PROPERTY OF PITCHER PARTNERS

DECEMBER 2012

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PROPERTY OF PITCHER PARTNERS

4 WELCOME

5 PROPERTY TRENDS

7 DON’T MISS OUT ON A GOOD PROPERTY OPPORTUNITY

8 PITCHER PARTNERS STATE TAX REVIEW 2012/2013

9 INVESTING IN THE NATIONAL AFFORDABILITY SCHEME

10 PROPERTY DEVELOPERS BUILDING TIES WITH MALAYSIA

11 KNIGHT FRANK COMMERCIAL UPDATE

CONTENTS

Cover Photo

An elevated view of

high-rise buildings in

Shanghai, China. View

to Jin Mao Tower (one of

China’s tallest buildings)

and Shanghai World

Financial Center.

© Pitcher Partners 2012

The Shanghai World

Financial Center (left)

and the landmark,

88-story, Jin Mao Tower

(right) in Shanghai, China

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WELCOMEWelcome to our inaugural edition of Property of Pitcher Partners. This publication will be produced biannually and provide insights on national property issues including tax, general trends and sentiment data.

Our first edition takes a close look at the surge of Asian investment into the Australian property market. We have asked investigative journalist, Nigel Hopkins to explore what is driving the investment and what Asian investors are looking for in Australian assets.

In addition Andrew Clugston, Director Pitcher Partners Melbourne looks at the trend of Malaysian private family groups investing in Australia and how Pitcher Partners is helping

to connect our clients with these investment opportunities. Knight Frank has also contributed their latest property data focusing on Asia’s appetite for commercial property in Eastern CBD markets.

Other articles include a wrap-up of the annual Pitcher Partners State Tax Review 2012/13, tips for Self Managed Superfunds and a closer look at the National Rental Affordability Scheme (NRAS).

We welcome your feedback - if you have any suggestions on articles you would like us to cover in future editions please send them through to lauren.hughes@pitcher-sa.com.au.

Pitcher Partners and Property

Property is a key specialisation and passion for Pitcher Partners. We are attuned to the needs of all players in this complex and exciting sector – owners, developers, investors, builders, valuers, agents and debt/equity participants.

Pitcher Partners has a well-established and proven track record in contributing to our clients’ success based on our extensive knowledge and our intimate approach to servicing our clients.

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PROPERTY TRENDSAsian Property Investment in Australia

Nigel Hopkins, Journalist

Foreign investment in Australia’s property markets has continued to increase on the back of the country’s stable economy and high-yielding assets, with Asian buyers leading the charge.

According to the latest research from Colliers International, the third quarter of 2012 saw foreign investors behind 67 per cent of all direct and indirect commercial property transactions across Australia, compared to 30 per cent during the third quarter of 2011, taking total foreign capital inflows to $6.3 billion so far in 2012.

Most of this has come from Asia, with investors from Singapore (33 per cent), Malaysia (20 per cent) and Hong Kong (10 per cent) accounting for nearly two thirds of the total.

Chinese buyers in particular, both corporate as well as well-heeled Mum and Dad investors buying apartments for their student children, have given new hope to Australian real estate agents. If evidence were needed of surging Chinese wealth, it came with the admission by the Chinese consortium behind a $300 million takeover of Australia’s largest cotton plantation that it needed more cotton for the linings of its luxury superfine wool suits for China’s emerging middle class.

“China is the sleeping giant,” says Colliers National Director of Capital Markets James Quigley. “At present 24 per cent of Australia’s two way trade is with China, but we get only 2 per cent of its direct foreign investment. That’s likely to increase significantly.”

Quigley says a lot of Chinese investment comes via Singapore, a regional hub for global investors, mostly aimed at office investment and mostly on the eastern seaboard, but there is also considerable interest from Chinese mum and dad investors keen to get some of their wealth out of China and into Australian residential property.

While the US and UK remain bigger targets for Asian property investment, given the high Australian dollar and perceptions of better value in those countries, Australia remains attractive for its political and economic stability, ease of access, familiarity with many Asian investors, and the lack of property investment alternatives in the south-east Asia region.

Vanessa Rader, Director, Consulting and Research Services for Knight Frank Australia, says it’s difficult to generalise but middle class Asian buyers are typically middle aged, buying for investment purposes but also often for educational purposes (for children studying abroad), and with a strong preference for newly built stock.

“Asian investors are only really interested in major cities like Sydney and Melbourne, however they will consider Brisbane,” Ms Rader says.  “For residential, the driving force is international students and the need to provide convenient and safe housing for family. The number of Chinese students has increased over the last couple years as other groups, such as from India, have fallen, so demand for housing stock is still high.

“For office investment, it is the attractive yields currently on offer and the yield spread to bond rate can show this.  We have high yields by international standards and investors look to Australia as a relative safe haven for investment. Asian investors are only interested in A grade buildings within Sydney or Melbourne CBD and are yet to move strongly into other non-core markets or properties that need development. Retail and industrial are yet to be a class that the Asian market understands or wants to invest in.”

Rader’s Singapore-based colleague Nicholas Holt, Knight Frank Research Director, Asia Pacific, says the relative proximity of Australia to Asia and China is an important factor, as well as the fact that cooling measures in China have pushed more capital abroad and gateway cities in Australia have proved attractive.

Downtown financial

district, Hong Kong (PRC).

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This is supported by the Shanghai-based ANZ Bank’s Head of China Commercial Client Solutions Henry Moo, who says that while getting investment funds out of China has involved a lengthy approval process, the Chinese Government is now opening up the flow of funds from Chinese capital accounts and allowing cross-border letters of credit.

This has been boosted by a recent pilot financial reform program in the eastern city of Wenzhou, which is allowing residents to make direct investments overseas on a trial basis. Previously Chinese residents were allowed to invest overseas or invest in securities through asset management programs offered by financial institutions.

Moo adds that there’s also been an informal “grey area” in which Chinese individuals have been permitted to each remit up to USD50,000 a year, with pooling of funds to enable overseas property purchases, while Chinese companies also have been able to use assets or funds already sitting outside China, such as in Hong Kong.

The Australian property industry is rapidly having to change the way it does business in order to tap into this market.

While Colliers already has offices throughout Asia and, says James Quigley, 2000 employees in China alone, others such as LJ Hooker have signed a partnership agreement with the Chinese property website www.juwai.com to tap into that country’s rapidly expanding investor market. It has a similar deal with another group to target buyers in Malaysia, the Philippines, Indonesia, Macao and Hong Kong.

While Juwai reports that more than 63 million Chinese now have the wealth to invest in overseas property and 90 million Chinese go online to search for investment property, only 1 per cent of mainland Chinese can read English. It means Australian agents are having to change the way they cater for buyers, particularly those from China, with some hiring interpreters and employing Mandarin and Cantonese-speaking assistants to help with negotiations.

Knight Frank’s Vanessa Rader adds: “Some developers have been project marketing in Asia – although not too much and this will likely increase over the coming years.

“Developers will need to be sure they are marketing the right stock and get the right price points for each market, which are different in Singapore, Hong Kong, China and Malaysia.”

“63 million Chinese now have the wealth to invest in overseas property and 90 million Chinese go online to search for investment property”

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Monte Engler, Technical Adviser, Pitcher Partners Adelaide

In the past decade we have witnessed a massive rise in investors holding property within Self Managed Superfunds (SMSFs). One strategy that is often overlooked is to purchase a property as ‘Tenants-in-Common’. Purchasing a property as tenants-in-common allows two or more parties to own a specific proportion of property. This investment option may allow you to purchase that ‘must have’ investment for your property portfolio that your current personal finances do not allow.

Rules and regulations surrounding SMSFs are complicated so it is worthwhile seeking advice before conducting transactions. Below are some of the most commonly asked questions -

• Can I own this property together with a related party?

• Can the SMSF or the other party borrow or use the property as security?

• Can the property be developed?

Related Parties It is possible for a SMSF to hold a property as tenant-in-common with a related party, however there are prohibitions related to the acquisition of certain assets. Transactions must be on arm’s length commercial terms and issues may arise where transactions are conducted with related parties such as - SMSFs, family members, yourself in your personal capacity and related businesses.

From an operational perspective it is essential that the management of the property ensures that the share of income and expenses which relate to the SMSF are received by the SMSF on a proportionate annual basis.

Note: Due to superannuation regulations - if the property is residential, the SMSF is unlikely to be able to increase its share of the property in the future as SMSF’s are prevented from acquiring residential property from related parties.

Bank

Lends $200,000

Mum & Dad$50,000 in cash

SMSF$250,000 in cash

Property value of$500,000

DON’T MISS OUT ON A GOOD PROPERTY OPPORTUNITY

Borrowing The SMSF is allowed to borrow to finance the acquisition of its portion of the property. However a better tax outcome may be achieved if you can use the SMSF’s capital to buy its share of the property and the other investor (perhaps you in a personal capacity) can negatively gear. This allows the personal investor the benefit of a greater tax deduction (personal marginal tax rate versus 15% in superfund) and effectively increases the net worth of the family group (Diagram 1).

Only the SMSF’s portion of the property is able to be offered as security when borrowing. A bank acting as lender may not be satisfied with security over only a portion of the property, unless that portion was readily saleable in its own right; the bank may request additional security.

Care must be taken as the SMSF is prohibited from allowing a charge over any of its assets, except in a limited recourse loan scenario. Each tenant-in-common is only entitled to give their portion of the property as security for their borrowing. There is risk of the whole property being given as security where all the tenants-in-common are related parties.

Developing Developing is possible; however the superannuation fund cannot borrow to fund the development. If each owner funds the development with respect to their proportionate interest there is no issue. Non-SMSF owners could borrow to fund development.

Diagram 1.

• Whilst individually the SMSF and Mum & Dad may not be in a position to purchase the property - together they are able to do so

• This could result in lower levels of gearing and better cash flows overall

• It could unlock cash tied up in SMSFs and provide better investment alternatives

• The bank can only have security over the Mum & Dad proportion or may seek alternative security (i.e. personal home)

8 PITCHER PARTNERS STATE TAX REVIEW 2012/2013 How do property taxes compare around Australia?

John Ross, Partner, Pitcher Partners Sydney

The annual Pitcher Partners State Tax Review 2012/2013 highlights that the NT and the ACT provide more generous concessions to small and medium business when compared with their State counterparts.

The State Tax Review compares scenarios of two small to medium sized companies starting up and purchasing a property in each State and Territory. It ranks the annual tax impost of each state including WorkCover Premiums, Payroll Tax, Land Tax and transfer of land duties.

In Scenario 1, as outlined below, new entrant to the review NT heads the leader board on all State tax fronts, a clear winner from the long-established former champion QLD with the other States maintaining their order – Tasmania (3) and ACT (5) splitting the field. SA remains a distant last with its aggregate taxes and charges being 69% greater than NT but getting closer to the former leader QLD. In the area of WorkCover premiums, Victoria reduced its rates with NSW, QLD and WA increasing costs slightly. In the area of land tax, QLD has halved and ACT is significantly higher in these taxes.

In Scenario 2, long-standing leader QLD has dropped to fourth position in the mainland States comparison and fifth against the eight competitors. SA still tails off although the margin between it and the leader NT reduced slightly to 21% against the mainland States, but 43% when compared to NT.

The example illustrates that for a start-up operation the NT is seeking to attract new business. The once unassailable position of Qld has now been surpassed by NT and WA. This is perhaps indicative of the Newman Government’s need to fund the enormous infrastructure needs of that developing State.

In addition to taxes, a business’s decision as to where to locate their start-up operations is also likely to be influenced by other issues such as proximity to markets, property costs, logistics, wage rates and industrial relations laws. NT at the top of the continent adds some distance to supply nationally, but is well positioned to access Asian markets.

Perhaps due to the financial position of the States we only saw one minor payroll tax threshold increase change in NSW. There were, however, major payroll tax threshold changes in QLD and ACT which enhanced their competitiveness. Businesses that have purchased property and have a $5 million payroll in NSW and SA remain significantly worse off than their other State competitors.

The gap is smaller for the larger businesses as outlined in Scenario 2, and WA and QLD are closer to the NT under this scenario with only NSW and SA being outriders.

As we have witnessed in previous years, this year the States were unable to offer payroll tax cuts to stimulate business over the past 12 months. Payroll tax remains the main revenue-raising for State Governments and the race to lower rates has ended.

Payroll tax continues to be the largest single source of State Tax revenue and we are unlikely to see further deductions in payroll taxes unless there is a widening of the GST base and/or an increase in the GST rate.

AGGREGATE TAXES & CHARGES

STATE NSW VIC QLD SA WA TAS ACT NT

Total $165,604 $172,125 $144,350 $190,515 $150,602 $144,412 $157,763 $112,167

Rank 6 7 2 8 4 3 5 1

AGGREGATE TAXES & CHARGES

STATE NSW VIC QLD SA WA TAS ACT NT

Total $1,199,534 $1,034,729 $1,073,730 $1,208931 $998,941 $1,001,365 $1,166,240 $846,560

Rank 7 4 5 8 2 3 6 1

Scenario 1 – Business has an annual payroll of $1,133,103 (including superannuation). It purchases a property for $2,266,000. This property has an unimproved value of $1,155,000. Totals costs payable in State taxes and charges in first full year:

Scenario 2 – Business has an annual payroll of $5,665,000 (including superannuation). It purchases a property for $11,330,000. This property has an unimproved value of $5,775,000. Total costs payable in State taxes and charges in first full year:

“NT heads the leader board on all State tax fronts, a clear winner from the long-established former champion QLD…. SA remains a distant last with its aggregate taxes and charges being 69% greater than NT”

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INVESTING IN THE NATIONAL RENTAL AFFORDABILITY SCHEMEAndrew Beitz, Principal, Pitcher Partners Adelaide

Investment in the National Rental Affordability Scheme (NRAS) is growing within our client base with investors attracted by good cash flows and tax incentives.

The National Rental Affordability Scheme was introduced by the Federal Government in 2008 to address Australia’s housing affordability crisis. It is designed to encourage large-scale investment in affordable housing by offering significant tax offsets and tax-free cash incentives to investors that provide new housing to renters (in specific income categories) at a 20% discount below market rates.

The NRAS is not public or social housing but rather a tax incentive to provide quality housing at below market rates.

The current yearly incentives offered in 2012-13 comprise the following:

• A Federal Government contribution in the form of a refundable tax offset or payment to the value of $7,486 per dwelling

• A State Government contribution in the form of cash or an in-kind contribution to the value of $2,495 per dwelling

Some of the points of difference that NRAS offers to property investors are:

• The property has all the benefits of a normal investment property with added annual tax-free government incentives

• Investors can apply the normal range of property expenses and the tax free allowances coupled with a lower assessable rental income, increases the negative gearing benefit

• The latest statistics estimate that more than 1.5 million Australian households are eligible to rent NRAS properties, hence vacancy risk is negligible and the added demand means that selection of tenants is better than the traditional model

• Tenants are selected on their potential to be good tenants and their capacity to meet strict eligibility requirements

• NRAS dwellings are private property the same as any other property development

• In many markets, NRAS properties often deliver a cash flow positive investment on an annual basis

• Most importantly, Self Managed Superannuation Funds and traditional investment vehicles can purchase NRAS properties

When pitched correctly, developers we have spoken to say that their NRAS product is some of the first to sell.

At the same time the banks are very wary of NRAS housing in general and in some cases the valuers they use end up valuing the property at 80% of the purchase price in line with the rental discount. At the extreme end some banks even refuse to be involved especially if a Self Managed Superannuation Fund is the investor.

Even though these issues may seem daunting NRAS is an investment well worth considering.

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PROPERTY DEVELOPERS BUILDING TIES WITH MALAYSIAAuthor: Andrew Clugston, Director, Pitcher Partners Melbourne

As highlighted throughout this publication, Australia is witnessing an influx of foreign investors seeking to acquire Australian property. Of particular note is the number of Malaysian private family groups seeking to invest in Australia.

Many of our clients see Malaysia as an untapped source of investors for their development joint ventures or property syndicates. Bringing together the in-depth knowledge and experience of an Australian developer with offshore capital seeking a stable political and economic environment appears to be a logical partnership. However, Malaysian private groups are unlikely to respond to an invitation from an Australian developer without an introduction from their trusted advisors.

Pitcher Partners recognised this as a significant opportunity to help our clients. Utilising our connections through the Baker Tilly International network, Pitcher Partners sent a team to Kuala Lumpur in August this year to hold an Australian Property Road Show. Baker Tilly Monteiro Heng, our affiliate firm in Kuala Lumpur, hosted an Australian Property Seminar at which Pitcher Partners presented to a full house of 80 Malaysian clients. The presentations included an economic and property market overview as well as Tax and Foreign Investment Review Board issues. The Q&A sessions ran well overtime demonstrating the keen interest in Australian property.

The success of the seminar reinforced the level of interest in Australian property. Malaysian’s familiarity with Australia appears to have been

created, in part, through our education system. A number of the attendees fondly recounted their time in Australia as university students or talked proudly of their children attending Australian schools or universities.

The trip also provided an opportunity to meet with Malaysian solicitors and banks to gain a deeper understanding of financing and structuring international transactions.

Phase two of our cross border initiative sought to involve our clients in presenting specific opportunities for investors. Andrew Heng, Managing Partner Baker Tilly Monteiro Heng, Kuala Lumpur, visited Pitcher Partners Melbourne in late October to meet with several Australian property clients. The visit provided clients with the opportunity to discuss in detail the prospect of working with his clients. Andrew took back details of a number of projects and is currently presenting them to his clients.

A second trip to Malaysia was recently made in the last week of November to progress specific opportunities with our clients. We will report back on the outcomes of this trip in our next edition.

South East Asia provides a significant opportunity for Australian developers to access the capital they require to commence their new developments or fund investments. However, our experiences so far have taught us that Malaysian Investors are seeking long term partners and this should not be seen as a quick easy solution to solving funding problem. Building a strong rapport is imperative and those willing to take the time and effort to embrace this opportunity will be well rewarded.

Aerial view of Kuala

Lumpur city centre,

Malaysia

11KNIGHT FRANK COMMERCIAL UPDATE Asia Pacific investment appetite continues to grow

While the global economic recovery remains fragile, there has been some positive news as we move towards the end of 2012. The Asia Pacific region is forecast to continue to drive global growth for the next few years.

Following a solid recovery in Australian office markets in 2011, in line with the modest employment growth, leasing activity across Australia has steadied over 2012 as global financial market conditions led businesses to focus on consolidation, cost-cutting and productivity. In the resource states, softer commodity prices, particularly iron ore and coal, have seen markets soften from recent highs. However, in the case of Perth and to an extent Brisbane, this is being offset by positive growth in the oil and gas sector.

Most major investors, including global investors, are taking a long-term perspective. In terms of pricing, the level of global interest in Australia’s prime office markets continues to gather momentum. Currently, in Melbourne alone, Knight Frank are marketing commercial property expected to transact before the end of the year in excess of $200 million of which a large proportion of the enquiry has originated from offshore groups.

Knight Frank Managing Director of Commercial Sales, Paul Henley, said the Australian office vacancy rate fell to 7.8% as at July, well below its 20-year average of 10.3%, however, vacancy is anticipated to rise in the short term impacted by rises in sub-lease vacancy and the consolidation activity of tenants. Across Australia, vacancy rate trends were mixed in 2012 to date with vacancies trending down in Sydney and Perth in contrast to vacancies rising in Melbourne and Brisbane,” he commentated.

He said over the short term, rental growth is likely to be limited in most markets, with Melbourne and Brisbane rents predicted to contract. In contrast, Sydney and Perth CBD office assets are forecast to register modest rental growth over the next 12 months.

“Nonetheless, the case for real estate investment remains strong, with property yields in most global markets offering a significant premium over government bonds,” he said

Mr Henley said investors from Asia have emerged as major players in intercontinental commercial property capital flows. This year, they are likely to account for 20% of all property acquisitions involving global cross-border investors, up from 5% just five years ago.

Mr Henley said many of these high net worth private investors from Asia wish to crystallise the gains from local investments and diversify into the higher yielding investment opportunities in Australia.

Offshore groups continue to be attracted to the Australian office market which offers attractive income returns when considered from a global perspective. Average core market yields for prime office assets in Australia range from around 6.5% in Sydney to 8% in Perth; whereas, yields for many other major cities abroad average between 4% and 5%.

Mr Henley said, looking forward, the fourth quarter is historically the busiest quarter of the year and we do not anticipate that this year will be any different. There are a number of large deals in the pipeline, which should close before the 31st December.

CBD Office Sales Transaction Trend 2007-20122012 CBD Office Transactions by Purchaser Type

Australian CBD Office Vacancy

Private Investor

31%

34%

20%

7%7%1%

Unlisted Fund/SyndicateAREITOff-shoreSuper FundOther (eg Gov’t, Developer, Owner Occupier)

1,000

0

2,000

3,000

4,000

5,000

6,000$ millions

2007 2008 2009 2010 2011 2012 YTD

2.00.0 4.0 6.0 8.0 10.0

Sydney CBD

Melbourne CBD

Canberra CBD

Brisbane CBD

Perth CBD

Adelaide CBD

WHAT’S HAPPENING IN…. SOUTH AUSTRALIA

DECEMBER 2012

Adelaide Andrew Beitz Principal, Chair Property Committee Telephone +61 8 8179 2848 andrew.beitz@pitcher-sa.com.au

Melbourne John Brazzale Managing Partner, Co-Chair Property Committee Telephone +61 3 8610 5110 john.brazzale@pitcher.com.au

Perth Leon Mok Executive Director Telephone +61 8 9322 2022 mokl@pitcher-wa.com.au

Brisbane Nigel Fischer Partner Telephone +61 7 3222 8444 nfischer@pitcherpartners.com.au

Sydney Deborah Cartwright Partner Telephone +61 2 9228 2240 dcartwright@pitcher-nsw.com.au

MELBOURNE Telephone +61 3 8610 5000 partners@pitcher.com.au

SYDNEY Telephone +61 2 9221 2099 partners@pitcher-nsw.com.au

PERTH Telephone +61 8 9322 2022 partners@pitcher-wa.com.au

ADELAIDE Telephone +61 8 8179 2800 partners@pitcher-sa.com.au

BRISBANE Telephone +61 7 3222 8444 partners@pitcherpartners.com.au

The material contained in this publication is general commentary only for distribution to clients of Pitcher Partners. None of the material is, or should be regarded as advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from one of the Partners of Pitcher Partners. Pitcher Partners, its Principals & agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice. © Pitcher Partners 2011 PrintPost Approved PP381827/0043

Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation.

Increased Government assistance for new home buyers

The SA Government has announced an $8,500 boost for residential construction to help stimulate the flailing South Australian property sector. Premier Jay Weatherill announced that the Government is replacing the existing First Home Buyers Grant with a Housing Construction Grant, which means that a financial bonus is now applicable to almost everyone building or buying a new home.

The South Australian construction industry has been hit by a severe downturn and the property sector hopes that this stimulus will drive buyers to enter the market. “The number of new dwellings built in SA declined by 18 percent in the last financial year,” Mr Weatherill said.

“This new Grant and reforms to the existing first home owner scheme will provide an urgent boost to the state’s housing construction industry and help stimulate the property sector.”

South Australian Government Home Buyers Grants

Off-the-plan apartments in the city (until June 30, 2013)

First Home Buyers First Home Owners Grant $15,000 (For property valued up to $575,000)

Housing Construction Grant $8,500 (For property valued up to $400,000)

Stamp Duty savings $16,330 (Off-the-plan apartment valued at $400,000)

Maximum total assistance $39,830

Other home buyers Housing Construction Grant $8,500 (For property valued up to $400,000)

Stamp Duty savings $16,330 (For off-the-plan apartment valued at $400,000)

Maximum total assistance $24,830

Building or buying a new home (until June 30, 2013)

First Home Buyers First Home Owners Grant $15,000 (For property valued up to $575,000)

Housing Construction Grant $8,500 (For property valued up to $400,000)

Maximum total assistance $23,500

Other Home Buyers Housing Construction Grant $8,500 (For property valued up to $400,000)

Maximum total assistance $8,500

First Home Buyers of an established home (until June 30, 2014)

First Home Owners Grant $5,000 (For property valued up to $575,000)

Maximum total assistance $5,000