BTR Series Part 9—Navigating the Need for Foreign Investment Approval

In Part 9 of this series, we take a closer look at the foreign investment considerations for build-to-rent (BTR) projects. In particular, we consider the circumstances where a foreign developer or financier would likely need to obtain confirmation from the Federal Treasurer that the Commonwealth of Australia does not object to a particular action (FIRB approval). This is commonly referred to as “FIRB approval”, as the Treasurer receives advice from the Foreign Investment Review Board (FIRB) when deciding whether or not to approve an action.

LET’S RECAP: WHO NEEDS APPROVAL?

Under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (Act), a “foreign person” is defined as:

• An individual not ordinarily resident in Australia; 
• A corporation, trustee of a trust or general partner of a limited partnership where:
  • An interest (or a beneficial interest in the income or property of a trust, in the case of a trustee) of at least 20% (Substantial Interest) is held by an individual not ordinarily resident in Australia, a foreign corporation or a foreign government; or
  • Two or more foreign persons hold an aggregate interest (or an aggregate beneficial interest in the income or property of a trust, in the case of a trustee) of at least 40% (Aggregate Substantial Interest);
• A foreign government or foreign government investor (FGI).

A foreign government investor is a:

• Foreign government or separate government entity; or
• A corporation or trustee of a trust, or a general partner of a limited partnership in which:
• A foreign government, separate government entity or foreign government investor holds a Substantial Interest; or 
• Foreign governments, separate government entities or foreign government investor of more than one foreign country (or parts of more than one foreign country) hold an Aggregate Substantial Interest.

The definition of foreign government investor can include, among other things, investment funds or portfolio companies for investment funds in which state-owned enterprises, sovereign wealth funds, public sector pension funds or public universities have a direct or indirect interest.

Due to the tracing provisions under the Act and the definition of a foreign person, an entity may still be considered to be a foreign person due to indirect upstream ownership interests by foreign persons.

FOREIGN DEVELOPER—VACANT SITES

FIRB approval is required for the acquisition of vacant commercial land and vacant residential land for a BTR project, as the monetary threshold for these actions is AU$0.

Vacant commercial land is land that contains no substantive permanent buildings that can be lawfully occupied by persons, goods or livestock, or land on which a wind or solar power station is not located. 

Vacant residential land is land:

• That has no substantive permanent buildings that can be lawfully occupied by persons, goods or livestock;
• Where a wind or solar power station is not located on the surface of the land;
• On which the number of dwellings that could reasonably be built is less than 10; and
• Where the land is not being used wholly and exclusively for a primary production business.

Set out below are the conditions that are usually imposed when FIRB approval is granted for acquisitions of vacant land. 

Land Type	Conditions
Vacant commercial land	Conditions usually imposed for acquisitions involving vacant commercial land are that: The land is developed; Continuous construction of the proposed development commences within five years of completing the purchase; and  The land is not sold, transferred or otherwise disposed of prior to the development being completed. However, given the acquisition is made for the purposes of a residential development, the conditions usually imposed on acquisitions of vacant residential land may be applied (see below).
Vacant residential land (with no previous residential dwelling situated on it)	If approved, the following conditions are generally applied: The purchase price being no greater than the value specified in the approval; At least one residential dwelling being built on the land;  Construction of all dwelling(s) being completed within four years from the date of notice of approval;  Evidence of the completion of the dwelling(s) being submitted to the government within 30 days of being received; and The foreign person not selling, transferring or otherwise disposing of their interest in the land prior to construction of all dwelling(s) being completed.

Once developed, there are generally no ongoing conditions about the foreign person’s use of the property. FIRB guidance provides that developers may rent out the property.

FOREIGN DEVELOPER—EXISTING RESIDENTIAL PROPERTY

FIRB approval is required for acquisitions of residential land, as the monetary threshold for such actions is AU$0. 

However, the Australian government’s policy is that foreign persons are generally prohibited from purchasing established dwellings unless it relates to:

• Foreign persons applying to purchase an established dwelling for redevelopment where the redevelopment will genuinely increase Australia’s housing stock;
• Temporary residents purchasing one established dwelling to use as their place of residence while they live in Australia; or
• Foreign-controlled companies applying, in limited circumstances, to purchase an established dwelling to house their Australian-based staff.

FIRB’s published guidance clarifies that the policy goal of increasing Australia’s housing stock means that at least one additional dwelling is created on the land and that, where an existing dwelling is or has been demolished, FIRB approval would generally only be granted if, for each dwelling demolished, at least two new dwellings are built. Expansions of an existing dwelling, including by way of granny flats or other private guest accommodation, would not be considered to represent a genuine increase in Australia’s housing stock. 

The Australian government’s current foreign investment policy does not appear to have specifically considered BTR projects and, indeed, would appear to restrict BTR projects involving acquisitions of existing residential properties, unless the project involves an increase to Australia’s housing stock.

However, this may change given the potential that such projects have to address the current issues with rental supply and affordability that have resulted in Australia’s current housing crisis (see Parts 1 and 7 of this Series). 

Set out below are the conditions that are usually imposed in circumstances where FIRB approval is granted for acquisitions of residential land.

Land Type	Conditions
Residential land that has an established dwelling that will be demolished to build new dwellings in its place	The purchase price being no greater than the value specified in the approval; The property being vacant at settlement, and no part of the existing dwelling being occupied from the date of settlement to the commencement of demolition; The demolished dwelling being replaced with multiple dwellings, each of a comparable size and value to each other; Construction of all new dwellings being completed within four years from the date of notice of approval; Evidence of completion of the dwellings being submitted to the government within 30 days of it being received; and The foreign person not selling, transferring or otherwise disposing of their interest in the land prior to construction of all dwelling(s) being completed.
Residential land that has an existing dwelling that will be retained with new dwellings built alongside	The purchase price being no greater than the value specified in the approval; The property being vacant at settlement; At least one additional dwelling, of a comparable size to the existing dwelling, being built on the land;  No part of the existing dwelling being occupied from the date of settlement until construction of the additional dwelling(s) is complete; Construction of all additional dwelling(s) being completed within four years from the date of notice of approval; Evidence of completion of the dwelling(s) being submitted to the government within 30 days of it being received;  The foreign person not selling, transferring or otherwise disposing of their interest in the land prior to construction of all dwelling(s) being completed; and Once construction of the new dwelling(s) is complete, one or more of the dwellings on the land being made available for use by independent third parties (e.g., by renting out or selling the dwelling(s)).
Vacant residential land that previously had a dwelling on it	The purchase price being no greater than the value specified in the approval; Multiple dwellings, each of a comparable size and value to each other, being built on the land; Construction of all the dwellings being completed within four years from the date of notice of approval; Evidence of completion of the dwellings being submitted to the government within 30 days of it being received; and The foreign person not selling, transferring or otherwise disposing of their interest in the land prior to construction of all dwelling(s) being completed.

Even in this context, FIRB guidance suggests that once the property has been acquired, there will not generally be conditions on the foreign person’s use of the property that would permit the property being subsequently rented out.

FOREIGN DEVELOPER—COMMERCIAL PROPERTY TO BE REDEVELOPED AS RESIDENTIAL LAND

FIRB approval is required for acquisitions of developed (nonvacant) commercial land where the relevant monetary threshold is met (see below). This may be the case where office or retail spaces are converted to BTR products.

Foreign Person	Threshold in 20231
Private (non-FGI) investors from Chile, China, Hong Kong, Japan, New Zealand, Peru, Singapore, the Republic of Korea, the United States of America, the United Kingdom and any other countries not otherwise listed (other than Australia) for which the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership, done at Santiago on 8 March 2018, is in force (i.e. Canada, Mexico, Malaysia and Vietnam).	AU$1.339 million
Private (non-FGI) investors not included in the above.	AU$310 million Where the land is sensitive2: AU$67 million
FGI	AU$0

There are no “standard” conditions imposed where FIRB approval is granted for acquisitions of non-sensitive developed commercial land. However, as details of the proposed intention for the land are included in applications seeking FIRB approval, and applications are usually assessed on this basis, we consider it unlikely that FIRB approval would be granted subject to conditions restricting the conversion of the land to residential land. The inclusion of limiting conditions may also be seen to be inconsistent with the push for increased housing availability, which, as flagged elsewhere in this article, is FIRB’s approach when considering a foreign developer’s acquisition of existing residential property.

BTR SCHEME FUNDED BY FOREIGN PERSONS

A security interest over Australian land is considered to be an interest in Australian land under the Act. This means that the grant of a security interest over land to foreign persons and the enforcement of such an interest by foreign persons who have, or are funding, a BTR project may require FIRB approval. 

As a security interest is often granted at the start of a project when the land is vacant commercial or residential land (unless the project involves refurbishments to developed commercial land), the relevant monetary threshold may be AU$0. 

Moneylending Exemption—What is It? 

Helpfully, there is an exemption to FIRB approval for interests held by way of security or acquired by way of enforcement of such security held solely for the purposes of a moneylending agreement. 

A moneylending agreement is defined as an agreement entered into:

• In good faith and on ordinary commercial terms; and
• Either:
• In the ordinary course of carrying on a business of lending money or otherwise providing financial accommodation (Moneylending Business); or
• Relating to the purpose of lending money or providing financial accommodation by an entity created predominantly for that purpose by a person or entity in the ordinary course of carrying on a Moneylending Business where the entity, before entering the agreement, did not carry on a business unrelated to the purpose of lending money or otherwise providing financial accommodation. 

The agreement must not deal with any matter unrelated to the purpose of lending money or otherwise providing financial accommodation. 

It also extends to an agreement to acquire an interest from a Moneylending Agreement by a person or entity carrying on a Moneylending Business or created predominantly for that purpose by a person or entity in the ordinary course of carrying on a Moneylending Business or a subsidiary or holding entity of these entities.

Additionally, for the exemption to apply, the entity that holds or acquires the interest must be:

• The lender;
• A subsidiary or holding entity of the lender;
• A person who is (alone or with others) in a position to determine the investments or policy of the lender (or its subsidiary or holding entity);
• A security trustee who holds or acquires the interest on behalf of the lender, a subsidiary or holding entity of the lender, or a person who is (alone or with others) in a position to determine the investments or policy of the lender (or its subsidiary or holding entity); or
• A receiver, or a receiver and manager, appointed by or in relation to one of the above persons.

Additional Requirements

For an interest in residential land, the moneylending exemption applies only if the lender or a holding entity of the lender is an Authorised Deposit-taking Institution (ADI) or otherwise licensed as a financial institution (whether or not in Australia). If the lending entity is not an ADI but is otherwise licensed as a financial institution, it can only benefit from the moneylending exemption if it has at least 100 holders of securities, 100 members or is listed for quotation on an official list of a stock exchange. 

If a foreign government investor acquires an interest by way of enforcement of a security held solely for the purposes of a moneylending agreement, the moneylending exemption will only apply if:

• For a foreign government investor that is an ADI or a subsidiary of an ADI:
• 12 months have not passed since the acquisition of the interest; or
• At least 12 months have passed since the acquisition of the interest and the foreign government investor is making a genuine attempt to dispose of the interest;
• Otherwise:
• Six months have not passed since the acquisition of the interest; or
• At least six months have passed since the acquisition of the interest and the foreign government investor is making a genuine attempt to dispose of the interest.

There are also restrictions on the application of the moneylending exemption where the interest acquired involves national security land or an interest in the assets or securities of a national security business.

ONGOING CONSIDERATIONS

Annual Vacancy Fee 

Once the BTR project is built, the foreign developer will need to ensure the project is rented out. If not, it will be required to pay an annual vacancy fee if the property is not residentially occupied or genuinely available for rent for more than 183 days (approximately six months) during a year.³  The vacancy fee is generally equivalent to the residential land application fee that was paid by the foreign person at the time the application for FIRB approval to purchase the property was made. In circumstances where the application fee was waived, the vacancy fee payable will be equal to the lowest tier foreign investment application fee that would have been payable. 

Register of Foreign Ownership of Australian Assets

Foreign persons will also need to be aware that acquiring a legal freehold interest in Australian land (among other things) will trigger the requirement to provide notice under the Register of Foreign Ownership of Australian Assets (Register). The need to provide notice does not involve a monetary threshold, so foreign investors should consider whether they must provide notice even if they were not required to obtain FIRB approval. Once notice has been provided, foreign persons will need to provide further notices to the Register if:

• They cease to hold the legal freehold interest in Australian land; 
• They cease to be a foreign person; or
• There is a change in the nature of the interest in Australian land, i.e., commercial land becomes residential land.

As a general rule, foreign persons must give the Register notice within 30 days of the relevant action occurring (i.e., acquiring the interest or a change in the nature of an interest in Australian land, etc.).