Has the wave of foreign capital ended for Melbourne’s CBD?

In marked contrast to the previous few years of strong growth in foreign development and investment, CBD property watchers would’ve noticed a trend of foreign developers exiting the Melbourne property market.

Major Malaysia- and Singapore-based developers and investors have been selling up premium CBD mixed-use development sites, quite often to local Australian developers and generally for more than the price they originally paid.

For example, just recently we’ve seen the 1 Queen St site sold by Malaysia-based Creative Wealth to a local developer.

383 King St, previously owned by Singapore-based Aspial Corporation, was sold to Haileybury College, which has now opened a city campus there (see picture on page 1).

And the Singaporean developer, Hiap Hoe Ltd has recently entered into a heads of agreement to divest 380 Lonsdale St to local developer, Brady Group. This is the second sale by Hiap Hoe Ltd in recent times, the first of which was the sale of 206 Bourke St, sold to super fund investor, ISPT.

Many others are quietly considering their options in relation to a partial divestment via a joint venture or a full sale.

So what’s behind this trend?

Many cite the buoyant Melbourne market as an opportunity too good to ignore. This would be supported by the fact that most sales have been above the price paid just a short time earlier.

Others speculate that some critical policy changes from the State Government are impacting on foreign developers’ appetites for the Melbourne CBD.

First up, plot ratios were introduced in September 2015 with no warning. The Victorian Government announced an interim plot ratio of 1:24 for CBD sites. Many foreign developers have expressed concerns at the lack of forewarning and may have been spooked by the change.

But plot ratios aren’t the only new policy change to concern foreign developers.

On July 1 last year, the Victorian Government introduced a 3 per cent additional stamp duty on foreign purchasers of residential property or commercial property to be developed into residential, in Victoria.

Whilst this immediately adds to the cost of acquiring a property for a foreign purchaser, the larger cost is incurred when the developed apartments are sold to foreign purchasers.

The 3 per cent surcharge applies to any residential apartment sold to a non-resident. But the real sting comes when purchasers realise there is no off-the-plan concession for the surcharge. This results in stamp duty rising from around $3000 to $18,000 on a $500,000 (average) apartment sold off-the-plan. Both local and foreign developers rely heavily on offshore sales and this surcharge is not levied by any other state in Australia.

Adding to the tax burden, in the 2016 land tax year, a 0.5 per cent land tax surcharge on “absentee owners” (foreign) of Victorian land will take effect. This tax is levied on all absentee landowners unless an exemption is sought.

These foreign investor taxes are impacting and will continue to impact on foreign developers and may drive investment decisions in the future.

The State Government will need to be careful that, in its rush to raise revenue to balance its infrastructure spending commitments, it doesn’t end up with the unintended consequence of driving development out.

At the end of the day, foreign investors and developers are key drivers of housing growth in Melbourne.

Additional taxes and surcharges and planning rules that make it hard to develop a site profitably could threaten foreign development and investment.

And that could compromise the availability of housing for the CBD’s growing population.

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