Trust Co says tax change to hit foreign investment in Australia property
* Foreign investors reviewing Australia after tax hike, company says
* Sees Australia's policy inconsistency an issue
* Local property investors returning, raising competition
By Eriko Amaha
SYDNEY, June 6 (Reuters) - Foreigners are likely to cut their investments in Australia's property market after recent tax changes that will hit returns, according to a company dealing with managed property investments schemes.
The federal government announced in May it would increase the withholding tax for foreign investors in Managed Investment Trusts (MITs) to 15 percent from 7.5 percent, reversing its previous policy aimed at attracting foreign capital Down Under.
"We don't foresee there being the same amount of take up in MIT structures as there was. And ultimately, the net loser for that will be Australia. It will result in less foreign direct investment," Andrew Cannane, general manager, corporate clients for the Trust Company, said in a recent interview.
Since the introduction of MIT in 2008 to streamline the tax system and allow foreigners to pay lower taxes, Australia has lured sizeable capital from offshore investors.
In calendar year 2011, foreign direct investment into Australian property rose 50 percent to A$7.7 billion ($7.5 billion). Cannane estimates that well over A$5 billion of that would have been in MIT.
"The big concern for investors is the inconsistency. The 7.5 percent rate has only been in place for two years and it's already changed," he said.
"Anecdotally, investors are saying 'Let's review our allocations in the Asia Pacific and reassess whether Australia is still the most attractive place to invest as a result of this change.'"
According to property services firm CBRE, offshore investors accounted for 37 percent of commercial property transactions in 2011, the highest level in nearly 20 years.
Cannane said some offshore investors were also considering a thin capitalisation structure where they apply debt to reduce taxable income.
Brokerage firm CLSA estimates the higher withholding tax would push down offshore investors' internal rate of returns (IRRs) by 100 basis points. CLSA said some investors were bracing for a further hike in the tax rate to 30 percent, which would cut IRRs by 310 basis points.
This would particularly affect the Sydney office market, where 55 percent of 2011 buyers were foreign, CLSA said, as it downgraded its recommendations on listed property firms Commonwealth Property Office, GPT and Investa Office.
The going seems to be already getting tougher for foreign investors. Cannane said there is less property available in the market now as most Australian sellers have recapitalised and boosted their balance sheets, reducing the pressure to sell.
"Recently, we've seen high-profile campaigns for a number of assets but none of them have been sold, suggesting there is a gap between seller and buyer expectations on price," he said.
Property group GPT has put up its stake in office tower MLC Centre, located in Sydney's prime business district, but the company and potential buyers have not agreed on price, according to local media.
Local buyers, including listed property trusts with their improved finances, were among those in the hunt for those assets that did come up, Cannane said.
"Super funds are also rebalancing and they will also start buying again which will make it more competitive for foreigner investors to buy property in Australia," he said. ($1 = 1.0265 Australian dollars) (Reporting by Eriko Amaha; Editing by Lincoln Feast and Ron Popeski)
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