THE PROPERTY DEVELOPMENT REVIEW
to the investment, resulting in a loss of -$7,420 per annum. Case study two – Foreign investor return forecast on Melbourne investment apartment A foreign investor has purchased an off-the-plan, one bedroom apartment for $550,000, with a taxable land value of $77,000. The intention is to lease the apartment for an extended period, aiming to generate rental income as a return on the investment. The forecast income is shown below:
Predicted sell-off of investment properties The recent changes in land tax duty in several jurisdictions, particularly Victoria, combined with the interest rate crunch have combined to make it almost impossible for foreign owners to hold an investment property over the long term. Despite increasing rents, property income is heading towards losses for foreign owners as additional duties and interest costs are outstripping rent. The proposed Victorian State Budget (2023-24) comes with even greater taxes which may be the catalyst for foreign owners to exit the market entirely. • From 1 January 2024, the rate of the Absentee Owner Surcharge will increase from two per cent to four per cent of the unimproved value of the land. Absentee Owner Surcharge is a ‘second’ land tax on top of the existing land tax payable for all types of property investors. The minimum threshold will also reduce from $300,000 to $50,000 for Land Tax and Absentee Owner Surcharge, meaning almost all properties will now be subject to the duties.I • A ‘COVID-19 debt temporary surcharge’ will also apply in addition to land lax: − a $500 flat fee will apply for taxable landholdings between $50,000 and $100,000. − a fixed fee of $975 will apply to taxable landholdings between $100,000 and $300,000. − for taxable landholdings above $300,000, a $975 fixed surcharge will apply and an increased rate of land tax by 0.10% of the value of the landholdings.
2020
2023
Stamp Duty
$72,070
$86,170
Rent
~$400-$450
~$550-$600
per week
per week
Annual rent
$23,400
$31,200
(upper range) Expenses Management fee Council rates Body corporate Income before interest, tax and duties Less interest payments (Assume 60% Loan-to-Value) fees Water rates
6%
6%
approx. $1,200 p.a. approx. $2,500 p.a.
approx. $1,200 p.a. approx. $2,500 p.a.
$500
$500
$17,796 p.a.
$22,560 p.a.
$16,500 p.a.
$26,400 p.a.
(5%* interest rate)
(8%* interest rate)
Less Land tax
Nil
$500 p.a.
Less Absentee owner surcharge Total annual income or loss
Nil
$3,080 p.a.
Source: SRO website, https://www.sro.vic.gov.au/state-budget-2023-24-announcement
$1,296 -$7,420 p.a. * A foreign purchaser without Australian income has limited finance options and higher interest rate, normally 2-3% higher than the local home loan rate. Source: SRO website, https://www.sro.vic.gov.au/state-budget-2023-24-announcement
The change in policy means some foreign investors will start to receive a land tax bill for the first time, as the reduction in minimum threshold to $50,000 will trigger land tax on almost all property holdings. Case study two shows the financial return for a foreign investor with an apartment in Melbourne. The combination of increasing interest costs and land tax proves to be detrimental
According to recent reports from CoreLogic, the proportion of investor-owned sale listings has surged to its highest point in 12 months, with Australian mum-and-dad investors divesting their investment properties due to interest rate increases and possible rent caps being proposed by the Victorian State Government. Foreign investors are likely to jump ship soon too, especially when 2024 surcharge duties hit their account. KordaMentha Real Estate is anticipating a wave of foreign investors exiting the Melbourne apartment market in the next 18 months, likely at a discount to the original purchase price. Some may argue this is a good thing for housing affordability for local owner occupiers, however, it creates a dilemma for new supply as developer’s feasibilities will come under significant pressure. What we know is that the sellers will likely lose, but we don’t know who the buyers will be. Will it be first home buyers looking to replace their rental or a local investor looking for a cheap deal? Either way, this is not going to provide the traditional developer any confidence to bring new apartment products to the high density, affordable and lettable apartment market. Perhaps institutional “Build-to Rent” will be the antidote, but this may require more aggressive tax incentives given the low returns derived from residential property.
August / September 2023 – 9
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