October 2019 Issue 10 Investing in Australian Non-Residential Property The Feng Shui of Asset Protection Vietnam, a destination for international IT business Fidinam Group Worldwide Group Fidinam Newsletter Newsletter number 10 - October 2019 p.3 Investing in Australian Non-Residential Property p.6 The Feng Shui of Asset Protection p.8 Vietnam, a destination for international IT business p.10 Singapore, application of GST on Digital Services effective from 2020 p.13 New Free Trade Agreement p.15 The importance of maintaining economic substance in international structuring INVESTING IN AUSTRALIAN NON-RESIDENTIAL PROPERTY Introduction most important criteria in real estate average return on investment of 7% Australia actively promotes overseas investment. With the population per annum, with lesser years of decline investment, and unlike many countries it has growth in Australia, especially in key compared to almost any other property limited barriers to entry into the market. This cities like Melbourne and Sydney not market in the world. is evidenced by the large amount of capital likely to slow down anytime, it makes • Low cost of debt, with many new inflows from overseas including Canada, investing in these cities attractive to lenders active in the market and Europe and Asia, due to the “safe haven” ensure a continuity of both capital and increased liquidity. status of the Australian property market. rental growth. • Week Australian dollar against the US However consideration should be given to • Australian property is often praised Dollar, provides for future exchange risk the potential tax implications for overseas by investors for its ability to maintain upside. investors, investment vehicles, borrowing steady rental yield while achieving • Australian properties have enjoyed and local management to ensure the positive capital growth. consistent capital growth over the optimum return out your investment. • As one of the world’s most consistent last 100 years, with property prices Why should you invest in Australian Property: property markets for the past three doubling roughly every 7 to 10 years. • High population growth is one of the decades, Australian properties see an • The Australian property market has 3 also displayed resilience in resisting The Economy below the long-term trend and GDP downward trends, giving investors The Australian economy, however, is not remains benign, prompting the Reserve the confidence needed to hold on to immune to the broader global economy, Bank of Australia (RBA) to act by cutting their investments for longer periods. and while we have not experienced a the cash rate to 1% with further cuts The low volatility of the Australian recession in over 27 years, economic expected to follow. A recent report property market has made it the growth has slowed in line with other released by Westpac Bank (major preferred choice over stock markets established world economies. Wage Australian Bank) provided the following and other property markets worldwide. growth remains low, inflation remains forecast: Current Dec- 2019 Mar- 2019 Jun-2020 Dec-2020 RBA Cash rate 1.00% 0.75% 0.50% 0.50% 0.50% 10 Year bonds 0.91% 0.90% 1.00% 1.00% 1.10% AUD/USD $0.675 $0.67 $0.67 $0.66 $0.67 The above table, highlights Westpac’ views highlights average A grade commercial Investment Considerations for of a reduction in the cash rate from 1.00% property yields across Australia: Overseas Investors to 0.5%, with some economists seeing The Australian Government proactively rates heading to 0% and remaining low for State Yield promotes overseas investment within a long period to come, which is in line with Perth 6.5% in Australia; however investors need to other central banks globally. A low interest Brisbane 5.75% carefully consider their approach and be rate environment will stimulate investment aware of ownership structures, federal Sydney 4.75% activity and consumer spending, however, and state-based taxes, and property it reduces greatly the returns investors Adelaide 7.10% types open for overseas investment. have received from cash. Many investors Melbourne 5.10% Consideration should include: are now searching for yield and with National Average 5.8% 1. Ownership commercial property yields over 5% in You can own property in your personal Sydney, Melbourne and Canberra and “Since June 2004 the average yield spread capacity; however it may be more over 6% in Brisbane, Adelaide and Perth, to 10-year bonds has been 2.5% verses beneficial to own the property in an the asset class has become increasingly June 2019 at 4%, highlighting the potential Australian domiciled company and or popular. Yields at this level are some for further capital value appreciation” via a Managed Investment Scheme, 400-500 basis points over the risk-free Source: Savills Research these provide more flexibility when cash rate and with economic forecasts managing borrowings, capital gains looking to a prolonged period of low rates Due to the underlying strength of the and distributions. we expect to see yields fall further thus Sydney and Melbourne economies, Fidinam 2. Government approval increasing commercial property values. has active mandates in investing in both Depending on the asset size you these markets on behalf of its clients. may require Foreign Investment Commercial Property Overview We are also seeing interest grow in the Review Board approval; in many The strong influx of foreign capital, and Adelaide market due to the higher income instances this is for assets of state the ongoing appetite of major Australian yields, a lower entry point to invest and the significance and or over $150million investment funds looking to chase quality South Australian government undertaking AUD. assets and yields, has added a great deal a number in initiatives to promote South 3. Property Taxes of liquidity to the market. Together when Australia as an investment destination, the With the exception of Adelaide all coupled together with highly attractive costs largest of these being the removal of stamp states charge stamp duty at an average of borrowing continue to put downward duty for commercial property investments, rate of circa 5.5% of the purchase pressure on cap rates and with rising saving some 5.5% of the property price when you acquire a property and rents capital values continue to improve. value when you purchase in Adelaide. charge ongoing annual Land Tax, with NSW and Victoria remain as the preferred As active investors and managers across Victoria and Queensland charging an destination for investment, however there all Australian markets the Fidinam team additional “absentee Owner” Land Tax is increasing transaction activity occurring can assist your investment in any major surcharge. This is where ownership in Brisbane and Adelaide. The table below capital city of Australia. structuring of your investment can 4 require addition advice to mitigate risk banking market that will assist with property acquisition if one of the most around these surcharges. Other taxes securing the right property finance. transparent in the world with strong to consider is the effect of Goods and Borrowing for an overseas investor, consumer protection. Services Tax (currently 10%) and if the while not difficult can be challenging asset is sold the potential for Capital due to Australia Anti Money Borrowing Gains Tax. Laundering laws and the “Know Your Leveraging a property investment in Australia, 4. Asset types Customer” required by the lender to is a prudent strategy for investors, as it Overseas investors can acquire all understand the ultimate beneficial allows you to hedge part of your investment, types of non-residential property and owner of the asset. as you are acquiring in Australian dollars, are restricted to only being able to 6. Australia’s legal system is based and with local interest rates at historical purchase new residential property. on the UK system just like Hong lows can substantially improve you cash on 5. Borrowing Kong or Singapore, so it’s familiar cash investment return, as example of this There is a strong banking and non- to many overseas investors, and is as follows: Property purchase price $20million AUD Investment income (yield) 5% per annum $1million AUD Mortgage (loan) 50% of purchase price $10million AUD Equity 50% of purchase price $10million AUD Mortgage interest 3% per annum ($0.3milliom) AUD Net income after interest $0.7million AUD Cash on Cash return 7% per annum Adopting a leverage strategy can increase of your overall investment strategy. your cash on cash returns from 5% to 7% per Local management will be well versed annum or over a 28% per annum increase in what is happening within with in investment return. However a leverage the domestic property market, have strategy needs to be carefully considered, strong and deep networks to assist as too much leverage can be risky if the in acquiring property, provide active market cycle changes and values fall. management to ensure the successful As a broad overview of the debt market financial performance of the asset and/ in Australia, and depending on the type or portfolio, work with the investor in MATTHEW BURROWS of property acquired a typical mortgage developing and implementing prudent Managing Director facility would look like: debt strategies, and advise on ownership structures to ensure maximum financial Fidinam (Australasia) Real Estate performance from the investment. [email protected] Mortgage (loan) 40-50% www.fidinamgw.com Interest rate 2.75%-3.25% Fidinam is well positioned to assist, it Finance fees 0.3 to 0.5% current manages over $400m in assets (establishment) for offshore investors and has ongoing Covenants mandates to acquire more quality Interest cover ratio 2 times investment property in Australia. Should The information contained in this note is you wish to learn more about investing in for general information purpose only and is Loan to value ratio 50% Australian property, please do not hesitate not intended to be relied as a substitute for to contact our Managing Director at tax, corporate and accounting professional Local Management Fidinam Australasia Real Estate via email consultation.