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Standing Committee on Economics
Foreign investment in residential real estate

CURTIS, Mr Christopher Donald, Managing Director, Curtis Associates


CHAIR: Welcome, Mr Curtis. I remind you that although the committee does not require you to give evidence under oath, the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. Thank you very much for appearing here today. I recognise the tight timetable that you are on. Thank you very much for the very comprehensive submission. If you would like to make an opening statement before we proceed to questions, that would be most appropriate now.

Mr Curtis : I would like to thank you, Madam Chair, for the opportunity to address this committee on what I think is an exciting opportunity perhaps to make a difference in an area that we have been specialising in since about 2007, and informally prior to that since about 1983 in various capacities. In addition to adopting the remarks made in my submission, and I will not repeat those in the interests of time, together with the article that we published on 30 April which is incorporated by reference in that submission, that forms part of this opening statement.

The topic in my respectful submission that this inquiry is dealing with raises a very important national issue. Relative to the equities market, the residential real estate market, as you know, is by far and away the single largest asset class in this country. Relative however to the equities market, the disclosure obligations that pertain in that market are radically inadequate compared to the equities market. This inquiry, I hope, represents an opportunity to redress that difficulty and, in my respectful submission, what you are here dealing with in terms of foreign buyers and overseas investors in residential real estate is but the tip of a very large iceberg, and unless you deal with the broader iceberg you will be going around in circles in terms of gathering the evidence, assessing that evidence and then working out what the appropriate policy settings are.

In our view, infecting this whole area of endeavour is the quality of the data. It is trite to say that whilst there is a lot of available data in the ether, the fact of the matter is that it comes from one side of the transaction. We specialise, in a sense, in drilling down into that data and discharging our duties as property advisers and buyers' agents, and when you do that on a regular basis you do become profoundly aware of the deficiencies in the data. In our view—and it is a serious comment—so one-sided is the data in that it comes from the vendor side of the market and emanates from research houses themselves owned by media outlets, which in turn have a vested interest in propping up the appearance of a very buoyant market, and you have a situation when you aggregate that across the nation where you have a very one-sided view of what is actually occurring in the market, a view that has been peddled by the side of the transaction that has a vested interest in maintaining prices, that serious deficiencies emerge. It is no small remark to say that we think that that phenomenon translated nationally has contributed in some major measure to the high level of unaffordability for this particular asset class. The important thing from our point of view is to try to redress that imbalance.

It would seem to us that there are in any transaction, typically, professionals upon whom it could be incumbent to report information real-time, as we have said in our submission. For example, most protagonists in a buying and selling situation would certainly be represented by a real estate agent on the selling side—and obviously we have a vested interest in hoping that that changes on the buyer's side, as we are exclusive buyers' agents—but one thing that is for certain is that each of those parties will be represented by either a conveyancer or a solicitor. I know that this is an era of cutting red tape, but it is really no great step to require, for example, those solicitors and possibly those real estate professionals within a 24-hour period to remit the information about the sale, including sale price and salient detail about the asset and nationality, to a central body or central bodies at both a state and a federal level.

I see this inquiry as a wonderful opportunity—with respect—to attack a national problem both on a national level and on a state level. It would absolutely immeasurably change the way in which we go about our business by opening up the transparency of the market, levelling the playing field and ending this hegemony that the vendors have over the provision of data. The problem with the provision of the data is not only its selectivity and its extremely one-sided emphasis on auctions, which represent but a very small percentage of the 550,000-odd transactions that occur per annum in Australia. They also represent a distorted view because typically prices paid at auction are going to be higher than prices paid in a negotiated private treaty. I listened with interest to the previous submission that made a similar sort of finding. The reality of the situation then is not only that the quality of the data would be improved by a mandatory reporting regime of the type that I have posited but also that it would give everyone a better opportunity to know exactly what is occurring in that greater part of the market that is not transacted under auction conditions.

I see no reason whatsoever—and we have tested this proposition in many respects—against a simple form that made it mandatory to disclose, punishable as a criminal offence not to so disclose, to a central agency, disclosing nationality. It would be doing, for example, something akin to a 100-point check that happens when you are opening a bank account and that sort of thing. When you consider the various red tape that a conveyancer or a solicitor acting in a matter has to go through to discharge their obligations, this is a very small ask. Looking at the public interest, the public interest to be served by mandating such a reporting requirement far outweighs any red-tape considerations, in our view.

So to summarise again: I see this not just as a very exciting opportunity to address the issue of foreign investment, because that would be taken up in such a mandatory reporting regime, but also as an opportunity to get some decent data for a change.

CHAIR: Thank you very much, Mr Curtis. I have three key questions before I throw to everybody else on the committee. My first question relates to your submission around data and the lack of comprehensive data. We have received quite a number of submissions to date on that very point. I am curious to understand your view that it should be supplied within 24 hours of a sale taking place as opposed to at the point at which there might be a transfer. Is there any reasoning behind that 24-hour time frame that you have put on that?

Mr Curtis : Indeed. We are fond of saying—and I listened to the people from RP Data and so forth; their real method of analysis is to look at things on a macro basis—that we tend and make money for our clients, as it were, and advise them not to buy things by focusing very much on the micro basis. We eschew the notion, for example, that there really is any one thing like the Sydney property market. The truth is that there are multiple submarkets operating in one side of the street or the other.

The difference typically between exchange of contracts and settlement can be six to 12 weeks, and it is even longer before that information becomes available from the LPI. In the world of real estate, that is a world of difference. In the same way that the trading of equities can spike and a market can go up and down in the bat of a eye or even less, it might not be quite as acute in the real estate market but there are a lot of transactions occurring minute by minute, and those transactions which, for example, occurred 12 weeks earlier than another transaction for a similar asset could turn out a radically different situation. For example, if you look at the election just gone, if you drill down into some of the transactions occurred, the week of the budget produced a very profound downward dip in certain asset classes. We specialise over the million-dollar bracket. It was very noticeable that no matter which measure or metric you used—we do not use median prices, but if you used sales volumes, sales values—there is no doubt that the budget, for example, had a profound effect. That effect bucked a trend, but was reversed in the following week when certain records were established. So in a sense the budget is a classic illustration of how significantly a market minute by minute can be affected by micro exogenous shocks.

CHAIR: I am not aware of any example in the world where they have that almost real-time data available in that 24-hour period. Could that not lead to a highly speculative market in the property area, if it was done on that real-time—

Mr Curtis : With respect, there is a suppressed premise there. The property market is already a highly speculative market. This would just be a better-informed, more-transparent speculative market. It is a very delicious asset class that excites a lot of passion, particularly in the residential sphere. It is a market in the residential, commercial and industrial sphere punctuated by scarcity. Good assets are hard to find. It does not matter where in the price point you are. The point I am making is that the speculative nature of the market is a function of the asset class and its appeal to great numbers, rather than the timing of the data that relates to how those people express that appeal.

CHAIR: You made comments about penalties for people who do not observe the exiting framework at the moment. Currently there are criminal sanctions if people do not do as they are meant to under the existing framework. Would you have a view around the idea of civil penalties that might apply and whether this might encourage people to better understand the rules and abide by them?

Mr Curtis : I do, and I thank you for that question. I read closely and with interest the first publicly available transcript of Mr Wilson, as of yesterday. What I took from it was that there are no criminal penalties. There was a bit of resistance to that notion that what penalties exist are of a civil type.

CHAIR: It is the reverse. There are criminal penalties at the moment, but as we understand it no prosecutions have taken place, because of the high threshold.

Mr Curtis : The high threshold and the mental element that might be necessary to establish that. I am former barrister of 16 years. My view is that that is easily fixed by just changing the nature of the penalty and making it a strict liability offence, where you remove the mental element and just make the reporting obligation mandatory. In our experience as buyers' agents I have to say that these anecdotes one hears about this xenophobic notion of Chinese buyers regularly approaching third-parties to buy on their behalf in my view just do not stand scrutiny and are not consistent with our experience. In our experience there has been a profound regard to do the right thing by the laws of the land in which these people are intending to buy. I am not saying it does not happen. I simply do not know. But what I can say is that without exception it is inconsistent with our experience that such schemes occur.

It would be my view that it would run on the same model as the self-assessment under income tax. Everyone fears the tax office. It is a self-assessment basis and you get the relatively high-profile prosecutions. That makes people stand up and take notice. If there is an endorsement on a form saying that there are criminal penalties applying that are 10 times higher if you are a corporation, even for those providing, for example, personal guarantees to a corporation or a trust, and simple non-disclosure is enough to trigger liability and guilt, my submission is that that would be a very profound driver towards providing reliable data. The questions and the tick box could be designed to test more accurately what the nationality is, what the connection is, and, if necessarily, the source of the funding, which could be quite important in this era of anti-terrorism and so forth.

CHAIR: On the point about penalties, under the current existing framework penalties are focused directly on the foreign investor who might be purchasing the property. Do you think those penalties should be extended to third parties—for instance, real estate agents or others—who might knowingly be involved in contravening the existing framework?

Mr Curtis : I think in principle it is probably a good idea. But based on our experience I would say that it is probably of academic interest, simply because I cannot see the commercial incentive for somebody wanting to put, for example, a $1 million or $10 million acquisition into the name of some third-party stranger with whom they might have just a fleeting contractual relationship. A time will come where that property presumably has to be conveyed out of that name. There will be stamp duty and so forth. So as a deterrent I think it would be—

CHAIR: I am not simply referring to those circumstances that you have described. I am referring to the circumstances in which somebody deliberately does not contact FIRB to apply for approval for the purchase of the property, and where somebody who is involved in that transaction may know this. In those circumstances do you think it is appropriate?

Mr Curtis : Very much so. It is the same model as the consumer protection act—a 'knowingly concerned' type provision that implicates other people with knowledge, actual or constructive, could not hurt.

CHAIR: My final question concerns taxes, because this is not addressed in your submission and I would be interested in your view given your experience in this market. We have had a number of submissions from different people who have suggested that Australia is somewhat different to the rest of the world in the stamp duties that we apply for foreign investors, in that there is no difference. Do you think that if higher stamp duties, or particular fees for foreign investors or even higher capital gains taxes, as exist in other countries, were to apply that would have an impact on foreign investment in Australia?

Mr Curtis : I am not sure that I am qualified to answer that. I will proffer a view that in a sense underlying that question is the chicken and egg type argument. Until we know what the data is and the contribution that foreign investors make for example to the supply of new housing, it is difficult to know what impact such a measure would have. From the developers point of view, as a property professional—and you will hear from others more qualified than me I am sure—it is a tremendous buffer no doubt to be able to secure pre-sales from foreign investors, in terms of getting projects off the ground and establishing feasibility. A regime like that is likely to discourage that sort of outcome. Once you have your decent data, through the mechanism I advocate, only then can you unravel the circle and work out exactly what contribution foreign investment makes to the market generally and that dynamic in particular. I think then you can make a value judgment as to the appropriateness or otherwise of those measures. But my gut reaction to that is that a discriminatory regime like that is probably not a great idea and it sends a poor message in this so-called Asian century.

Mr CONROY: I suspect your answer to this will be that you are not in this particular market, but as a buyers' agent, are you aware of any large unit developments—particularly ones over 100—where there has been no marketing done in Australia but instead it has all been done overseas?

Mr Curtis : That is probably a function, as you surmised, of our not being in that area of the market. We tend to stay away from the generic product.

Mr CONROY: I put to the Property Council last week that, if everyone is right in saying that there are not significant abuses or breaches of the law, one way of increasing public confidence is to dramatically ramp up the penalties. So you are saying to the public that you do not think it is happening, but if it does happen people are going to get a really hard whack. Do you think that is a reasonable way of trying to insert more public confidence into this area?

Mr Curtis : I think penalties should be ad valorem, in a similar way as stamp duty—$85,000 on a $500,000 transaction would be a complete impediment, whereas $85,000 in a $15 million transaction would be a fly in the ointment. If you are going to have penalties you should peg it to the asset value and make it really hurt.

Dr HENDY: I do not know that in your presentation you actually said the extent to which you have observed a breach of the rules. Being in the market, to what extent have you observed a breach of the rules in seeking Foreign Investment Review Board approval?

Mr Curtis : We have not explicitly made reference to the commission.

Dr HENDY: I am not saying you have. But you have seen through competitors—

Mr Curtis : The answer is no. Indeed, when I was extended the privilege of addressing this inquiry, I did actually send an email, for example, to the Real Estate Institute of New South Wales and the agents there inviting—obviously on a no-names basis—any anecdotes of experiences that they may have had. I have received not one response. I think that is highly unlikely to be a function of the practice being rife and people having a lot to hide; I think it is more consistent with it not happening.

Conversely, the blogosphere goes quite alive with this sort of thing. We know some of the people—in my view quality people—who do that. I have actually had a conversation, to prepare myself for this address, with one of those people who gave the impression in the blogosphere that it was rife and is regularly happening. Without going into details, when I probed this particular person on the basis for that belief, I was not persuaded at all.

Dr HENDY: Being involved in the market and being involved through the industry, what is your view about the source of financing? When foreigners come in to purchase residential property in Australia, where, from your point of view, are they principally getting their financing?

Mr Curtis : They are getting it locally.

Dr HENDY: They get it locally in Australia? From whom?

Mr Curtis : Yes, without exception. They get it from local banks—

Dr HENDY: Do they get it from the principal banks?

Mr Curtis : Yes, from principal banks, the majors. I can think of some of our larger acquisitions done by people who are absolutely, fairly and squarely, foreign non-residents.

Dr HENDY: So you are pretty confident in that opinion?

Mr Curtis : Yes, I am. This one matter I would volunteer that goes to this question of penalty and reputation and the role of FIRB. There is a duality or an ambivalence—or the perception of an ambivalence. You get some people who say, for example, 'FIRB is like being hit with a wet cabbage leaf' or something. That very same source related an anecdote where that person and a journalist put forward a bodgie application to FIRB with an absurd name of an alleged Russian person with a false passport but attributed to an actually existing property, and obtained an approval in an hour. I have no reason to doubt that that anecdote was correct.

There is a view abroad among certain people that FIRB is under resourced and, in a sense, a little bit of a pushover. The ambivalence is a view that in our direct dealings with FIRB or with clients who have had direct dealings with FIRB, is not one that those clients share. It could be that we are blessed with a very law-abiding clientele who are fearing of the local rules—and I think that is exactly right. One of those is factual and the other one anecdotal. How they sit, I do not know. But I do think that whilst ever there is a perception that the regulator is a toothless tiger, you have a system that needs to be improved upon.

CHAIR: That actually was going to be the question I asked around financing so I think I am satisfied. Thank you very much, Mr Curtis, for your time and for your submission. We very much appreciate it.