Trends.

18 November, 2014

 


  • Real estate continues to dominate and resources runs a close second
  • Stepping back from the detail, we ask – what does the most recent Foreign Investment Review Board (FIRB) Annual Report tell us about M&A trends and what can we expect for the next six months?

 

FIRB Annual Report Highlights

 
FIRB’s 2012-2013 Annual Report was released earlier this year and the total value of proposed investment fell by 20.5% from A$170.7 billion in 2011-2012 to A$135.7 billion in 2012-2013. This significant decrease (when compared to the modest 3.4% decrease observed in the previous year) was despite the number of proposals increasing from 10,703 to 12,731.

 
The real estate sector was again the largest sector by value with approvals of A$51.9 billion in 2012-2013. No applications were rejected during the year (compared with 13 real estate related proposals rejected in 2011-2012), although this fact was soon overshadowed by Treasurer Joe Hockey’s decision to reject Archer Daniels Midland’s takeover bid for GrainCorp in late 2013.

 
The United States (AUD 20.6bn) was again the largest source country for approved proposed investment into Australia. Other major source countries were Switzerland (AUD 18.4bn), China (AUD 15.8bn), Canada (AUD 14.4bn) and the United Kingdom (AUD 6.8bn). This is the fifth consecutive year that China has been ranked in the top three sources of proposed investment. Switzerland ousted Japan from the top five sources of investment.

 
Resources Returns?

 
Excluding real estate applications, mineral exploration and development applications of AUD 45.1bn accounted for around 53.9% of the value of approvals – increasing from 46% in the year prior. The performance of the resources sector may have come as a surprise to many in the industry, but the results were skewed by Glencore International Plc’s offshore takeover of Xstrata Plc in May 2013. This transaction may also explain Switzerland replacing Japan as one of the top five sources of investment.

 
Leaving aside the Glencore/Xstrata transaction, the FIRB data seems to reflect the deal inertia that many resources players experienced in 2013. Going forward, we expect M&A activity in the resources sector to increase as a number of major mining houses progress their divestment programs and the lower Australian dollar makes the assets of independent mining companies more attractive to potential buyers.

 
Focus On Real Estate

 
Although the real estate sector was the largest sector by value, it too experienced a decline of approximately 12%. Notwithstanding this decline, the real estate sector has been subject to significant public and political scrutiny with coalition MP Kelly O’Dwyer currently chairing a federal inquiry into housing affordability and foreign ownership.

 

Although the matters facing that inquiry are beyond the scope of this article, it will be interesting see whether the report provides any general insights into trends in foreign investment regulation. In our opinion, whilst increased scrutiny may be justified by the scope of foreign investment in real estate, it is important not to overstate the size of such investment by reference to FIRB data. The Annual Report notes, in particular, that approved investment figures for off-the-plan approvals for developers and annual programs overstate the likely extent of actual foreign purchases.

 
Agriculture

 
Although proposed investment in the agriculture sector decreased by value from AUD 3.6bn in 2011-2012 to AUD 2.9bn in 2012-2013, investment in agricultural land continues to attract significant public and political interest. We expect this interest in agribusiness to continue in the next six months, buoyed by the opportunities presented by new free trade agreements and the lower Australian dollar. Many in the industry will be monitoring whether the coalition Government successfully institutes lower thresholds for FIRB scrutiny of foreign acquisitions of farm land and agribusinesses (as promised in 2013).

 

herbert smith Freehills

 

For further information, please contact:

 

Matthew FitzGerald, Partner, Herbert Smith Freehills
matthew.fitzgerald@hsf.com

 

Homegrown International Trade Law Firms in Australia

 

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