Lack of foreign buyers is accentuating the shortage of rentals

Taxes, tighter credit, and travel restrictions have seen off foreign residential buyers.

Foreign buyers dry up

The absence of foreign buyers may lead to a significant undersupply of rental properties. Over the past decade, new apartment projects have largely been funded by superannuation fund investors and non-resident investors, mainly from China. Neither cohort is buying heavily anymore as credit has tightened, and as the HomeBuilder stimulus impact recedes we’re heading squarely for a shortage of rental properties in some cities and locations.

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The number of residential real estate approvals reported by the Foreign Investment Review Board fell another 38 per cent in the 2021 fiscal year to sit at the lowest level in a decade-and-a-half, with no sign of the multi-year slowdown reversing.

Figure 1 – Number of FIRB Residential Real Estate Approvals

The value of FIRB residential investment proposals also contracted another $6.7 billion lower to just $10.4 billion in the year to 30 June 2021.

The comparative figures for previous years may not be directly comparable for several reasons, but back in 2016 the equivalent figure many times higher at over $70 billion.

Figure 2 – Value of FIRB Residential Proposals

Queensland attracts residential investment

We can analyse the numbers by state and development type, but the residential investment figures are now so small they are not going to move the needle for dwelling supply in any event.

Queensland picked up some investment in new developments, but overall the figures were very low for residential property, with commercial real estate projects attracting the bulk of foreign interest and approvals surging to $82 billion as Australia’s economic recovery took hold.

While our analysis shows some areas have enough new developments in the pipeline, nationally rental vacancies are continuing to tighten as the economy improves.

Nationally rental vacancies are continuing to tighten as the economy improves.

Various driving factors

There was a range of factors causing the lack of foreign investment in the residential sector.

Firstly, there’s barely any lending to non-resident investors these days. Once common among even larger lenders, regulation has effectively shut this lending channel down.

Secondly, state stamp duty surcharges and taxes have also hugely discouraged foreign buyers. 

Thirdly, Australia’s relationship with China has cooled over recent years, while the ongoing absence of Chinese international students has disrupted one of the possible channels for investment.

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And fourthly, COVID-19 restrictions and international border closures dissuaded some prospective buyers from travelling to inspect projects and developments.

Policymakers may need to take a look at finding ways to allow non-residents to invest in new residential properties again.

In our experience, Australian investors and prospective landlords tend to steer clear of new apartment projects these days due to the increased risk of loss on resale. Meanwhile, residential vacancy rates continue to tighten, with little respite in sight, and rents are likely to rise significantly.

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