The drivers of overseas investments in the Australian residential property market

Wong, P 2016, The drivers of overseas investments in the Australian residential property market, Doctor of Philosophy (PhD), Property, Construction and Project Management, RMIT University.

Document type: Thesis
Collection: Theses

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Title The drivers of overseas investments in the Australian residential property market
Author(s) Wong, P
Year 2016
Abstract Active participation by foreign investors in the Australian residential property market has been most evident since the Global Financial Crisis 2008 (GFC 2008). According to National Australia Bank, 16% of the total sales in Australian new housing markets were transacted into the hands of foreign buyers in 2015 with Foreign buyers’ involvement reached 21% in NSW and Victoria (NAB, 2015). Furthermore, Janda (2014) predicted that Chinese investors and newly arrived migrants would be investing approximately AUD44 billion into Australian residential real estate market over the next seven years. Empirical studies only shed limited information on new overseas private wealth’s investment characteristics and strategies. These relatively distinct and unique investment behaviours are set to impact on the Australian residential property market significantly based on an entirely new perspective of global cross border private wealth investment strategies.

According to Savills (2014), direct-owned residential property contributes 83% of the total value of property in the world of USD180 trillion. As a comparison, Australia’s residential property market is valued at AUD5.93 trillion (based on 0.745 USD:AUD exchange rate as at 30th June 2015) with a housing mortgage market of AUS1.47 trillion (CorLogic, 2015). Since the GFC 2008 house prices in both Sydney and Melbourne have continued to escalate with Australia receiving strong endorsement from the international investment community, being the seventh and ninth most popular Foreign Direct Investment (FDI) destinations in the world in 2012 and 2013 respectively; attracting USD57 billion in 2012 and USD50 billion in 2013 (UNCTAD 2013, UNCTAD 2014).

This research focuses on the emerging overseas investor determinants for the Australian residential property market subsequent to the GFC 2008. The aim of this study is to determine whether there is historical evidence and whether there are emerging trends to support the existence of a significant relationship between overseas investors and residential housing markets’ performance. This research will first examine the established residential property market performance in metropolitan Melbourne and two Melbourne suburbs which have attracted substantial overseas investment interest. The foreign investment elements in Melbourne’s housing market will be assessed through a case study on Chinese investors. This reflects the significance of recent FDI funds emanating from China. The result of this research aims to provide a better understanding of the relationships between the performance of the Australian residential housing market and its market determinants in terms of both existing and emerging factors. The study yields empirical evidence that can potentially assist policy makers in making informed decisions to promote Foreign Real Estate Investment (FREI).

Research was undertaken using a mixed method (quantitative and qualitative) approach. A “sequential explanatory” mixed methods research design was used to provide a better understanding of the multifaceted Australian housing market. Quantitative research constituted the first phase of secondary data analysis upon which the theory was built for the second phase qualitative analysis. The qualitative analysis involved semi-structured interviews with real estate professionals in Australia and China. The qualitative phase helped to support and validate the new determinants discovered in the quantitative study. The entire research was guided by adopting the three-market model depicted by (Archer and Ling, 1997), reinforced by Higgins (2010) as the research platform to facilitate a structural approach on the research coverage in this study. As Australia has become increasingly relevant in the era of globalisation, an attribute labelled “Overseas Government Policies” was added to the model. It constituted the “Push & Pull” model established in this study to encompass the “push factor” from overseas exerting a new investment dimension and its weight onto the local property market.

This quantitative research fell into the classification of “predictive” design. House prices in the selected suburbs were predicted using the models established in this study and they were compared with the latest residential property price trends as part of the validation measure on the models established. Three statistical analyses were applied, namely Pearson Correlation Coefficient Matrix, Multiple Linear Stepwise Regression and Descriptive Analysis. The qualitative research was conducted in both onshore and offshore locations to solicit validations and in-sights on the new investment trends and determinants. A series of semi-structured interviews were conducted with eight senior ranking real estate professionals in Melbourne and seven senior ranking real estate professionals in China. Results of this phase assisted in justifying, or otherwise, the findings that overseas conditions and new drivers played a part in the Australian residential property market performance.

Past empirical evidence revealed that traditional investment portfolios which comprised a mixture of equity and bonds were either too volatile or provided an unacceptably low return (Ley, 2001). Global real estate had gained significant attention from the world investment community due to the relatively low volatility and relatively high returns. Real estate had emerged as an investment option among both the large institutions and private investors seeking diversification on a global stage. In the midst of extensive internationalisation and deregulation, Australia’s residential property sector was identified as one of the major contenders for global investors seeking improvement to their investment portfolio due to its relatively stable economic and political conditions.

Regression analysis on secondary data was performed on Melbourne Metropolitan, Clayton and Doncaster house prices. Based on the correlation matrix and the three regressions equations, factors associated with offshore investments had primarily shaped the models and emerged as a relevant metric at least as significant as other traditional economic indicators. For example, 10-year Government Bond Yields, Foreign Currency and Net Overseas Migration were significantly correlated and formed the crucial components of the regression equations and correlation matrix. These components were found to have higher significance than other more traditional residential market determinants such as rent growth, GDP per capita and net saving rates in Australia.

In this study, typical investing characteristics by new global private investors in Australia were discovered. These global private investors looked beyond the traditional purpose of portfolio diversification in their decision making on Australian residential property investment. They placed great emphasis on “emotional” value factors such as clean air, recreation parkland and the secured Australian living environment. They sought residential properties for leisure, for their offspring and some ultimately aiming for attaining Australian permanent residency. It is believed that as long as Australia maintains its favourable liveability standards, foreign investors from all over the world, not just China will continue to invest in the Australian residential property market owing to its strong brand presence.

Residential Tourism (RT) was identified as an emerging determinant of the Australian residential property market. Residential Tourists (RTs) carry both the characteristics of being tourists and migrants. In this study, RTs have been categorised into High Net Worth Individuals (HNWIs) and Middle Class individuals. Note that both categories “live” life here in a similar style to an Australian resident and they spend money in Australia much like tourists. While enjoying leisure activities much like tourists, the extensive duration of their stay in Australia resembles the profile of a migrant to Australia.

Education was validated repeatedly empirically as a major component of the Australian service industry and offer, potentially overtaking iron ore as one of the largest foreign exchange income sources (Loussikian, 2015). Contrary to common perceptions that international students were mostly confined to tertiary degree courses, exploration in this study revealed an emerging trend of international student enrolments in Australia’s primary and secondary schools. As a result, international students have been residing in Australia for a much longer period of time compared to the 1980s or 1990s. This emerging trend further incentivised overseas-based parents to invest in the residential property market in Australia for their children’s accommodation purposes. This study revealed that decision making by these international students was mainly focused on the relative reputation and cost of Australian tertiary institutions compared to alternative universities in the United States and United Kingdom. They would decide to have their education in Australia in their earlier years as a “pathway” to be eventually admitted to a reputable university.

This thesis is the first to take the research “cross-border” whereby interviews were conducted with the senior real estate professionals in both Australia and China. This research identified the latest investment decision making process undertaken by both the Chinese HNWIs and the expanding Middle Class. Important insights on major investment determinants such as China’s “1 + 1 = 2” phenomenon, China’s “going-out” policy and “Capital Deflator” effect were uncovered and discussed. These findings established empirical validations of offshore investments in Australia’s residential property market with an increased understanding.

Through merging both the new overseas inward investment patterns and the domestic conventional determinants of the Australian residential property market, a new trend in the Australian residential property market was identified. The emergence of this group of global property investors who have looked beyond the traditional valuation methods had lifted the Australian residential property market to a new prospective. Empirical evidence established in this thesis can provide appropriate assessment and analysis platform for the Australian residential property market which has become increasingly complex due to the uprising influences of various offshore variables. These factors must not be overlooked and should be added to the traditional valuation method so as to enhance the relevance of research outcomes.
Degree Doctor of Philosophy (PhD)
Institution RMIT University
School, Department or Centre Property, Construction and Project Management
Subjects Housing Markets, Development, Management
Investment and Risk Management
Tourism Economics
Financial Economics
Keyword(s) Residential property
Foreign Real Estate Investment (FREI)
Cross border investment
Private investor
Housing market
Residential tourism
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Created: Fri, 23 Sep 2016, 13:34:12 EST by Keely Chapman
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