March 23, 2015 1:00 pm JST
Property Down Under

Australia forces Chinese tycoon to sell Sydney mansion but 'welcomes' foreign investment

By Geoff Hiscock, Contributing writer

The Villa del Mare mansion, which Chinese businessman Xu Jiayin is being forced to sell, is in Sydney's exclusive Point Piper area.

SYDNEY -- Are we welcome in Australia or not? It is a fair question from foreign investors looking to buy Australian assets, following a shock ruling in mid-March that will force one of China's richest men, Xu Jiayin, to sell a Sydney harborside mansion that his Evergrande Real Estate Group bought for $39 million Australian dollars ($30 million) less than five months ago.

     According to Australian Treasurer Joe Hockey, the answer is yes. "We welcome all foreign investment that is not contrary to our national interest," Hockey said on March 3 as he revealed the decision against Xu's company over what he determined was an illegal purchase.

     The latest figures show Australia is a hot destination for Chinese property buyers across residential, commercial, agricultural and leisure sectors, with about A$2.5 billion of investment in 2014 and several major deals already made in the first quarter of 2015.

     Most recently, Sunshine Insurance Group in February paid about A$40 million for the Chateau Elan boutique hotel and spa and its associated Vintage Golf Club in the Hunter Valley, and plans to spend another A$100 million building a 300-room hotel on the site.

     In January, Fosun Group paid A$117 million for an office block in north Sydney in partnership with Australian company Propertylink, with Fosun chairman Guo Guangchang saying the Australian property market was "well known for its stable growth and transparency."

     Last year's two biggest China-related deals were both in Sydney -- Dalian Wanda Group bought Gold Fields House, a landmark office tower that overlooks Circular Quay and the Opera House, for A$415 million in December, while Sunshine Insurance Group bought the luxury Sheraton on the Park Hotel for A$463 million in November.

     But it is the enforced sale of Xu's Sydney mansion, along with proposed reforms that will tighten government scrutiny of foreign investment in Australia and make it more expensive, that worry some participants in China's outbound property scene.

Australia on China's radar

Property adviser Simon Henry, founder and co-chief executive officer of the Hong Kong and Shanghai-based real estate information source Juwai.com, told the Nikkei Asian Review that he was hearing from premium buyers that "everything depends" on "what the Australian government does next."

     He warned that if Canberra "continues to act unpredictably and aggressively against foreign investors, premium buyers may simply stop coming to Australia." In addition, he said, the imposition of application fees on foreign investors "makes Australia that much less attractive."

     Property construction driven by foreign investment had become the most vibrant sector of the Australian economy, and the government "risks breaking the one sector that is showing rapid growth," he added.

     While Henry believes it is too early to assess the true fallout from the Xu decision, recent figures show Australia is firmly on the Chinese property radar. The country was China's third-largest property investment destination last year, behind the U.S. and second-ranked Britain, with about A$2.5 billion invested. Of this, more than A$1 billion was spent on commercial office space, according to data compiled by property agency JLL.

     In launching its 2015 Australian office market review and outlook on March 12, JLL said it believed that "2014 represents the tip of the iceberg for Chinese investment in the Australian office sector."

     Several Chinese companies have already embarked on major redevelopments of office space, in some cases targeting the hotel and new apartment markets. For example, Shanghai-based Greenland Holding Group, which bought the Sydney Water Board site in the central business district of Bathurst Steet for A$110 million in 2013, expects to complete its A$600 million Greenland Centre hotel and residential development there in 2017. Greenland Group is also partnering with James Packer's Crown Resorts to bid for the new Brisbane casino development at Queen's Wharf in the city, and has a 1,200-apartment project underway in Melbourne near Flemington racetrack.

     But the debate is focused on the residential and agricultural sectors. This was reflected in Hockey's comments that more residential property deals might face scrutiny and in his joint statement with Prime Minister Tony Abbott on Feb. 25 that the government will act to "strengthen Australia's foreign investment framework for residential real estate and agriculture."

90 days to sell

Xu, a 56-year-old Guangzhou resident better known in Hong Kong by the English transliteration of his Cantonese name Hui Ka Yan, is the first big foreign investor to fall foul of Australian government regulations since 2006. Xu bought the luxury harborside mansion Villa del Mare on a 1,500-sq.-meter block of land in Sydney's exclusive Point Piper through an Australian shelf company, Golden Fast Foods, in Nov. 2014.

     Hockey said Golden Fast Foods was ultimately owned by Xu's Hong Kong-listed Evergrande Real Estate Group, via a string of shelf companies in Australia, Hong Kong and the British Virgin Islands. By law, foreign investors have to notify the Australian Foreign Investment Review Board (FIRB) before buying residential real estate. The general rule is that non-resident foreigners cannot buy established dwellings as homes or investments.

     "Golden Fast Foods is a foreign-owned company which failed to notify FIRB of its intended purchase," Hockey said. Under his March 3 order, the company has 90 days to sell the property to an approved buyer or face possible referral to the Australian Commonwealth Department of Public Prosecutions.

     An enforced sale by the June 1 deadline is unlikely to fetch a record price, according to real estate agents, even though average Sydney house prices have risen more than 13% in the past 12 months. But a potential loss on the sale may not be a big concern for Xu, whose majority stake in Evergrande Group gives him a net worth of $6.3 billion, according to Forbes magazine's latest billionaires list.

     Immediately after the enforcement decision, Evergrande spokesperson Ke Peng said the group had used a law firm in Australia to handle the Villa del Mare purchase, and would fully cooperate with Australian authorities to ensure compliance.

     Evergrande Real Estate Group did not respond to NAR's request for further comment on Hockey's decision through its Hong Kong-based public relations firm, iPR Ogilvy.

     In their joint statement, Hockey and Abbott said a lack of compliance and enforcement of the residential buying rules in recent years was "threatening the integrity of the [foreign investment] framework."

    "We need to make sure that all foreign investors are following the rules, and that those who break the rules are not able to profit from breaking the law," they said.

''Highly sensitive area''

Hockey's proposed reforms include setting up a special investigative and enforcement unit within the Australian Tax Office to monitor foreign investment in residential real estate. There will be new civil penalties and increased criminal penalties for foreign investors and third parties who breach the foreign investment rules. The government is also considering bringing in an application fee on all foreign investment proposals, based on the type of investment.

     It intends to introduce an A$55 million screening threshold for foreign investment in Australian agribusiness, subject to public consultation on the definition of agribusiness. Submissions on the proposed reforms had to be submitted by March 20.

     The Abbott government has already acted in the sensitive area of agricultural land, where some farming groups claim too much of the country's food-producing capability is already in foreign hands. Since March 1, the screening threshold for agricultural land purchases -- as distinct from agribusiness -- is a cumulative A$15 million, down from A$252 million previously.

     In a joint statement detailing the change on Feb. 11, Abbott, Hockey and Agriculture Minister Barnaby Joyce said that while the government continued to welcome foreign investment, the Australian community "must have confidence that this investment is coming in on our terms and for our nation's benefit." Joyce told the National Farmers Federation congress last October that an area two and half times the size of Victoria state was now foreign-owned. "Land ownership is a highly sensitive area," he said.

     While there has been some Chinese buying of dairy and other farmland in recent years, British, American, Canadian and Japanese interests have bigger holdings of Australian agricultural land.

     From July 1 this year, the Australian Tax Office will start collecting information on all new foreign investment in agricultural land regardless of value, and will also begin a stocktake of existing agricultural land ownership by foreign interests.

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