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23 Mar 2010

Changes to Australia's foreign investment rules to affect the tourism and real estate sectors

by Anne Taylor, Julie Ha

Changes to Australia's foreign investment policy and law which reduce compliance costs might stimulate investment in the tourism and real estate sectors.

In the past few years we have seen an increase in foreign investment in Australia's tourism sector. The Foreign Investment Review Board (FIRB) reported that the total approved foreign investment in the tourism sector more than doubled in 2007-2008 from $1.5 billion in 2006-2007 to $3.2 billion in 2007-2008. In its 2007-2008 Annual Report, the FIRB reported that the United States was the leading investor in Australia's tourism sector in 2007-2008, with around $2.5 billion approved proposals granted to investors from the United States. This is followed by the United Kingdom ($391 million) and Singapore ($112 million).

Despite constricted market conditions during 2008 and 2009, we have seen foreign investment in Australian hotels and resorts pick up momentum in late 2009. Cashed up offshore investors have been quick to take advantage of the favourable currency exchange rates and the availability of hotels and resorts sold at reduced prices during the global financial crisis. Notable hotel and resort transactions in 2009 and early 2010 involving offshore investors were the sales of:

  • El Questro Wilderness Park & Homestead in Western Australia, Kings Canyon Resort in North Territory, Queensland's Lizard Island Resort, Heron Island Resort and Wilson Island Resort to United States company Delaware North for an undisclosed amount;
  • the Four Points by Sheraton Hotel in Sydney to a South-East Asian private investor for $185 million;
  • the Mercure, Ibis and Novotel hotels in Brisbane and the Mercure and Ibis hotels in Perth to a Singapore listed REIT for $175 million;
  • Surfers Paradise Marriott Resort & Spa to Indonesia's Rajawali Group for about $75 million; and
  • Holiday Inn Adelaide to Malaysian group Hotel Grand Central for $35 million.

Changes to Australia's foreign investment policy and law affecting the tourism and real estate sectors

In recent years the Australian Government has been keen to encourage more foreign investment in Australia, as this is considered to be vital to Australia's future growth and prosperity. In line with this goal and in order to streamline the screening process, reduce compliance costs on foreign investors and promote foreign investment in Australia, the Government has implemented a number of changes to the foreign investment policy and law. The changes which affect the tourism and real estate sectors are outlined below.

Accommodation facilities

As from 31 March 2009, accommodation facilities such as hotels, motels, hostels and guesthouses are no longer treated as residential real estate but are now treated as developed commercial real estate.

Acquisitions of such accommodation facilities (including acquisitions of individual units in such facilities eg. a hotel room in a strata titled hotel where the room is managed by the hotel operator) which are valued below the relevant developed non-residential commercial real estate monetary thresholds, are exempt from the operation of the Foreign Acquisitions and Takeovers Act 1975 and do not require notification to and approval by the Government.

Holiday homes, time share schemes and residential real estate in integrated tourism resorts

The classification of other types of tourist accommodation such as holiday homes, time share schemes and residential real estate in resorts designated as Integrated Tourism Resorts by the Government remains unchanged. That is, they are treated as residential real estate and are subject to the same notification requirements and eligibility criteria as other residential real estate, subject to certain exemptions.

Residential real estate

As from 18 December 2008, the following notable changes took effect in respect of the administration of foreign investment in residential real estate:

New dwellings: The previous requirement that only 50 percent of new dwellings can be sold to foreign persons in an "off the plan: transaction no longer applies, provided developers market the dwellings locally as well as overseas. The definition of a "new dwelling" was expanded to include dwellings that have not been sold by the developer but may have been occupied for no more than 12 months.

Second-hand (established) dwellings: Foreign-owned companies are permitted to acquire second-hand (established) dwellings for the use of their Australian-based staff provide they undertake to sell or rent the property if it is expected to remain vacant for more than six months. The timeframe for the redevelopment of second hand dwellings was extended from 12 months to two years. The existing dwelling must be demolished and construction of the new dwelling must commence within two years.

Vacant residential land: The timeframe for the development of vacant residential land was extended from 12 months to two years. Continuous substantial construction of the development must commence within two years.

New monetary thresholds

On 22 September 2009, the Government changed the monetary thresholds that apply to private foreign investment in Australian businesses, reducing the previous six monetary thresholds to just two. The aim of the change is to increase the thresholds below which transactions can proceed without review by the FIRB. Additionally, the requirement that private foreign investors notify the Government when establishing a new business in Australia valued above $10 million was abolished. The table below summarises the changes made to the monetary thresholds.

 Previous Thresholds

 New Thresholds

Foreign Investor - Interest in an Australian business

$100 million (not indexed)

$219 million indexed on 1 January each year to the GDP price deflator in the Australian National Accounts for the previous year (currently $231 million after indexation on 1 January 2010).

  • The four lowest thresholds was replaced with a single threshold of 15 percent in a business worth $219 million.
  • Indexing of the threshold will provide a more realistic threshold as it keeps pace with inflation over time.

Foreign Investor - Offshore Takeover $200 million (not indexed)

US investors - sensitive sector acquisition $110 million (indexed)

US investors - offshore takeover

$219 million (indexed)

US investors - interest in an Australian business

$953 million (indexed)

$953 million indexed on 1 January each year to the GDP price deflator in the Australian National Accounts for the previous year (currently $1004 million after indexation on 1 January 2010).

Foreign investor - establishing a new business

$10 million (not indexed)

Abolished.

 

Monetary thresholds as at 1 January 2010

The current monetary thresholds as at 1 January 2010, applying to acquisitions of an interest in developed non-residential commercial real estate, an Australian business (including shares or assets) and an offshore company owning Australian assets or conducting business in Australia, are:

For Non-US investors

$5 million

developed non-residential commercial real estate, where the property is subject to heritage listing

$50 million

developed non-residential commercial real estate, where the property is not subject to heritage listing

$231 million

(This threshold is subject to indexation on 1 January each year. It was previously $219 million.)

  • an interest in an Australian business; or
  • an interest in an offshore company that holds Australian assets or conducts a business in Australia, and the Australian assets or businesses of the target company are valued at/above the threshold.

 

For US investors

$231 million

(This threshold is subject to indexation on 1 January each year. It was previously $219 million.)

involving Australia/US Free Trade Agreement prescribed sensitive sectors such as transport:

  • an interest in an Australian business; or
  • an interest in an offshore company that holds Australian assets or conducts a business in Australia, and the Australian assets or businesses of the target company are valued at/above the threshold.

$1004 million

(This threshold is subject to indexation on 1 January each year. It was previously $953 million.)

not involving Australia/US Free Trade Agreement prescribed sensitive sectors:

  • an interest in an Australian business; or
  • an interest in an offshore company that holds Australian assets or conducts a business in Australia, and the Australian assets or businesses of the target company are valued at/above the threshold.

 

Acquisitions of an interest in developed commercial real estate, an Australian business (including assets or shares) or an offshore company that holds Australian assets or conducts a business in Australia, where the value of the real estate or business is less than the prescribed thresholds, do not require notification or approval from the Government under the Foreign Acquisitions and Takeovers Act 1975.

These thresholds do not apply to acquisitions of shares or units in Australian urban land corporations or trust estates or direct investments by foreign Governments or their agencies (including proposals to establish new businesses in Australia). These acquisitions must be notified to the Government irrespective of the value of the transaction or the nationality of the foreign investor.

Will the changes promote foreign investment in the Australian tourism sector?

As we have seen in recent years, Australia has become an attractive location for private foreign investors wishing to invest in the tourism market. Australia's stable economy, strong financial services (as demonstrated during the global financial crisis) and lack of new supply of hotels and resorts, are all attractive attributes for the offshore investor.

The changes to the foreign investment policy and law may assist in encouraging more private foreign investors to come into the Australian market by reducing the compliance costs, particularly for the lower-end transactions, and thereby removing some of the previous disincentives. However, reduced compliance costs and a more streamlined foreign investment review process are just a few of the many factors which are taken into consideration in a decision to invest in a tourism product and a lot depends on the prevailing economic climate and market conditions.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.