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• The House of Representatives Standing Committee on Economics is investigating whether existing controls on investment in residential property are appropriate
• The enquiry has attracted a great deal of attention and appears likely to conclude that existing controls are not adequate and should be strengthened

 
Scope Of Enquiry

 
Australia’s foreign investment policy, as it applies to residential property, is favorably disposed to investment that increases Australia’s housing stock. However, foreign investors cannot generally buy established dwellings as investment properties or homes other than to use as their residence while in Australia.

 
In March this year the House of Representatives Standing Committee on Economics, chaired by prominent Liberal MP Kelly O’Dwyer, was asked by the Treasurer to examine:

• the economic benefits of foreign investment in residential property; 
• whether such foreign investment is directly increasing the supply of new housing and bringing benefits to the local building industry and its suppliers; 
• how Australia’s foreign investment framework compares with international experience; and 
• whether the administration of Australia’s foreign investment policy relating to residential property can be enhanced.

 
Views Expressed

 
Treasury estimates that foreign investment in property reached USD 24.8bn in the first 9 months of the last financial year, but this figure only captures investment which is known to be foreign.
The Committee has received a large number of submissions. Concerns reflected in submissions and in media commentary include that foreign investors are frequently acquiring existing housing without approval in circumstances where approval would not be granted. There are no reliable sources of data, but anecdotal evidence has been presented to the Committee.

 
The policy against ownership of existing housing by foreign investors is that, in the absence of appropriate controls, a substantial proportion of existing housing stock would be owned by foreign investors, Australian residents would be ‘crowded out’ of the market to an extent and housing prices would rise. Some, but by no means all, other advanced economies have similar policies.

 
Some of the views expressed to the Committee, which point to its likely findings are:

• There is widespread non-compliance in this area.
• Properties are often purchased by foreign investors when they are temporarily resident but not disposed of when they return home or are ‘warehoused’ by relatives of investors who are residents or real estate agents, lawyers or accountants.
• The Foreign Investment Review Board (FIRB) has not found a breach since 2006. Enforcement is difficult because the only real source of information is the various state land registry offices. While the addresses of purchasers of property are recorded, it has not been systematically collated – however, this should be feasible with technological advances in these facilities. Ms O’Dwyer has expressed the view that more enforcement should be expected despite these difficulties.
• The maximum fine for non–compliance of AUD 85k for individuals is believed not to be a sufficient deterrent, and has been described as a ‘cost of doing business’ given that, if anyone were ever to be prosecuted, an offender would be able to keep the proceeds of any forced sale of a property bought without approval. While imprisonment for up to two years can be ordered, this has never occurred.

Possible Recommendations

 
The Committee appears to take the view that the policy concerning investment in existing property is soundly based and should therefore be enforced effectively. However, the Committee seems keen to find more effective means for ensuring compliance with the law and the policy behind it. Some options might include:

• data collection: requiring a standard questionnaire to be completed where the foreign investor buyer’s address is outside Australia, collecting it through the land titles offices and referring data to FIRB; 
• resourcing: as effective enforcement is likely to come at some cost, an application fee for approvals from FIRB could attract a small administrative charge to fund enforcement and data gathering; and 
• immigration verification: a system for cross referencing immigration data might also assist to identify properties purchased by foreign investors who were resident in Australia at the time a purchase is made but then return home.

 
More controversially perhaps, the Committee could consider harsher penalties, including for those who aid and abet the purchase of property by a person who does not have FIRB approval where such approval is required.

 
Some concerns are also bubbling to the surface that foreign investment in new property developments has reached such heights that Australian property developers are being crowded out of the market. Aside from developers, Treasury estimates that around 35% of all ‘off the plan’ developments are purchased by foreign persons. Ultimately, the level of foreign ownership of residential property may become quite high simply through investment in new developments. However, there appears to be little appetite to change existing policy with respect to foreign investment in new property developments.

 
The Committee is scheduled to report by 28 November 2014.

For further information, please contact:

Robert Nicholson, Partner, Herbert Smith Freehills
[email protected]

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