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Economics Legislation Committee

MORRISON, Mr Ken, Chief Executive, Property Council of Australia

NEELAGAMA, Mrs Anna, Chief Executive Officer, Real Estate Institute of Australia

SINELNIKOV, Mr Kosta, Policy Manager, Property Council of Australia

Evidence from Mr Morrison and Mr Sinelnikov was taken via teleconference—

CHAIR: Welcome. I thank you for appearing before the committee today. Information on procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. Responses to questions on notice are due by 20 November. Who wants to put their hand up first for some opening remarks?

Mrs Neelagama : I would love to go first if possible.

CHAIR: Please go ahead.

Mrs Neelagama : Firstly, thanks to the committee for the opportunity to present today. As you might be aware, the Real Estate Institute of Australia, or REIA, represents Australia's residential property industry. There are around 46,000 real estate agencies in Australia, who employ around 130,000 Australians. Ninety-nine per cent of these businesses are small businesses that contribute to Australia's property sector. As practitioners in the market, REIA have long supported foreign investment in residential real estate, because we know this improves both housing supply and, in turn, affordability, to help Australians get into homes. This has particularly been the case in the ongoing COVID-19 economic environment, where we've seen both state and federal governments rely on the construction sector as a means to stimulate the economy. REIA asks that unnecessary impediments are not imposed on foreign investors looking to invest in the residential property market. Fees should be structured simply to reflect undertaking the assessment and administration by the Australian government. We should not be increasing impediments to foreign investment by raising fees for the residential property sector.

In reality, foreign investment in the residential property market is the lowest it has been since 2015-16. We understand, from our agents working in this area, that the cumulative impact of Commonwealth and state government fees has contributed to the decreased demand from foreign investors. It has been our proposal to Treasury and now this committee that fees should be equitable and simply reflect the cost of assessment and processing by FIRB. REIA has recommended that fees be structured to reflect the cost of undertaking the assessment and administration only. This is not just across the board but for each category of fees. Residential property applications should not be offsetting or subsidising the cost of administration of other categories. The proposed fee structure within the bill this committee is tasked to inquire into ignores all of this.

COVID-19 has attracted a welcome and widespread commitment from all levels of Australian governments to deregulate and be more business- and investment-friendly. REIA is concerned that the current fee-setting framework within the bill doesn't meet these best-practice policy aspirations. In short, unnecessary impediments should be removed for foreign investors looking to invest in Australia's residential property market. Fees should therefore reflect the cost of undertaking assessment and administration. I'm more than happy to answer questions where I can, but we've provided three submissions to various inquiries and submission processes, and they reflect all of our rationale behind these positions.

Mr Morrison : Thank you for allowing the Property Council to talk to you today about these bills. The property industry makes up 13 per cent of the nation's GDP and generates over 1.4 million jobs. A good amount of this activity is underpinned by foreign direct investment. Our members include institution investors that deploy significant amounts of capital across the globe as well as Australian property businesses that partner with offshore groups and rely on foreign capital to begin at-scale projects. This foreign investment underpins many of the commercial properties that we see across our cities—the office buildings, the shopping centres, the industrial parks, the hotels, the retirement villages and many more. Foreign investment can also underpin new commercial projects. Foreign purchases are also an important part of demand for newly constructed apartments and housing. We have consulted widely with our members on these bills, including listed and unlisted property groups.

Can I say at the outset that the Property Council understands and appreciates the government's intention to strengthen the security dimensions of the FIRB assessment. We have no problems at all with that policy objective. Foreign investment into office buildings, shopping centres or other commercial property has little, if any, security issues to assess. It stems from both the nature of the assets themselves and the types of capital that typically invest in these assets, which are overwhelmingly high-quality institution investors such as superannuation, pension and sovereign funds. From a security perspective, investing in commercial property is a very vanilla exercise.

The primary issue that the Property Council raises first and foremost is the very significant fee increases that have been proposed in the draft regulation. The cost of applying for further approval for the average developed commercial property transaction under that proposed new fee regime is set to increase from $26,700 to $66,000. That's an increase of almost 2½ times. For investments valued at just below $1 billion, the proposed FIRB fee increase would be more than nine times the current level. We don't see how these very large costing increases in investment in commercial real estate—a very vanilla investment class, from a security perspective—can be justified on any policy basis. These proposed increases would go far beyond the administrative cost recovery and would put Australia at a material investment disadvantage to other countries. As Anna has just noted, the Productivity Commission has also commented on FIRB application fees and recommended that they be set at levels in proportion with the cost of delivering that regulatory regime.

The problem with the proposed fee regime set out in the draft regulation is that it is a sliding scale. It assumes that the bigger the investment, the more significant the security issues to assess must be. When we are talking about our commercial property, we are talking about large amounts of capital required for large assets. This vanilla commercial real estate sector has little or no security implications. To address this issue, we have recommended that the government adopt a separate fee regime basis for investment into national security land or national security businesses, with those fees recognising the additional assessment required for that type of investment.

Our submission also raises a couple of other issues. One of the most important is drawing the committee's attention to the difference in investment in the commercial property asset itself and any activities that might occur within that asset or within that building. Across the commercial property market, the sensitive data or operations that are housed in a particular piece of land or a particular asset are very much incidental to who owns that land or who owns that asset. To use a simple analogy: while a landlord might own the box—the building—it is the tenant who owns the contents of the box—the operations of their own business. Landlords would almost never have access to those contents without a tenant's consent. An acquisition of such a property asset, the building or the land, shouldn't be treated the same as an acquisition of a national-security-sensitive business in itself; for example, you might have an office building in a CBD and within that office building there might be a tenant who is a defence contractor et cetera. We have covered off those issues in the submission.

To put these changes to foreign investment in property in context, access to both domestic and offshore capital is one of the most vital elements of the continued growth of the property sector in Australia. It enables job creation and stimulates many other parts of the economy. We know that over $70 billion of foreign capital was approved for investment by FIRB in Australia in 2018-19, and that created much-needed commercial and housing precincts, delivered a significant economic contribution and supported development activity and thousands of local jobs. It should also be noted that diversified sources of funding are particularly important for institutional grade real estate assets in Australia.

The sector is attractive to investors, both domestic and offshore, and that will bring patient long-term capital because of its relative stability, maturity and desirable risk return profile. The high number of profitable investment opportunities that Australia has to offer, relative to our domestic savings pool, means that Australia continues to be a net importer of capital, and that is a factor which is certain to continue into the future. However, it is important to highlight that Australia is in constant competition for international capital with other developed countries. Australian businesses and investors are also keen to see more institutional foreign capital because of the partnership opportunity, high liquidity and lower investment risk that it brings to the property market.

I'll leave my opening comments there. Thanks very much again for the opportunity to appear today. I'm very happy to take any questions.

Senator O'NEILL: Chair, again, if we could have copies of those opening statements, that would be helpful—if you wouldn't mind sending them to us now.

CHAIR: That would be helpful?

Senator O'NEILL: Yes. Thank you.

CHAIR: Just as a frame-setter, Mr Morrison, could you give me a breakdown of foreign versus domestic investment, ideally as a percentage? How much of Australia's property investment normally comes from the foreign investment pool?

Mr Morrison : Looking at Australia's domestic savings pool, in our superannuation sector primarily, they will diversify across their asset base—across their investments—so real estate will be an important component of that, and then they'll look to diversify that real estate component. From a domestic savings pool perspective, it obviously doesn't make sense for companies to put all their eggs in one basket, so, even within their real estate allocation, that will include domestic real estate and offshore real estate. So superannuation funds are a very important component of onshore investment, and there are also other forms of domestic savings investment which goes into commercial operations.

If we're looking at office buildings or shopping centres, the major commercial assets across our skylines, within those buildings, on average, more than 50 per cent of the investments standing behind those assets are likely to come from offshore, so it's quite significant. That's because those assets are, in aggregate, quite large, so they're beyond the scope of the domestic savings pool to invest in, because the domestic savings pool wants to diversify and because Australia is an attractive place for the type of patient long-term capital that typically wouldn't want to invest in commercial real estate. So it's not a small or incidental component of investment and it's also part of a healthy investment universe. Our members who are domestic superannuation funds who invest in Australian real estate want a liquid market, so they want foreign capital to be involved because that's a sign of a good portfolio.

CHAIR: What's been the experience of 2020 from the industry's perspective? Obviously, the economic shock induced by the pandemic has been extraordinary. Did everything just stop for you? How has the industry responded?

Mr Morrison : Capital transactions dried up quite quickly, because the uncertainty, obviously, was chronic. And also, some of the practical limitations of offshore investment in Australia—overwhelmingly, people couldn't come here to inspect assets, and generally when you're talking about large amounts of money, that's something that they would do. So activity on capital markets dried up quite significantly. There's more happening now. There are transactions occurring and there are investments going on. There's also starting to be some distress in some areas. Again, that creates opportunities for some players, whether they're domestic or whether they're offshore, so we're seeing more capital flows at the moment. But, certainly, there was a pretty dry period when no-one knew how this was going to land.

Senator McALLISTER: Thanks very much to our witnesses for appearing; I apologise for not being physically there in person. I want to ask you about some of the observations made in your submission about the definitions. If I'm correct in understanding this, you have two objections: the first that the definition of a 'national security business'—and all of the things that flow from that—is too broad and doesn't conform to the policy intent of the reform; and, the second that, in any case, it is too uncertain. So you have two objections, one is the scope, and the other is the inability to clearly understand that scope. Is that correct?

Mr Sinelnikov : I think those are correct observations, but I think the two issues kind of go hand in hand. So, when we talked to members about the draft exposure bills when they were first released, their feedback was that, basically, the way things were drafted at that point suggested that the scope was quite broad, but it also meant that how it applied to a specific deal or a specific transaction or specific asset that they might be looking at—it did create uncertainty about whether that particular asset would be in or out under this national security framework. I think, as Ken mentioned earlier, we don't have concerns in terms of the government's focus on national security as being a very important element to foreign investment. But I think it's just down to, I guess, the right level of guidance that can be provided and how that's applied when a particular foreign investment is being made. I think, if that uncertainty can be alleviated—whether it's through guidance or examples given, perhaps within the explanatory memorandum of the legislation—that would be most useful to the market.

Mr Morrison : Just to add to that, the backdrop to this, which we've also outlined in our submission, is that Australia does have a more encompassing set of investments that it asks FIRB to review than a number of other like countries. The market investors are used to the Australian system, but it is in that context: that we already ask for more. If the fee issue wasn't to be addressed, then they'd be being charged a lot more, and if there was uncertainty added to that mix then that's quite a troika of issues which you would expect to see impact on some investors' decision to do business with Australia.

Senator McALLISTER: At the top of page 12 of your submission, you indicate that you think the proposed definition doesn't conform to the policy intent of the broader reforms. I'm not being cute about this, but what is your understanding of the policy intent of the broader reforms?

Mr Morrison : I guess our understanding would be that the government believes that there are sufficient security risks associated with some offshore investment in Australia which are not being adequately assessed under the current regime, and that there's a need to upgrade that assessment focus on security issues. We accept that prima facie. I guess when we look at the universe that we're in—commercial property most particularly but also individuals purchasing units in apartment buildings et cetera—this is not a security-rich area. In fact, it's very vanilla. It's not telecommunications and it's not ports. We are talking about Canadian pension funds investing in office buildings in Melbourne or Perth or somewhere. This is very, very vanilla. In fact, this is some of the best capital in the world, and we want it here supporting assets which are really important for our cities and are really important for our economy.

Senator McALLISTER: Have you any indication of the kinds of risks that the government believes are not being adequately assessed in the current regime?

Mr Morrison : We haven't been briefed on anything other than what's in the public domain on those issues, so I couldn't really add to any other comments beyond what's on the public domain that the government's provided. We don't have anything else to add to that.

Senator McALLISTER: The reason I ask is that you raised some very specific questions about the relationship between asset owners and tenants in the analysis that you provide, both about commercial buildings generally and particularly about data centres. The government clearly is concerned about some specific risks in relation to data and information—or I think we can assume that the government is, by the way that these matters are treated in the bill. I'm interested in your assertion in your submissions that the risks of building owners having access to data centres are limited and that the approach in the bill is based on a misunderstanding of the relationship between owners and tenants. I wonder if you wanted to elaborate on that, because that is a significant proposition that we may need to engage with as a committee in thinking about the way the legislation practically works.

Mr Morrison : I'd be delighted to. It's a really important point. Typically, when we're talking about data centres—or any commercial asset, but data centres as well—in the property asset that houses the data centre there might be a number of investors in that property asset. The management of the property asset would be undertaken, normally, by a real estate investment trust [inaudible] components of that exercise. But there might be a number of parties, some of which are offshore investors in that asset. So you've already got one step removed. If you've got an offshore investor in that asset, they don't have any operational control. They're not on the ground doing the normal property management activities of a property manager; they're removed already. Then you've got the fact of the difference between the owner of the property asset in total, including whatever mix of investors actually own the asset, and what's happening within the data centre. Overwhelmingly, with the ownership of the asset you wouldn't be able to access the contents of that asset—the tenants' space—without the authority or the approval of the tenant.

I understand if the government is concerned about security issues and about information being held on data centres or, indeed, on servers within office tenancies. Yes, there may well be information, data, which has some sensitivity or security dimensions to it, but it's not managed by, it can't be accessed by and it's not owned by the property owner. And, if a component of that ownership is actually an offshore investor, typically the offshore investor is offshoring—he's not actually in the country—and he hands on the role in terms of the actual asset itself. So there are two gaps, or walls, between the data in the data centre and the offshore investor.

This is something which FIRB has been focusing on much more over the last couple of years, and the industry has not sufficiently understood—we believe, anyway—the reality that there is a difference between a box and who owns the box and the contents of the box. That's the fundamental difference between the landlord and the tenant, and, in this case, with the landlord having a foreign investment component.

Senator McALLISTER: I would hazard a guess that the issue that is driving this particular set of reforms is that the risk of unauthorised access might be magnified in cases where an entity has physical access to a place—and we can certainly make inquiries about that with the government witnesses who are appearing later today. My final question is whether you think the recommendations that you make for exemptions or streamlined approvals for trusted foreign investors might assist in managing some of these issues to the satisfaction of your industry.

Mr Morrison : The risk here with the change the government's making is that it's increasing the ambit of the issues that it wants to focus on—and it has clearly seen quite a big task there, because it's quite a significant additional requirement of FIRB resources. The risk here is that that extra focus is not confined to what that focus should be confined to—that is, not confined to where the security risk is. What that does is delay, and cause further uncertainty around, foreign investment in what is otherwise a pretty vanilla investment, such as commercial property. So that's the big risk. And that risk is heightened if some of these definitions are not clear enough, and it's heightened or accentuated if you've also got a fee regime which also is not targeted. The risk we see, which is clearly evident in the draft fee regime—the draft regulation—is that it just assumes that a larger investment must create additional security concerns, and, therefore, that justifies very, very large increases in fees, and those two things just don't go together, because you're talking about commercial real estate, which is a capital-intensive business but very vanilla from a security perspective.

Senator McALLISTER: Okay. Thank you.

CHAIR: We will need to move on to our next witnesses. We thank you all very much for your time today.