A new wave of foreign direct investment into Australia – from China and many other countries – is just the latest episode in a story that reaches back to 1788.
“China is Australia’s biggest foreign investor after $12b property splurge” – so went a headline earlier this year in Australia’s daily business newspaper, the Financial Review. Its readers would have been well advised not to jump to conclusions. Mainland Chinese investors rank seventh on the list of foreign buyers of Australian assets, and Hong Kong is sixth, according to figures from the Australian Bureau of Statistics (ABS). The US, UK and even Belgium have more financial interest in the land Down Under.
While it’s true that Chinese investment is expanding fast, it’s just one part of a larger foreign investment boom. That boom has repercussions across Australian business. It is also changing the rules on foreign investment – but probably not in a way that will seriously slow cash flows.
A history of investment
Since Europeans landed at Botany Bay in 1788, Australian investment has been paid for partly with overseas money. Even 226 years later, the song remains the same. Australia was the eighth-largest recipient of foreign direct investment (FDI) inflows in 2014, according to the UN Conference on Trade and Development (UNCTAD).
“Mainland Chinese investors rank seventh on the list of foreign buyers of Australian assets, and Hong Kong is sixth.” Doug Ferguson, head of Asia business with KPMG
It’s clear that Australia has been going through a new foreign direct investment boom. UNCTAD’s figures put Australia’s 2014 FDI at 4.2 per cent of the global total. It dropped slightly in 2014 (by 4.4 per cent), but Australia’s FDI flows remain well up on their average numbers before the 2008 global financial crisis (GFC). In 2014, FDI in Australia was US$51.9 billion – greater than for Germany, France, Japan, Italy, South Korea and even India.
It’s also clear that Chinese foreign investment has played a big role in this boom. In 2013-14, China for the first time ranked as Australia’s biggest source of approved annual foreign investment, according to the Foreign Investment Review Board (FIRB). Chinese investors were approved for A$27.7 billion, overtaking US investors, who were approved for A$17.5 billion.
US dominates investment stocks
Has this new wave of investment made Chinese entities the biggest foreign owners of Australian investments? Not at all. ABS data for 2013-14 says that even excluding portfolio investment, China is just Australia’s fifth-largest investor with 4 per cent of foreign investment stock. That’s equal with Singapore and behind the Netherlands (6 per cent), Japan (10 per cent), the UK (13 per cent), and the US (24 per cent). Australia-China trade is almost a quarter of Australia’s total; compared to that, China’s share of Australian FDI seems relatively low. Count portfolio investment, too, and China holds just 2.3 per cent of foreign-owned assets.
Top foreign investors in Australia
The diversity of Australia’s 2014 foreign investors shows in the year’s biggest deals: the A$6.5 billion purchase of Toll Holdings by Japan Post, the A$2.4 billion takeover of energy group Envestra by Hong-Kong-based multinational group Cheung Kong, the A$2.9 billion sale of Shell’s downstream oil businesses to Swiss-based oil trader Vitol, Canadian Baytex’s A$2.6 billion buy-up of Aurora Oil & Gas, and the A$2.2 billion takeover of retailer David Jones by South Africa’s Woolworths Holdings.
Malaysian and Singaporean investors were also approved for many billions of dollars of direct investment, according to FIRB. All those deals followed the Australian Government blocking a A$3.4 billion takeover of local grain-handling business GrainCorp by US-based Archer Daniels Midland in November 2013.
Spending beyond housing
While previous foreign investment from US and Japanese interests centred on businesses or commercial property in Australia, Chinese investors appear to have a different focus – real estate. More than 40 per cent (A$12.4 billion) of China’s approved new foreign investment in 2013-14 was in Australian real estate, FIRB reports.
While Australia’s media shout long and loud that the Chinese are snapping up existing homes for exorbitant prices and shutting out local buyers, the figures show the big Chinese money is going into building new dwellings, presumably for rental.
As China’s economy expands and broadens, HLB Mann Judd director Nick Guest expects Chinese buyers will be looking hard at other large investments coming to market, including infrastructure such as the Port of Darwin, New South Wales power assets and the Port of Fremantle. He also suggests mid-tier miners will come back onto Chinese investors’ radar.
Allan McKeown, CEO of Prosperity Advisers, believes Australia’s service sector can capitalise on China’s desire to diversify investments.
US $51.9billion Australian foreign direct investment inflow, 2014 Source: UNCTAD World Investment Report 2015
He says it’s important to look beyond the A$500-million-plus Chinese acquisitions that have already occurred in major port infrastructure (Newcastle), construction (John Holland), leisure (Hoyts) and mining (Aquila Resources). Recently he’s done work for a Chinese business that plans to spend A$20 million in Australia annually, and he sees a big potential for smaller asset purchases by Chinese investors – but that will require investor education (see “Boutique Approach” on page 50).
Chinese investors won’t be alone in their interest. Brett Himbury, chief executive of IFM Investors, believes that a paucity of home-grown deals in the US is about to trigger a “tsunami” of capital for Australian infrastructure, as American funds focus on infrastructure as an asset class.
There’s far more capital than deals on the ground, and he expects cashed-up American funds will join Chinese investors in circling Australian infrastructure assets. It’s already happening. California Public Employees’ Retirement System (CalPERS), with US$300 billion of assets, reached a deal in May with Brisbane-based investment group QIC to find and manage A$1 billion in Asia-Pacific infrastructure assets.
The politics of foreign investment
In Australia as elsewhere, foreign investment can be a magnet for political controversy. An upsurge of Japanese investment in Australia in the late 1980s triggered concern about a Japanese buy-up of Queensland real estate and tourism businesses. That concern evaporated with Japan’s 1990s slowdown, but the attitudes remained. After conducting a nationwide poll in 2014, the Lowy Institute think-tank found there was “undeniably some concern” about foreign investment in supposedly strategic industries such as “minerals, and agricultural land”.
Successive Australian Governments have tried to quell these concerns with new foreign investment rules. These began to tighten in 2009, and this year the government has instituted reviews of foreign acquisitions of agricultural land worth more than A$15 million, and started a register of foreign agricultural land ownership. At the same time, free trade agreements mean foreign investment has been freed up for US, NZ, Korean and Japanese investors – with China next off the starting line.
Actual intervention against foreign investment has been rarer. The current wave of Chinese investment has triggered stronger enforcement of rules against foreign buyers owning investment properties. That crackdown stopped Chinese millionaires from buying two Sydney mansions in 2013-14. A far bigger intervention was the government’s blocking of Archer Daniels Midland’s GrainCorp bid in 2013 – but that rejection remains unusual.
Why do house prices keep rising in countries like Singapore and Australia?
As Guest notes, most Australian acquisitions are bought for their underlying synergies and left to operate independently. Over time, Australians have grown used to each succeeding wave of overseas owners. There’s little sign that the latest wave will turn out any differently.
Chinese companies know about Sydney (its home state of New South Wales attracted 72 per cent of total Chinese investment in Australia in 2013-14) and also about Melbourne. However, Allan McKeown from Prosperity Advisers says Australian professional services firms have to get better at educating Chinese buyers about what else is out there.
“Business won’t just fall into the lap of professional service providers,” he says.
Business with Chinese investors can be more relationship-driven than transactional, so McKeown says firms offering boutique professional services within niche markets have a better chance of success, regardless of whether they’re in audit work, tax structuring or wealth management. Firms have to narrow their focus, he says.
“Those that try to be ‘all things to all’ will come undone,” he warns.
“Australia’s at the tip of the iceberg with foreign investment, especially with China.” Allan McKeown, Prosperity Advisers
Australian accounting, legal, consulting and financial service firms are well represented in Hong Kong. However Doug Ferguson, head of Asia business with KPMG, says they need to play catch-up in mainland China.
The China-Australia Free Trade Agreement (ChaFTA) promises to open up the services sector and remove many of the major obstacles. Yet Ferguson says a niche strategy, and awareness of Chinese regulators support of a strong domestic professional services companies, remains imperative.
He reminds Australian service firms that willingness by Chinese firms to pay fees is less about “the contract” per se than the sense of added value and the warmth of relationships with key decision-makers. “We need to understand that for the Chinese … life is a pursuit of building important networks.”
Australia’s recently inked landmark China-Australia Free Trade Agreement (ChaFTA) follows similar deals with South Korea and Japan, and could have far-reaching implications for investments.
The bilateral trade deal will allow private Chinese investors to make a single investment of US$950 million [A$1.08 billion] without review by the Australian regulators.
According to a recent report in the People’s Daily newspaper, China’s government is encouraging its firms to boost their return on equity (ROE) by buying more profit-oriented foreign companies, and diversifying their US-dollar risk.
HLB Mann Judd director Nick Guest says this initiative, along with ChaFTA, will see China’s acquisition of Australian assets reach double-digit growth in short order.
Australia’s Foreign Investment Review Board must still review all deals by entities with more than 15 per cent foreign government ownership, creating particular hurdles for investment by China’s state-owned enterprises.
This article is from the September issue of INTHEBLACK
6 economists who predicted the global financial crisis