Sydney, Australia: Despite a clear intent from policymakers to increase incentives for international investment in the Australian property sector, the lack of available ‘a-grade’ properties has the potential to stymie foreign demand.

The 2011 PKF REIT Monitor highlights the appeal of the Australian property sector internationally, given the majority of AREITs are trading at heavy discounts to NTA, far lower than their South-East Asian rivals. 

According to Marcus Leonard, Tax Partner at PKF and co-author of the 2011 PKF REIT Monitor, rules surrounding Managed Investment Trusts (MITs) in Australia have resulted in the reduction of the withholding tax rate to just 7.5%, in the hope of enticing international investment.

Furthermore, overseas investors are looking for stable, low risk markets to consolidate returns.  Given AREITs’ efforts to diversify debt, reduce gearing and avoid risk, as well as a relatively stable government and national economy, Australia’s international appeal has heightened.

“International interest in Australia has definitely increased based on the recent number of property transactions by foreign funds.  For instance investment funds from larger foreign markets, such as Europe, Asia, Canada seem to have the ability to raise equity more easily than their Australian counterparts, given their lower bond interest rates and the availability of cheaper debt.

“However, these funds are most interested in premium properties, typically worth in excess of $250 million.  Australia has only a limited number of these so-called ‘a-grade’ premium buildings with keystone tenants, such as Aurora Place and 8 Chifley Square in Sydney, thereby restricting foreign investment in the sector,” he said.

While international interest in AREITs is high, only larger international businesses are continuing to invest in the current market. Smaller players looking for investments in the $50m to $150m range are wary of the high Australian dollar.

Mr Leonard noted the purchase of Aurora Place by the Korean National Pension Fund as an example of international demand for premium Australian property.

While a lack of supply is the primary barrier to international investment in AREITs, Mr Leonard also pointed to impending regulations surrounding the management of MITs, which could send mixed messages to investors.

New regulations require a substantial proportion of the investment activities of MITs to be based in Australia, which effectively requires the offshore funds to establish a presence in Australia so as to avail themselves of the concessionary withholding tax rate.

“Previously, international investors have run their Australian investments through commercial operators, however, we’ll no doubt see an increase in the number of satellite offices set up in Australia to meet the new requirements."

“Ultimately, the AREIT sector is encountering international interest. The stability of the Australian economy will continue to attract international investors looking to achieve a strong debt-equity ratio. It is likely competition in the market will increase as investors look to secure premium  investment properties,” he said.