Are Foreign Developers Loving Us to Death?

This week’s $147.5 million sale of Nine Entertainment’s Sydney headquarters to Hong Kong-based developer Euro Properties was another reminder that foreign developers are here in force.

While debate continues to rage about the effect of foreign investment on residential housing, mainly due to home affordability concerns, the discussion of foreign development activity has been much more muted.

This is despite the fact that foreign developers have similar effects upon the market to residential investors in key respects.

Just as foreign property investors bid up home prices, there is evidence that foreign developers from countries with much lower borrowing costs are bidding up the price of development sites, crowding out their local competitors.

According to CBRE’s latest Viewpoint report, of the 116 inner city property assets sold across Sydney, Melbourne and Brisbane in the 12 months to April, 36 were acquired by Chinese investors.

“Sites incorporating development opportunity have risen in prominence over the last two years,” said report author Stephen McNabb, who is Head of Research at CBRE.

“Domestic economic and residential market risks in China have led investors and developers to diversify interests offshore into relatively safer markets.”

CBRE said that Sydney and Melbourne dominate the demand for Australian assets. Of the 36 Chinese deals, 16 were in Sydney, 15 in Melbourne and just 5 in Brisbane.

Hong Kong developer Forise Investments $1 billion Gold Coast mega tower.[/caption]Despite the huge and growing influx of Chinese developers, reports have started to emerge that some may be getting cold feet as they come to terms with Australia’s complex regulatory environment.

One foreign-owned development site, the former CUB complex in Swanston Street on the fringe of Melbourne’s CBD, has already been resold.

The sale in March this year delivered a capital gain of $33 million for Singapore-based Chip Eng Seng.

Chip Eng Seng has not left the market though. It is currently building a 71-storey building, called Tower Melbourne, in Queen Street.

According to CBRE, the picture for investment by foreign developers in other Australian markets is mixed.

“We expect the undersupply of housing to sustain a healthy flow of development related capital in Sydney over the next 1-2 years, while other markets in which the market fundamental area more skewed towards oversupply, may see a relative slowing in overall activity,” CBRE said.

And in an ominous sign, its Viewpoint report flags that Chinese interest in existing office, retail and industrial assets is starting to increase, meaning local developers will face increasing competition in these markets too.