Triple check: increased foreign investment fees for Australian residential land

Implications for developers and the build to rent industry

It is not uncommon for foreign-owned property developers to purchase residential land that contains existing dwellings for the purpose of redeveloping the land into new housing stock (which includes housing under a ‘build to rent’ (BTR) scheme).  This may include the acquisition of one or more existing residential dwellings, which are subsequently re-developed into mixed-use or high-density housing (such as apartments).  Developers may accordingly hold residential land for several years (and therefore be subject to the imposition of vacancy fees until completion of the project and sale of the re-developed land).

The imposition of the high fees applicable to residential land can operate as a significant disincentive to foreign developers and investors which may have unintended consequences noting the challenges with affordable housing stock in Australia.⁴  In this context, it remains to be seen whether the intention of the Amending Act will be achieved as:

• foreign developers may incur substantially increased holding costs for the duration of a large subdivision or redevelopment project (which the developer in turn may seek to pass on to acquirers of interests in the completed project, resulting in increased property prices); and
• foreign investors may be increasingly reluctant to invest in investment vehicles that operate in the residential development industry if FIRB approval requirements are triggered at the higher fee tier, reducing the amount of capital potentially available to those developers.

The Treasurer has, however, specifically announced that the Federal Government intends to ensure that foreign investment application fees for BTR projects after 14 December 2023 are assessed at the lowest level (being the fees applicable to commercial land), regardless of the type of land that is actually involved.  It remains to be seen whether any formal amendments of Australia’s foreign investment legislation will be implemented to achieve this objective, or if the fees will simply be waived or reduced on a discretionary basis under FIRB’s existing powers to do so.

On 1 May 2024, the Federal Government also announced its intention to implement further reforms permitting foreign investors to acquire established BTR developments (with the aim of encouraging additional investment in the sector), which we expect will be of particular interest to offshore institutional investors and real estate funds given Australia’s current rental market and BTR project pipeline.

Other relevant matters

The changes to Australia’s foreign investment regime were noted by Treasurer Chalmers to be part of the Australian Government’s ‘broad and ambitious’ agenda to improve housing affordability and supply, and the Amending Act was passed with bipartisan support.  In the current context of historically low rental vacancy rates, high housing prices and the forecast and increasing divergence between new housing stock and the requirements for Australia’s forecast population growth, we expect that this will be an area of increasing focus for the Australian Government moving forward (supported by the policy reform announced on 1 May 2024).

Current and prospective foreign investors should be aware that the original announcement of the proposal to make the changes effected by the Amending Act on 10 December 2023 was accompanied by commentary from the Treasurer that the ATO’s compliance regime would be enhanced to ensure that foreign investors comply with the foreign investment regime, including selling their properties where required.  Although we are yet to see specific legislative amendments in support of this announcement, we anticipate that this may be reflected in increased audit activity from the ATO and correspondingly in the issue of infringement notices.

FIRB is still in the process of updating its guidance to reflect the changes imposed by the Amending Act, and so it remains to be seen whether there may be any further policy overlay to how FIRB intends to apply the changes introduced by the Amending Act.

1. Foreign persons may apply for FIRB approval to acquire an established dwelling if they are a temporary resident (provided that they may only buy one established dwelling to live in, which must be sold within six months after leaving Australia) or for redevelopment if the redevelopment will either genuinely increase Australia’s housing stock or is a commercial development (which will in turn be subject to development conditions imposed by FIRB). Foreign companies may also apply for approval to acquire an established dwelling to house Australian-based staff.
2. The relevant property must be available to rent for a term of at least 30 continuous days for at least 183 days in a 12-month period.
3. Although there is a lower tier of fee, this tier only applies to acquisitions with a value of less than $75,000 (which is therefore only relevant in very limited circumstances).
4. A foreign investor may be reluctant to invest in a property fund holding seed assets that constitute ‘residential land’, as the acquisition of interests in that fund by the foreign investor may give rise to FIRB approval requirements at the increased fee thresholds.