jll blake dawson australian real estate a legal guide for foreign investors september 2009

www.blakedawson.com

Des

ign

135

58 –

Sep

t 09

adelaide

Level 4 151 Pirie Street Adelaide sa 5000

t 61 8 8112 1000 f 61 8 8112 1099

brisbane

Level 36 Riverside Centre 123 Eagle Street Brisbane qld 4000

t 61 7 3259 7000 f 61 7 3259 7111

canberra

Level 11 12 Moore Street Canberra act 2601

t 61 2 6234 4000 f 61 2 6234 4111

melbourne

Level 26 181 William Street Melbourne vic 3000

t 61 3 9679 3000 f 61 3 9679 3111

Perth

Level 32 Exchange Plaza 2 The Esplanade Perth wa 6000

t 61 8 9366 8000 f 61 8 9366 8111

sydney

Level 36 Grosvenor Place 225 George Street Sydney nsw 2000

t 61 2 9258 6000 f 61 2 9258 6999

Port moresby

Mogoru Moto Building Champion Parade (po box 850) Port Moresby Papua New Guinea

t 675 309 2000 f 675 309 2099

shanghai

Suite 3408-10 34th Floor, CITIC Square 1168 Nanjing Road West Shanghai 200041, prc

t 8621 5100 1796 f 8621 65292 5161

singaPore

Unit #14-00 Level 14, ASO Building 8 Robinson Road Singapore 048544

t 65 6438 7886 f 65 6438 7885

associated office Jakarta

Soebagjo, Jatim, Djarot Plaza DM 17th Floor Jalan Jenderal Sudirman Kav 25 Jakarta 12910, Indonesia

t 62 21 522 9765 f 62 21 522 9752

www.blakedawson.com

For more information please contact:

Les KoltaiPartner, sydney real estate

t 61 2 9258 6113

[email protected]

Michael RylandPartner, sydney corPorate

t 61 2 9258 5627

[email protected] Australian Real Estate A legal guide for foreign investors

REIT

Hotel

Office

Retail

Industrial

Residential

Au

stralian R

eal Estate – A

legal guide for foreign

investors

© BLAKE DAWSON AND JONES LANg LASALLE 2009

Blake Dawson DisclaimerAustralian laws and regulations are constantly changing. This publication is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice.

We invite you to contact us for any further information or assistance. This work is copyright. However reproduction of any part is welcome with prior permission from Blake Dawson. Requests and inquiries may be emailed to [email protected].

Jones Lang LaSalle DisclaimerThe information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part.

This report is confidential to the party to whom it is addressed for the specific purpose to which it refers. No responsibility is accepted to any third party and neither the whole of the report nor any part or reference thereto may be published in any document, statement or circular or in any communication with third parties without our prior written approval of the form and context in which it will appear.

Cover image: ASX building, 20 Bridge Street, Sydney

welcome to AustrAliAn reAl estAte: A legAl guide for foreign investors , one of the Publications in our series of real estate guides, Published in conJunction with Jones lang lasalle.

About Blake DawsonOur focus is getting to the heart of your legal needs and delivering commercially astute and practical solutions. We have a proud history, long standing client relationships, a passion for challenging conventions and thrive on cutting edge work.

We provide legal services to Australia’s leading corporations and institutions as well as global corporations and government. We are privileged to work with many of the organisations who are shaping tomorrow’s industries.

Blake Dawson delivers more than just the law. We value our relationships with our clients and look forward to working with you.

our real estate PracticeOur Real Estate practice has an established track record of assisting our local and international clients with domestic and cross-border transactions, REITs, developments, joint ventures, real estate based mergers and acquisitions, and capital raisings. We act as a bridge between legal cultures and advise on highly complex transactions both domestically and across multiple jurisdictions. According to Chambers Global 2008, clients commend our ability to “provide impressive advice in narrow and pressured time frames” and work with “100% accuracy and timely reporting.”

For further information, please visit our website, www.blakedawson.com.

About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a professional services firm specialising in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2008 global revenue of US$2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.3 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than US$46 billion of assets under management.

Jones Lang LaSalle has over 50 years of experience in Asia Pacific, with over 17,500 employees operating in more than 80 offices in 13 countries across the region. We were the first commercial property firm to establish an Australian presence in 1958 and currently employ over 1,500 employees throughout our 13 offices across the country.

For further information, please visit our website, www.joneslanglasalle.com.

Page 59

Jones Lang LaSalle offices in Australia

Australian Real Estate – A legal guide for foreign investors

adelaide

Level 22 Grenfell Centre 25 Grenfell Street Adelaide SA 5000

t 61 8 8233 8888 f 61 8 8233 8836

liverPool

Suite 5 Level 5, 33 Moore Street Liverpool NSW 2170

t 61 2 8777 5533 f 61 2 8777 5566

north sydney

Level 27 North Point 100 Miller Street North Sydney NSW 2060

t 61 2 9936 5888 f 61 2 9957 5126

brisbane

Level 33 Central Plaza One 345 Queen Street Brisbane QLD 4000

t 61 7 3231 1311 f 61 7 3231 1313

mascot

Level 3 Sydney Airport Centre 15 Bourke Road Mascot NSW 2020

t 61 2 9693 9800 f 61 2 9313 5384

Parramatta

Level 8 79 George Street Parramatta NSW 2150

t 61 2 9806 2800 f 61 2 9633 9923

brookvale

1 Dale Street Brookvale NSW 2100

t 61 2 9938 3122 f 61 2 9939 7420

melbourne

Level 21 Bourke Place 600 Bourke Street Melbourne VIC 3000

t 61 3 9672 6666 f 61 3 9600 1715

Perth

Level 3 St Georges Square 225 St Georges Terrace Perth WA 6000

t 61 8 9483 8403 f 61 8 9481 0107

canberra

Level 9 15 London Circuit Canberra ACT 2601

t 61 2 6257 3099 f 61 2 6248 6038

mona vale

Suite 501 20 Bungan Street Mona Vale NSW 2103

t 61 2 9979 8844 f 61 2 9979 4488

sydney

Level 18 400 George Street Sydney NSW 2000

t 61 2 9220 8500 f 61 2 9220 8555

glen waverley

Ground Floor Brandon Office Park 540 Springvale Road Glen Waverley VIC 3150

t 61 3 9565 6666 f 61 3 9562 1725

newcastle

Corner Hunter and Auckland streets Newcastle NSW 2300

t 61 2 4929 1205 f 61 2 4929 2437 www.joneslanglasalle.com.au

John Talbot Head of Capital Markets

+61 2 9220 8486

[email protected]

Simon Rooney Retail Investment

+61 2 9220 8497

[email protected]

Stuart Crow Asia Capital Markets

+65 6494 3888

[email protected]

Australian Real Estate – A legal guide for foreign investors – September 2009

for further details Please contact:

Foreword – Blake dawson

The global financial crisis has had a direct impact on the Australian real estate market. The challenging environment for real estate investment, particularly among the A-REITs, has severely tested the robust nature and strength of Australia’s legal and regulatory system.

While confidence in Australia’s listed REITs and unlisted real estate funds has been shaken, the prevailing view remains that the fundamentals underpinning the Australian real estate market, when compared to other world markets, remain relatively strong.It is expected that foreign institutional investors, previously unable to access real estate opportunities in Australia due to the intense competition from A-REITs and wholesale real estate funds, will see the current economic conditions in Australia as representing unique buying opportunities, either directly or indirectly through REITs and unlisted real estate funds. It is apparent many investors are still wanting a balanced exposure to a resilient Australian economy with a track record built on well-established and detailed legal principles.

The legal and regulatory framework underpinning the Australian commercial real estate market has helped in protecting this market when compared to others. Over the medium to long-term, this system, is likely to contribute to the market’s success by encouraging flexible investment structures supported by rigorous disclosure and corporate governance. As in the past, this will allow the market to meet, at a high standard, investor criteria such as liquidity, security of title, tax “pass through” treatment, expert management, and transparent and responsive corporate governance.

This legal and regulatory framework will continue to serve as a template for other jurisdictions globally and continues to be regularly cited as an exemplar of an investor friendly framework that provides certainty and generates confidence.

This is not to suggest that the framework is set in stone: we see innovation as a constant feature of Australian real estate market.

A combination of a sophisticated market, an investor friendly framework and strong medium to long-term consistent returns will continue to support demand for clear advice on regulation, structuring and taxation of Australian real estate transactions.

We hope this guide will give foreign investors a helpful overview and practical information, so enabling them to gain a sound base of knowledge and understanding that will assist in their dealings with Australian real estate advisers and opportunities.

les koltai Partner Blake Dawson


Foreword – Jones lang lasalleAustralia has for many years been an attractive investment destination for foreign investors and our market has seen a steady influx of foreign capital from all parts of the world over several decades. This is not terribly surprising. Australia has told a very good story to foreign investors and they have been keen to gain exposure to our market.

Commercial real estate in Australia has offered solid and stable returns and an attractive environment for investors seeking stability in their globally diverse portfolios. Australia offers investors an extremely stable political environment and a stronger demographic profile than most developed nations due to higher levels of overseas migration.

Despite global economic uncertainty Australia continues to perform more favourably than most of the major world economies. With a large endowment of natural resources, a large and highly sophisticated professional services sector and a strong and well regulated banking sector, Australia is well positioned to continue to capitalise on strong long-term growth coming out of the Asia Pacific region, fuelled primarily by the sustainable growth in China and India.

Commercial real estate markets in Australia are as easy to negotiate as anywhere in the world, with the nation on par with the US at the top of Jones Lang LaSalle’s global real estate transparency index.

Now more than ever is a great time for foreign investors to seriously consider increasing their exposure to the Australian market or gaining a foothold here. Australia has traditionally been a market with relatively high barriers to entry for foreign investors given our very strong domestic investor base and the difficulty many foreign investors have experienced in competing with domestic groups.

This competitive landscape has fundamentally altered in the wake of the global sub-prime crisis and the financial markets’ instability that has ensued. Many Australian investors are in retreat mode and the wall of domestic capital looking for a home to invest in has largely dissipated driven by redemption issues, turmoil in the REITs sector and the scarcity of debt. The combination of a reduced domestic capital base, an increased number of prime acquisition opportunities and recent falls in official interest rates has created a very attractive and unique environment for astute investors, particularly cashed up overseas investors.

Australia has become a buyers’ market but one that continues to tell a very positive story underpinned by comparatively strong economic and real estate market fundamentals.

We commend this publication to all foreign investors who may have a serious and active interest in the Australian commercial real estate market. It will be a valuable resource to assist investors in better understanding our market from a commercial perspective, as well as from a legal and regulatory perspective.


John talBot Australian Head, Capital Markets Jones Lang LaSalle

simon storry Director, International Investments Jones Lang LaSalle

Contents

Foreword – Blake dawson 3

Foreword – Jones lang lasalle 4

overview – investing in australian real estate 6

the australian legal system 17

Foreign investment in australian real estate 19

australian real estate law 24

structures For investing in australian real estate 34

australian real estate investment trusts (reits) 38

Finance and Banking 45

tax 47

environmental responsiBility and land use 52

useFul weBsites 58


Investing in Australian real estate australia has one oF the most sophisticated and transparent real estate sectors in the world. this, comBined with a staBle political environment, a wealth oF natural resources and a Burgeoning services sector, provide compelling reasons For Foreign investors to invest in australian real estate.

solid risk adJusted returnsAgainst a backdrop of slowing global growth, Australia is better placed than most countries to weather the international financial crisis. Australia entered the global financial crisis with unemployment near historic lows, high levels of business investment and zero net public sector debt. A very healthy underlying economy and an exchange rate that has depreciated over the past 12 months means Australia can offer international real estate investors an attractive entry price and the prospect of solid risk-adjusted returns over the medium term.

Australia’s economic strength and plentiful supply of natural resources also means it is better placed than most countries to ride out the current volatility in global financial markets and continue to capitalise on Asia’s long-term economic growth prospects.

In the short to medium-term, tightening credit and decreased acquisition activity among domestic investors such as Australian Real Estate Investment Trusts, provide significant opportunities for foreign investors to enter the market.

The key attractions of Australian real estate include:

asset opportunities that rarely become available•

solid returns over the medium-term•

highly transparent, ranking number one alongside •the United States in the 2008 Jones Lang LaSalle Real Estate Transparency Index

a range of sectors and markets that offer fair to •good value

stable political environment•

stronger demographic profile than most developing •countries due to immigration and a high birth rate

wealth of natural resources and a buoyant services •sector, offering exposure to strong growth in Asia with many of the benefits of a modern and sophisticated financial sector

comparatively low unemployment providing a •significant measure to protection against the global growth slowdown anticipated through 2009.

australia’s political and economic landscape

staBle political leadership

Australia has a stable, multi-party democratic political system. In November 2007 the Australian Labor Party, led by Kevin Rudd, was elected to government following 11 years of government by a coalition of the Liberal Party and National Party, led by John Howard.

The election of the Rudd government has not significantly changed economic management in Australia. The main differences between the two governments are their approach to industrial relations and environmental issues. One of the first acts of the new Labor Government was to ratify the Kyoto Protocol, which the previous government had not supported.

Prior to its election the Labor Party announced its intention to make Australia the financial services hub of Asia. Proposals by the government to support international investment in Australia include:

a reduction of the withholding tax on distributions •by managed funds to non-residents as discussed further in the Tax chapter on page 49

an increase in the time that international •purchasers of undeveloped land will have to develop the land, from one year to five years.


Frequently ranked the most resilient economy in the world in recent years1, Australia recorded its first quarter of negative growth in December 2008. This follows 17 consecutive years of growth, the longest sustained period of expansion in the country’s history.

The International Monetary Fund has acknowledged Australia as being at the forefront of international best practice in its annual assessment of the Australian economy, citing the “sound fiscal, monetary and structural policies” that “have created the conditions for a continuous expansion, supported by high employment levels.”2

Importantly, the Australian housing market, which also accounts for around two thirds of private sector wealth, remains solid. While house prices fell by 3.3% in 2008, averaged across eight of Australia’s largest cities, the market remains fundamentally under-supplied. Vacancy rates are close to all-time lows and rents are estimated to have risen by 8% over the past 12 months.3 Home mortgage default rates are low and the 425 basis points of reductions in official interest rates have been passed immediately and almost in

full through to borrowers. These factors highlight the Australian housing market as being significantly different from housing markets in many other economies.

In 2008, the Australian economy was also ranked in the top three countries in the Asia Pacific region for its overall competitiveness. Among countries with a population of 20 million or more, Australia ranks second in the world, behind only the United States4.

While 2009 will be a challenging year for the Australian economy, the longer term outlook is for positive, stable growth over the next 10 years, with an average growth of 3.2% per annum expected over the next five years according to independent forecaster Access Economics5. With the professional services sector and resources sector well positioned to capitalise on continued growth in the Chinese and other Asian economies, Australia is likely to be well insulated, though certainly not immune, from the impending slowdown in global growth.

1 International Institute for Management Development (IMD) World Competitiveness Yearbook 20072 International Monetary Fund: Article IV Consultation with Australia, September 20073 Australian Bureau of Statistics estimate4 IMD World Competitiveness Yearbook 20085 Access Economics, Q1 2008


economic strength

Australia OECD

Forecast

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

GDP Growth Source: OECD, ABS, Access Economics

While Australia’s population of 21 million people makes it relatively small on the global stage, the highly concentrated pattern of population settlement means the commercial real estate markets in the capital cities have considerable depth. As 85% of the population lives in urban areas near the coastline, Australia’s capital cities accommodate a high proportion of the nation’s population.

As the map below shows, Sydney is the country’s most populous city with around 4.1 million people, followed by Melbourne with 3.6 million. Greater Brisbane is also relatively populous, with a population of 1.8 million, but also benefits from both the large and rapidly growing Gold Coast and Sunshine Coast populations in close proximity.

Major Australian CitiesSource: Jones Lang LaSalle

Australia’s demographic profile, like many developed nations, is shifting towards an older population due to low levels of fertility and increased life expectancy. At 81.2 years, Australians have the fifth highest life expectancy in the world. The median age of the population is 37 years with 13% over the age of 65. This aging of the population is making the health and aged care sector a rapidly growing focus for real estate developers in the country.

Despite the aging population, Australia still has a relatively strong population growth rate for a developing country due to high rates of immigration. Over the 10 years from 1995 to 2005, Australia’s population grew by an average of 1.2% per annum, which compares to an average growth rate of 0.7% per annum across OECD countries. Overseas migration accounted for 51% of the increase in Australia’s population in 2005-06.

Australians are relatively wealthy, with real GDP per capita of US$37,709 in 2006. This compares to an OECD average of US$32,484 and puts Australia on par with other OECD nations such as the UK, Canada, Germany, France and Japan. The distribution of wealth within Australia is also consistent with most other developed nations. The 20% of the population with the lowest household incomes account for 15% of total household net worth, while the 20% on the highest household incomes account for 39%.

In 1992 the Australian Commonwealth Government introduced the Superannuation Guarantee, a system of compulsory retirement saving. 9% of Australian wages and salaries must be contributed to superannuation and this has led to the rapid expansion of superannuation fund assets, from just A$154 million in June 1992 reaching A$1.1 trillion in 2008. This has created a steady demand for real estate assets in Australia with superannuation funds allocating around 10% of funds to real estate investment.


demographics

darwin (pop: 0.1m)

Broome

alice springs

cairns

Brisbane (pop: 1.8m)sunshine coastgold coast

newcastleSydney (pop: 4.1m)

Canberra (pop: 0.3m)

Melbourne (pop: 3.6m)

Hobart (pop: 0.2m)

Adelaide (pop: 1.1m)

Perth (pop: 1.4m)

western australia

northern territory

south australia

Queensland

new south wales

victoria

tasmania

australian real estate marketsAustralian real estate markets lead the world in terms of transparency, ranking alongside the US at the top of the Jones Lang LaSalle Real Estate Transparency Index. Foreign investors face the same type of market conditions as local investors and can expect:

accurate market and financial information •

reliable performance benchmarks•

clarity regarding taxation and regulation•

fair treatments in the transaction process •

high ethical and professional standards. •


Real Estate Transparency Index, 2008 Source: Jones Lang LaSalle, LaSalle Investment Management, Economist Intelligence Unit

commercial sector highly sophisticatedWhile small from a global perspective, the Australian real estate market is highly sophisticated. Investors can invest directly in the underlying real estate or through a range of listed and unlisted investment vehicles. These include unlisted real estate trusts, real estate syndicates, Real Estate Investment Trusts (REITs) and debt products such as commercial mortgage backed securities (CMBS) and real estate trust bonds.

Real estate investment vehicles can be divided into debt and equity assets and are traded on both the public and private markets. This is shown in the following diagram.

puBlic markets private markets

eQuity assets SHArES – real estate investment trusts

PrivAtE EntitiES – unlisted property (wholesale property trusts and property syndicates)

deBt assets trADED DEBt SECuritiES – commercial mortgage Backed securities – property trust Bonds

BAnk LOAnS – whole commercial property mortgages

Four Quadrant Investment MarketSource: David Higgins, RICS Research, University of Technology Sydney

norway

switzerlandireland

usa

new Zealandhong kong

germanyuk

Japangreece

south korea

turkeychina

russiamalaysia

australiacanada

india

Brazil

01 2 3 4

GD

P Pe

r Cap

ita (u

SD)

real Estate transparency Score

100,000

75,000

25,000

50,000

The Australian commercial property sector has suffered the impact of the global financial crisis that emerged in the US in the second half of 2007. The Australian REIT (A-REIT) sector as a whole produced a -55% return for calendar year 2008. Direct property, in contrast produced a modest but positive 1.8% investment return for the year6. The sharp divergence is partly to be explained by the unique characteristics of the A-REIT sector. In recent years A-REIT have become increasingly exposed to offshore markets. By the end of 2007 the Australian REIT sector was around 29% exposed to the US market and 7% exposed to other offshore markets7. Offshore exposure carried with it exchange rate risk and hedging risk. In addition, financial gear levels rose steadily in the years prior to 2007. And, many REITs adopted “stapled” structures, which exposed them to the volatile earnings of tourism, development and funds management businesses.

The contraction of the A-REIT sector is not therefore a reliable proxy for future trends in the market for prime real estate assets within Australia. Until the end of 2008, commercial real estate capital values had proved to be resilient against the global downturn in property values. Some fall in asset values seems inevitable, however, as the economy weakens through 2009, risk averse investors are withdrawing from property funds and many A-REITs are looking to sell assets in order to pay down debt and re-capitalise their operations.

Beyond 2009 the outlook for property investment is favourable. The economy is expected to regain momentum. Vacancy rates are forecast to decline again in CBD office markets from 2011, reflecting the many projects that have been postponed or cancelled over the past 12 months. While many institutions and fund managers are looking to reduce exposure to Australian real estate, sometimes under duress, cashed up private buyers and offshore investors are increasingly active in seeking opportunities.

Therefore 2009 represents a unique but small window of opportunity for astute investors to enter the market ahead of the inevitable recovery of investor sentiment and capital flows.

sustainaBle development oFFering opportunitiesWith environmental issues coming to the forefront of public debate, sustainable development has gained momentum in Australia in recent years. Opportunities and growth in sustainable development have been driven by large public and private sector tenants as they have stipulated minimum required environmental ratings for new office space. Local energy and environmental building standards including the NABERS Energy rating tool and the Green Building Council’s Green Star rating have become standard practice in the office sector and are rapidly emerging in other sectors. (See page 57 for more details.)

This trend towards sustainable development is boosting development activity and increasing the replacement and refurbishment cycle of Australian commercial real estate, thus creating investment opportunities across all sectors.

strong rental growth in residential propertyThe residential sector, while less of a target for institutional and wholesale investors, has also provided considerable returns for investors both in terms of capital gains and rental growth over the past decade. This has been particularly the case on the eastern seaboard in Sydney, Melbourne and Brisbane, and more recently in western and northern Australia where the resources boom has pushed up real estate prices in Perth and northern Queensland.

A softening in residential property prices during 2006-07 saw some investors leave the market but an ongoing undersupply of housing and strong rental growth is expected to attract investors. According to the Real Estate Institute of Australia, strong rent increases have also been fuelled by a record low residential vacancy rate of 1.9% over the past two years. The institute reported that rents for two bedroom apartments were growing annually by 12.5% in Melbourne, 9.7% in Sydney, 11.5% in Brisbane and 20.8% in Perth.


6 Source: PCA/IPD Performance Index7 Source: Citigroup Global Markets


the commercial sectorsCommercial real estate investment in Australia over the last 15 years has provided solid returns with very low volatility. This performance has persisted through 2008. 2009, however, is likely to be a challenging year. Values are expected to moderate, although prime grade assets are expected to hold their values better than secondary grade assets. The market will become more discriminating, with tenant quality, lease expiry profiles and sustainability assuming greater importance. While past performance is no guide to the future, the relative value of the market and Australia’s solid economic fundamentals suggest the historical pattern of performance should reassert itself once the current period of adjustment is completed.

The following graph shows the average annual return from income and capital gain within the Australian office, industrial and retail property sectors over the past 10 years. While industrial real estate has been supported by high yields, over the long-term the retail sector has provided the highest returns due to capital growth. As a very broad benchmark, capital growth in the office and industrial sectors approximates the rate of inflation while in the retail sector growth is more closely aligned with real wages growth which is between 1% and 1½% higher.

Commercial real estate investment in Australia over the last 15 years has provided solid returns with very low volatility.

australian office

australian industrial

australian retail

australian composite property

0 2 4 6 8 10 12 14percentage change year on year

capital returns

income returns

Property Investment Returns: Average Annual Returns – December 1998 to December 2008 Source: PCA/IPD, Jones Lang LaSalle Research

oFFicethe australian oFFice market oFFers attractive prospects For gloBal investors. the national vacancy rate remains Below eQuiliBrium and Face rents have managed to remain relatively Firm despite weak economic conditions.

Demand for office space has moderated in response to the slowdown in the global economy. Despite a moderation of demand, the national CBD office markets recorded an increase in occupied space of 150,000 sqm in 2008. The sector has achieved annualised returns over the past five years of 12.5%.

opportunities For Foreign investors

In one of the most developed REIT markets in the world, and with a large volume of funds from superannuation trusts pouring into commercial real estate, competition for available assets is usually intense. However, the rising cost of debt and the problems of re-capitalising the Australian REIT sector means that prime grade assets will be accessible to investors during 2009. In addition, the decline in equity markets has led to several superannuation trusts being over-allocated to Direct Property. With these purchasers largely absent from the market, it provides an opportunity for foreign investors to purchase commercial assets that would otherwise be unavailable.

Foreign investors have remained active in the Australian office market with recent purchases by global investors including Credit Suisse, KK DaVinci Advisors and German funds such as Deka and Real I.S.

Although international market volatility will cause a slowdown in occupier demand, particularly in Sydney and Melbourne, the strength of the Australian economy relative to other mature economies and low vacancy rates are expected to keep face rentals at or around current levels. Vacancy rates are expected to increase to the upper end of equilibrium by the start of 2011, to around 10% to 11%, before tightening in response to a more favourable demand environment in line with a broader economic recovery.

As the current office cycle gathers pace, the amount of new stock to be added to the Australian office market before 2010 has steadily increased. New supply in all CBD markets except Sydney and Adelaide is expected to exceed projected demand over the next two years. However, all capital cities are currently recording vacancy at or below their long-term average and this means the market can accommodate significant supply additions over the next few years and in some markets, such as Perth and Brisbane, supply is needed to alleviate the acute shortage of space.

The credit crunch has curtailed further development activity, impacting medium-term supply expectations in CBD office markets. Consequently there will be minimal supply additions in the 2011 to 2012 period, which coupled with a recovery in tenant demand is expected to tighten vacancy rates and lead to an acceleration of rental rates in Sydney and Melbourne. By 2012, the correction in Brisbane and Perth rents will have occurred and these markets will start to record rental growth from a more sustainable base.

Further, strong momentum in tenant demand for environmentally sustainable office space will drive the next development cycle. Australia’s office stock is ageing and with over 40% of stock in the Eastern Seaboard in excess of 30 years, obsolescence is a factor of increasing importance.


National CBD Office Demand Outlook (2009 to 2013) Source: Jones Lang LaSalle Research @ Q4/2008

Square metres

500,000

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0 Melbourne Sydney Adelaide Brisbane Perth Canberra CBD CBD CBD CBD CBD CBD

Supply Demand

retailaustralian retail property has consistently delivered strong staBle returns over the past Few decades, making the sector highly sought aFter By Both domestic and Foreign investors.

Despite a more challenging retail environment in the wake of the global economic slowdown, the sector remains in a strong position to weather the storm, with low vacancies prevailing across all retail sub sectors and limited new supply under construction. With yields already returning to attractive levels and the possibility of some forced sales, the next 12 months presents an opportunity for investors to acquire trophy assets in the usually tightly held market.

Over the long-term the Australian retail sector has had the strongest returns and lowest volatility of Australia’s commercial real estate sectors. Industry data shows retail property had an annualised total return of 13.0% for the 23 years to December 2008 (IPD/PCA Property Investment Digest).

strong consistent perFormance

The strong and stable performance of the retail sector relates to a number of factors. Australian shopping centres contain strong anchor tenants who commit to long-term leases, providing steady and predictable income returns. In addition, rental increases are generally linked to inflation each year and have been steadily rising by around 4% to 5% per year.

The Australian shopping centre industry is also relatively mature, with new supply constrained by strict planning and development controls, and is dominated by existing centres. New supply is usually by way of expansion of existing centres or new centres on greenfield sites, rather than new urban infill development.

Occupancy levels remain very high, following more than a decade of expansion by major retailers and assisted by active centre management. Vacancy rates have started to trend higher in 2008 as the economic slowdown has progressed, but rates are still at historically low levels. In regional shopping centres vacancies are particularly low, at below 1% across the major capital cities. This is illustrated in the chart below.

Given their strong performance, retail assets have been in strong demand by investors over the past decade and the market has been very tightly held. The need for many listed entities to de-leverage and for institutional investors to rebalance their portfolios means that the next 12 to 18 months will see many good assets reach the market and provide an opportunity for willing buyers to purchase without the same level

of intense competition for assets that has prevailed over recent years. Furthermore, with yields across all retail sub-sectors already softening by between 50 and 150 basis points over 2008, the retail sector now offers an attractive return relative to the 10 year bond rate.

Foreign investment in the retail sector, while low compared to ownership by domestic buyers, has seen some significant purchases in recent years. A half share in Westfield Parramatta was bought by Singaporean investor GIC Real Estate and GIC was also part of a consortium which purchased the Myer store in the Melbourne CBD. The level of offshore interest has picked up more recently and foreign investors are expected to dominate the buyer profile of retail assets in 2009.


Retail Vacancy in Australia Source: Jones Lang LaSalle Research @ Q4 2008 Note: Arithmetic average of all major cities sub-regional vacancy excludes Canberra.

Percentage of Shops vacant

10%

9%

8%

7%

6%

5%

4%

3%

2%

1%

0%12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08

CBD regional Sub-regional neighbourhood


industrialindustrial real estate is estimated to Be the largest commercial property sector By Floor space in australia. it is also the sector with the lowest level oF institutional ownership, estimated to Be around 50%. this is growing as the sector develops.

Dominated by the transport and logistics industry, investment performance of the sector is closely linked to the economy and housing market. Strong GDP growth in Australia in recent years has enhanced the performance of industrial property. The sector has delivered a five year annualised return of 11%.

Over the last decade structural change has resulted in the industrial sector moving away from a manufacturing base to a transport/storage/logistics oriented one. This shift was primarily driven by the change in the nature of Australian manufacturing, which has halved its contribution to the Australian economy over the past 30 years as a result of increased competition from Asia. With an increasing number of Australian manufacturers locating production offshore and focusing on local assembly of products, property requirements shifted from factory to logistics space.

The process has been facilitated by continued innovation in technology and communications and, over the past five years or so, the release of serviced industrial land adjacent to new road infrastructure. The new developments provide occupiers with large modern facilities at a relatively low cost located near growing population bases with significantly improved transportation infrastructure.

Associated with the growing dominance of the transport and logistics industry is an increasing preference to lease rather than purchase real estate. The trend is driven by the industry’s need for increased flexibility in matching contract lengths and occupying purpose-built facilities.

New demand for industrial real estate is expected to be subdued in the short-term as the economy is contracting leading to retail sector weakness and imports falling. On a medium-term basis, the sectors requiring industrial space, including manufacturing, transport and storage, and wholesale and retail trade, are forecast to register solid growth over the next five years.

The large wave of supply that came into the market in 2007 and 2008 will go some way to constraining future rental growth nationally. As the construction cycle wanes in 2009 and 2010, land values are coming under downward pressure in markets with a high availability of development land and construction costs are easing from recent very high levels. Rental growth is expected to pick up in line with a recovery in residential activity and the broader economy.

National Industrial Supply Source: Jones Lang LaSalle Research Q4/2008

10 year annual average

3,000

2,500

2,000

1,500

1,000

500

01998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Completed underconstruction Plans approved/Plans submitted

Square metres (‘000s)


hotelsa surge in investor demand, under-pinned By an aBundance oF Both eQuity and competitively priced deBt, resulted in record levels oF investment in the australian hotel property sector over the Four years to 2007.

An improved outlook for earnings growth, due to limited new supply in most markets and strong demand growth, also underpinned this unprecedented demand for the sector. However the onset of the US sub-prime crisis in the latter part of 2007 and increased volatility in world debt/equity markets throughout 2008 has resulted in rapidly declining market sentiment and added uncertainty to the current outlook.

Against this backdrop, Australian hotel transaction activity declined by around 50% through 2008 (with other countries around the Asia Pacific showing a stronger decline). Lower volumes were also largely attributable to the slowdown in activity by highly leveraged players, such as global private equity and real estate funds, who have dominated activity over the last few years. As lending institutions have grappled to understand the extent of their exposure, they have sought to limit their risk, reducing the amount of debt which is available (from both global and regional lenders). Prior to monetary intervention in the second half of 2008, the cost of capital had increased with spreads widening between 50 and over 150 basis points. Financing has also been made more difficult by a reduction in loan to value ratios and strict adherence to interest cover guidelines by major lenders, to varying degrees across the region.

Positive trading in many markets for most of 2008 also meant that owners were not forced to sell which, when combined with credit restrictions and the more cautious buying approach, resulted in a gap in pricing expectations limiting transaction volumes. The softening trend in initial yields that became apparent in the latter part of 2008 has put downward pressure on capital values. The asset revaluations to date have come primarily as a function of liquidity, though a further decline may be expected should hotel trading performance taper off materially through 2009.

As economic growth slowed through the second half of 2008 and inflationary pressures subsided, the Reserve Bank of Australia started to loosen monetary policy and interest rates have reduced. Interest rates were cut by 100 basis points in February 2009, plus an additional 25 basis points in April 2009, bringing

the total rate cut to 425 basis points since September 2008. The cash rate as at April 2009 is 3.00% and debt serviceability has therefore improved. These factors, combined with the ensuing positive yield spread for hotels, are likely to tempt more investors back into market and instill some semblance of confidence.

This competitive landscape across Australia has now softened in the wake of the current global financial environment. Many domestic investors are paring back their investment strategies. The combination of a reduced domestic capital base, lower interest rates, more favourable exchange rates and an increasing number of acquisition opportunities is creating a very attractive and unique environment for astute investors, particularly liquid overseas investors.

Foreign investment set to rise againTransaction volumes are expected to remain constrained in the short to medium term and dependent on the availability of appropriately priced stock. Currency issues may also continue to impact Australia’s real estate market, given their fluctuations in the latter stages of 2008. This is expected to tempt well capitalised Asian investors back into the market, taking advantage of a weaker Australian dollar, after dominating the scene in the 1990s when market conditions mirrored today’s. This trend has already commenced with recent hotel purchases made by Thailand-based TCC Land (Novotel Rockford Darling Harbour, Hyatt Hotel Canberra and Hyatt Regency Adelaide) and Malaysia-based TA Enterprises Berhad (Westin Melbourne). Over the last 10 years, Asian investors have proved to be very countercyclical purchasers.


Generally investors will be most attracted to Australia’s financial capital of Sydney, which has little new supply and holds high barriers to entry. However, Perth and Brisbane are still held in high regard even though the resources boom has now softened.

hotel development FeasiBilityHotel development remains largely unfeasible in Australia as hotel values have not kept pace with the rapid growth in construction costs over the last 12 years – the peak of the last development cycle. Five to 10 years ago, the development phase was also boosted by the booming residential sector and the co-related proliferation of strata-titled serviced apartments, however this type of development has now slowed.

Higher construction costs, as well as the recent strength of other property classes, most notably the office sector, explains in part why new hotel development in many cities has been hard to progress despite market trading statistics indicating that cities need more hotel rooms. Restricted debt markets and decreases in leisure and corporate travel, following the global financial crisis and slower economic growth, are expected to result in project delays. Lenders are also more likely to direct their restricted capital toward existing product rather than riskier new-build developments.

New building technology that reduces construction costs could change this outlook but at the moment there is nothing to suggest that such events will occur. Low cost development, which reduces labour and transportation costs, would be particularly beneficial for the development of accommodation rooms in remote areas such as those in Western Australia, many of which have experienced increased accommodation demand from mining exploration and expansion of related services.

The combination of a reduced domestic capital base, lower interest rates, more favourable exchange rates and an increasing number of acquisition opportunities is creating a very attractive and unique environment for astute investors, particularly liquid overseas investors.

The Australian legal systemaustralia is a Federation consisting oF six states and two territories. as the australian constitution contains no speciFic power to legislate with respect to land, state and territory laws apply to real estate.

The States and Territories (and their capital cities) are:

The Australian Capital Territory (ACT) (Canberra, the national capital of Australia)

The Northern Territory (NT) (Darwin)

New South Wales (NSW) (Sydney)

Queensland (QLD) (Brisbane)

South Australia (SA) (Adelaide)

Tasmania (TAS) (Hobart)

Victoria (VIC) (Melbourne)

Western Australia (WA) (Perth).

The Federal Government, which is based in Canberra, is the major governmental body. Federal Parliament effectively comprises two levels: the House of Representatives (the Lower House) and the Senate (the Upper House). Members of each House are elected by popular vote. All States have equal representation in the Senate.

New laws are introduced into Parliament by a member from one of the two Houses of Parliament in the form of a Bill. Each Bill must be passed by both Houses of Parliament. This means it must be agreed to and voted on by a majority in each House.

Once the Governor-General assents to the Bill, it is called an Act and becomes law. Laws are also made by State and Territory Parliaments in a similar way.

A Federal Constitution shares power between the Federal Government and the State and Territory governments. The Constitution vests legislative power in the Federal Government to pass laws on various specific areas such as taxation, defence, trade and commerce, immigration, foreign investment, communications, banking, corporations and external affairs.

The second tier, the State and Territory governments, pass their own laws, except on matters exclusive to the Federal Government. They are particularly concerned with the running of State and Territory facilities (for example, water and electricity supplies, education and hospitals).

The third tier is Local government, which has restricted powers. Land use and development usually fall within Local government control, although Federal, State or Territory government bodies may have some authority, especially on major development projects.


the Judicial systemAustralia has two sources of law: legislation enacted by the Federal and State or Territory governments; and common law which comprises judicial decisions.

Under the separation of powers, the judicial system is completely separate and independent from the executive and legislative branches.

Each State, together with the Australian Capital Territory and the Northern Territory, has its own judicial system and hierarchy of courts headed by a Supreme Court. The hierarchy of courts includes specialised boards and tribunals established under legislation to handle disputes of a particular nature.

The High Court of Australia, established under the Federal Constitution, deals with Constitutional matters and is the ultimate appellate court for Federal, State and Territory matters. This has led to the uniform development of the common law throughout Australia and consistency in statutory interpretation. The Federal Court of Australia principally deals with matters arising under Commonwealth legislation.

In addition to the formal judicial resolution of disputes, a variety of alternative dispute resolution techniques is increasingly being utilised by parties in Australia. Some of these methods, such as mediation and arbitration, are now formal requirements of the court system and are designed to facilitate the commercial resolution of disputes.

Common law (or case law) are laws that are widely understood to have been developed through court decisions rather than through legislation. Under this system a decision in a case before the court depends on decisions in previous cases with similar circumstances. The court will consider the precedent set by earlier cases when interpreting the law. Therefore, real estate law in Australia is governed by legislation supported by case law.

In addition to the formal judicial resolution of disputes, a variety of alternative dispute resolution techniques is increasingly being utilised by parties in Australia.


Foreign investment in Australian real estate

regulation oF Foreign investment

a staBle and transparent real estate market, roBust legal Framework and eFFicient titles system makes australian real estate attractive to local and Foreign investors. while there are some restrictions on Foreign investment, the australian government recognises that Foreign real estate investment can enhance australia economically and socially. accordingly the government actively promotes Foreign investment provided that it is consistent with the national interest.

According to the Australian Treasurer the largest number of foreign investment proposals involve the purchase of real estate.

Foreign investment in Australia is regulated primarily through a regime established under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA). Foreign investment may also be regulated under other Federal, State and Territory laws applicable to Australian and foreign investors because of the particular investment activity. For example, State or Local government approvals may be required for development projects involving construction works.

According to the Australian Treasurer the largest number of foreign investment proposals involve the purchase of real estate. Foreign investment in Australian real estate is strictly controlled. Notification to (and, in some cases, pre-approval by) the Foreign Investment Review Board (FIRB) is compulsory for the acquisition of certain interests in Australian urban land, including the acquisition of securities in an Australian urban land corporation or trust estate.

This chapter sets out an overview of the regime applicable generally under FATA as supplemented by government policy. In addition to determining whether approval is required or advisable under FATA, consideration also needs to be given as to whether regulations specific to the relevant sector (for example, urban real estate) apply. This chapter will focus on the real estate sector.

(At the time of publication, changes to the foreign investment screening arrangements had been announced. However the amendments to the regulations implementing such changes had not yet been passed and details of the changes to the relevant policies were not yet available, although this had been expected by the end of March 2009. Where relevant, we have noted the changed proposed to the current regime as set out below.)


reQuirements For Foreign investmentThe FATA regime is administered by the Australian Treasurer and FIRB. FIRB is an advisory body within the Commonwealth Department of Treasury.

Under FATA, the Treasurer has wide powers to prohibit foreign investment proposals and in circumstances where the prior approval of FIRB to such transaction has not been obtained to order divestiture or unwinding of foreign investment acquisitions if they are considered contrary to the national interest. The Treasurer cannot issue such adverse orders after the expiry of a 40 day period from notification of the proposal to FIRB or if foreign investment clearance has been given. The 40 day period can be extended by the Treasurer by an additional 90 days.

The notification of some investment proposals to FIRB is compulsory while the notification of others, although not compulsory, is advisable to avoid the risk that the transaction may subsequently be unwound if considered contrary to the national interest. The Treasurer determines what is contrary to the national interest by considering the widely held community concerns of Australians. The government policy is to balance these concerns against the strong economic benefits to Australia that arise from foreign investment. National interest implications are determined on a case-by-case basis. Notification of the proposal to FIRB requires the submission of certain information required under FATA regarding the acquirer and the proposal. FIRB issues guidelines to assist with clarifying obligations under FATA.

Approval may be granted by the Treasurer subject to the parties meeting certain conditions. In the case of proposals concerning real estate, such conditions could include the time for completion of development activities or environmental requirements.

Where notification under FATA is compulsory, it is a criminal offence to proceed with a transaction unless notification has been given and either the proposal has been cleared or more than 40 days have elapsed since the notification was received by FIRB (and no notice from FIRB extending the 40 day period has been issued). It is also important to note that FATA contains a general anti avoidance provision.

proposals suBJect to Fata

proposals – real estate sector

Where the foreign investment proposal involves Australian real estate, the specific regulations regarding the real estate sector should be considered.

australian urBan land

The definition of Australian urban land includes all land situated in Australia that is not used exclusively for carrying on a substantial business of primary production. That is, generally speaking, land that is not used for commercial farming or forestry purposes. It should be noted that land used for mining purposes is considered urban land.

proposals reQuiring notiFication

Under current regulations and policy, proposals that must be notified to FIRB and require approval include acquisitions of:

vacant real estate regardless of value•

residential real estate regardless of value •(subject to the exemptions detailed below)

developed non-residential commercial •real estate valued at A$50 million or more (A$913 million or more for US investors). For commercial heritage listed properties the threshold is A$5 million where the acquirer is not a US investor

residential and commercial leases where •the likely term of the lease is more than five years, including any option or right to renew. (Commercial leases are, however, subject to the above monetary notification thresholds – where possible this is done by valuing the asset subject to the lease)

accommodation facilities (including hotels, •motels, guest houses and serviced apartments) regardless of value although with the changes to FIRB, accommodation facilities will be treated as commercial real estate rather than residential real estate. Accordingly, acquisitions of such facilities valued below the relevant developed commercial property threshold ($5 million for heritage listed property, $50 million for non-heritage listed property or $953 million for US investors) will be exempt from the FATA and will not require FIRB notification and approval

any profit sharing arrangement held over •urban land (unless the asset subject to the profit sharing arrangement is developed commercial real estate, in which case the above monetary notification thresholds apply).


Importantly, notification is required in the case of the acquisition of shares in a company or units in a trust if the value of its (and its subsidiaries) total Australian urban land assets exceeds 50% of the value of its total assets irrespective of the total value of the company, trust or the value of the proposal.

When considering whether a proposed investment is notifiable, funding arrangements including debt instruments having quasi-equity characteristics are treated as direct foreign investment.

Where a person, together with any associates, holds 15% or more of the issued shares, units or voting power of a corporation or trust or where two or more persons, together with any associates, hold 40% or more of the issued shares, units or voting power of a corporation or trust, they are taken to hold a substantial interest unless the Treasurer is satisfied that they are not in a position to determine the policy of the corporation or trust.

Proposals in sensitive sectors such as banking, telecommunications, shipping, civil aviation, airports, tourism and media are subject to more detailed examination but are approved unless considered contrary to the national interest.

The Australian government recommends that where any doubt exists as to whether a proposal is notifiable to FIRB, it should be notified.

It should be noted that exemptions from notifying FIRB apply to foreign persons acquiring less than a substantial interest in certain managed investment schemes having more than 100 unitholders and either being an urban land trust estate or a trust which is primarily engaged in the development of land and less than 10% of its real estate assets are developed residential real estate. With the changes to FIRB, it is expected that there will be exemptions for temporary residents acquiring established dwellings as a residence, new dwellings and single blocks of vacant residential land.

residential real estate

Residential real estate means all Australian urban land other than commercial real estate (that is, offices, factories, warehouses, accommodation facilities, restaurants and shops).

The Australian government seeks to ensure that foreign investment in residential real estate increases the supply of new housing stock including new developments such as house and land packages, home units and townhouses.

Generally, foreign buyers intending to acquire real estate in Australia must seek prior approval from the Australian government, unless specifically exempted as follows:

acquisitions by Australian •citizens resident abroad

acquisitions of real estate zoned residential •by foreign nationals who hold permanent resident visas or hold, or who are eligible to hold, a special category visa (for example a New Zealand citizen)

foreign persons purchasing real estate •zoned residential, as joint tenants, with their Australian citizen spouse.

Generally, acquisition of residential real estate by a foreign person for investment purposes will otherwise not be permitted unless such acquisition is an “off the plan” sale of no more than 50% of newly constructed dwellings with existing FIRB approval. With the changes to FIRB, this requirement will be removed provided that developers market locally as well as overseas.

rural land

The definition of rural land includes all land that is used wholly and exclusively for carrying on a substantial business of primary production. A substantial business of primary production must have a commercial purpose or character and be involved in activities related to the cultivation of land, animal husbandry/farming, horticulture, fishing, forest operations, viticulture or dairy farming (but does not include vacant land, hobby farms, land used for stock agistment or mining).

Proposed acquisitions of such a business valued at A$100 million or more (or the relevant threshold for US investors) must be notified to FIRB and require approval.

contracts

It should be noted that any contracts by foreign persons to acquire real estate in Australia must be made conditional upon FIRB approval (unless approval has already been granted). Contracts should provide for a minimum 40 days from date of lodgement for a decision from FIRB.

For real estate to be purchased at auction prior FIRB approval must be obtained.


proposals – generallyForeign investment proposals (non-specific to real estate) subject to FATA include:

acquisitions by a foreign person or persons •of a substantial interest in an Australian corporation, business or trust that has total (gross) assets of A$100 million or more or where the proposal values the corporation at A$100 million. For US investors, a higher notification threshold of A$913 million currently applies, unless the proposed investment is by a US government or is in one of the prescribed sensitive sectors, in which case the threshold is currently A$105 million

acquisitions by a foreign person or persons •of a substantial interest in a foreign company with Australian subsidiaries or assets that are valued at A$100 million or more and represent half or more than half of the global assets. Where the foreign company has Australian subsidiaries or assets that represent less than half of the global assets, the threshold value for the notification is A$200 million (being the value of Australian assets). In the case of US investors, the higher notification thresholds described above also apply

arrangements under which an Australian •business valued at more than A$100 million or having total (gross) assets exceeding A$100 million, becomes controlled by foreign persons. Again, the higher notification thresholds for US investors apply

proposals to establish a new business •involving a total investment of A$10 million or more. Subject to policy requirements applicable to specific proposals, proposals by US investors (except a US government) do not require notification

direct investment by foreign governments and •their agencies irrespective of the size of the proposal (subject to the thresholds applicable to US governments discussed above)

portfolio investments in the media •of 5% or more and all non-portfolio investments irrespective of size.

Foreign personsA foreign person includes:

a natural person not ordinarily •resident in Australia

a corporation in which a natural person not •ordinarily resident in Australia or a foreign corporation holds a controlling interest

a corporation in which two or more •persons, each of whom is either a natural person not ordinarily resident in Australia or a foreign corporation, hold an aggregate controlling interest

the trustee of a trust estate in which a natural •person not ordinarily resident in Australia or a foreign corporation holds a substantial interest

the trustee of a trust estate in which two •or more persons, each of whom is either a natural person not ordinarily resident in Australia or a foreign corporation, hold an aggregate substantial interest.

us investorsThe Australia-United States Free Trade Agreement (AUSFTA) had the effect of increasing the notification and approval thresholds for eligible US investors.

US investors benefiting from the relaxed rules include nationals and permanent residents of the USA and US enterprises. A US enterprise includes various entities constituted under United States law and branches of other entities located and carrying on business in the USA.

Importantly, the definition of US enterprise excludes an Australian entity (such as an Australian subsidiary established as an acquisition vehicle) owned by a US enterprise. Proposed acquisitions by such entities therefore continue to be subject to the A$100 million threshold applicable to non-US investors.

In the case of investment proposals in certain prescribed sensitive sectors (including media, telecommunications, certain transport infrastructure and services, military equipment and technology, the extraction of uranium or plutonium and the operation of nuclear facilities) and by a US government (or entities controlled by it), the threshold is currently A$105 million.

The thresholds applicable to US investors are subject to annual indexation. Accordingly, the thresholds prevailing from year to year should be checked.


Foreign government related investmentsProposed investments by foreign governments and their agencies irrespective of the size of the proposal must be notified to FIRB (subject to the thresholds applicable to US governments discussed above). In examining foreign investment proposals by foreign governments and their agencies, FIRB will consider whether or not:

an investor’s operations are independent •from the relevant foreign government

an investor is subject to and adheres to the law and •observes common standards of business behaviour

an investment may hinder competition or •lead to undue concentration or control in the industry or sectors concerned

an investment may impact on Australian government •revenue or other policies (for example, investments by foreign government entities must be taxed on the same basis as other commercial entities)

an investment may impact on Australia’s national security•

an investment may impact on the operations and directions •of an Australian business, as well as its contribution to the Australian economy and broader community.

Key issuesThe regulation of foreign investment in Australia is governed by a combination of FATA and Australian government policy. Specific legislation or policy also regulates foreign investment in real estate.

Any foreign investment proposal therefore needs to be carefully considered having regard to its specific circumstances to determine:

whether foreign investment restrictions exist•

whether foreign investment notification is required or advisable•

where notification is to be given, what documentation •should be submitted to FIRB.


Australian real estate lawcentral to australian real estate law is the torrens title system. this system, named aFter its inventor sir roBert richard torrens, Began operating in australia in 1858. torrens drew on his merchant shipping Background to devise a system oF land ownership Based on methods oF registering ships under merchant shipping law. the torrens system is now used in many parts oF the world.

torrens title and common lawtorrens’ aim was to devise a system to replace the complex old english land law, which made the transFer oF real estate ownership time consuming and expensive.

each state and territory has its own real estate legislation. the two main categories are:

Legislation dealing with general real estate matters. Examples:

Conveyancing and Law of Property Act 1898 • (ACT)

Conveyancing Act 1919 • (NSW)

Property Law Act 1974• (QLD)

Property Law Act 1958• (VIC).

Legislation establishing and regulating a system of title by registration. Examples:

Land Titles Act 1925• (ACT)

Real Property Act 1900• (NSW)

Land Title Act 1994• (QLD)

Transfer of Land Act 1958• (VIC).

each oF the other states and territories has its own legislation in these categories.

Under the Torrens system, title or ownership right to real estate is created by the act of registration in a central register or record. Normally the person who is recorded as the owner of a parcel of land cannot have their title challenged or overturned. This concept is known as “indefeasibility” of title. There are some exceptions in limited

circumstances to this general rule which are discussed in the following section on registration of title.

As Australia is a federation of sovereign states, each State has a different registration system but they are all based on the Torrens Title system. Real estate law in Australia is governed by relevant State or Territory legislation and case law.

There are many instances particular to real estate law, and common to many real estate transactions, that are not covered by legislation and so must be decided under common law.

The Australian courts, in interpreting and applying the law of real property, have regard to the case law of other countries with similar or comparable legal systems.


real estate registrationThe Torrens system is based on a guarantee of registered title by the States and Territories. Under the Torrens system priority between interests is determined by their order of registration and not their order of execution. The general principle of the Torrens system is that upon registration the registered proprietor holds their interest subject to prior registered interests, but free from all interests which are not registered. This general principle of indefeasibility is subject to a number of statutory exceptions such as fraud, some short-term leases and misdescription of boundaries.

In order to obtain the protection of registration under the Torrens system, transfers of land, mortgages, easements, restrictive covenants and profits à prendre must be registered.

The consequences of non-registration are that the holder of the unregistered interest has an equitable interest only, will lose priority to subsequent interests, and the interest will be defeated by the registration of a later dealing.

On a sale of Torrens land, title is transferred to the buyer on the registration of the transfer in the Registrar General’s Office of the particular State or Territory.

The main rights in land which are not required to be registered are some categories of leases. The criteria for protection differ considerably between State and Territories. For example, the applicable legislation will protect unregistered tenancies for terms not exceeding one year in the NT and SA, three years in the ACT, NSW, QLD and TAS, five years in WA and terms of unlimited duration in VIC.

converting From old system title to torrens titleThe policy in all jurisdictions of Australia is for land to be registered under the Torrens system where possible. Most land in QLD and the NT is now under the Torrens system. Some areas of land, typically rural, in NSW, TAS, VIC and WA have not yet been converted to the Torrens system and remain under old system title. In NSW, the Registrar General begins the process of converting old system land to Torrens Title each time that a dealing with old system land is lodged for registration in the General Registry of Deeds. The jurisdictions that still have unregistered land all have procedures for bringing land into the Torrens system, but these vary.

The main categories of land which are commonly unregistered are:

Crown land, which is land owned •by a State or a Territory

Commonwealth land, which is land owned •by the Commonwealth of Australia

old system land, which is land that has •been the subject of a Crown grant by the State or Territory but has not been brought under the Torrens system. Generally, unregistered land in private ownership is found outside urban areas.

unregistered rightsThe interests that can be registered vary between States and Territories but include transfers of land, life estates, leases, easements, mortgages, and restrictive covenants.

Some rights that cannot be registered include options to purchase. Because an option is regarded as an interest in land, it may be protected by way of a caveat which is lodged against a title to give notice of the option. However, the option does not receive the full benefits of indefeasibility with the registration of a caveat, and, for the purposes of resolving priority disputes, it is treated as being unregistered.

Caveats are also used to protect the interests under dealings that are registrable but have not yet been registered, provided such interests in land are validly claimed.

Further, most jurisdictions in Australia provide that trusts may not be noted on the title although the title or interest claimed is registered in the name of the trustee.


the registriesEach State or Territory has its own real estate registry. The Torrens system is based on a State’s or Territory’s guarantee of registered title. Legislation in all States and Territories, except the Northern Territory, provides for the compensation of persons who suffer loss as a result of the operation of the system in certain circumstances.

The differences between the real estate registries are generally procedural. For example, there are differences regarding lodgement fees, the forms used, and the number of copies of a document to be lodged.

Buyers are able to obtain all the information they may reasonably need regarding the title and the encumbrances registered on it. Title information is publicly available and can be accessed online in all jurisdictions other than the ACT. The authority responsible for recording and registering land titles provides a service whereby searches of information kept on the register can be made on the internet.

Searches in the ACT can be requested by email, with the Land Titles Office returning the search results by email.

real estate rights

rights over land

The principal rights over land which are recognised in Australia include the following:

Freehold estates

Fee simple • – this is an estate of unlimited duration in land and represents the most common form of ownership of land in Australia

Life estates• – Australian law also recognises life estates although these are not common and grant a person exclusive possession of the real estate during their lifetime.

leasehold estates

Four categories of leasehold interest are recognised in Australia:

Fixed-term• – this is a lease for a fixed term of years and is the most common form of leasehold interest for commercial leases. The dates on which a lease is to begin and end must be known, or at least be ascertainable, before it commences

Periodic tenancies• – a periodic tenancy is created where land is leased from week to week, month to month or year to year, until one party terminates it by giving the appropriate amount of notice

Tenancies at will• – a tenancy at will arises when a person occupies land on the terms that either party may terminate it at any time. It cannot be alienated

Tenancies at sufferance• – a tenancy at sufferance will arise when the tenant remains in possession after the expiration of a lease without the landlord’s assent or dissent.

Both tenancies at will and tenancies at sufferance may be converted into periodic tenancies by the acceptance of rent by the landlord.


other rights over landSome other rights over land are as follows:

Mortgages• – typically a mortgage is an interest in land that is created in favour of a party to secure repayment of a loan or other financing arrangements

Easements• – generally, an easement is an interest in land to the extent that it creates a right to use, but not occupy, the land of another for a specific purpose. Examples are the right to use a road that crosses another person’s land or the right to drain water across another person’s land

Restrictive covenants• – while a restrictive covenant is an interest in land, it is in effect an agreement by one land owner with another that they will not use their land in a particular way. For example an owner of real estate may covenant with a neighbouring owner that they will not use the real estate other than for residential purposes

Options to acquire land• – the grant by a landowner to another person of an option to purchase the land is generally considered a right over land.

Typically, mortgages, easements and restrictive covenants are capable of being registered on the title to the land.

contractual rightsThe following rights are purely contractual between the parties:

Licence• – a permission to do what would otherwise be unlawful, such as, for example, to enter upon or occupy the land of another

Right of first refusal to acquire land • – where the land owner agrees with a person not to sell the land without first offering it to that person.

Contractual rights such as those mentioned above cannot be registered on the title to the land.

native titleNative title was first recognised in Australian law in 1992 by the High Court in the decision of Mabo v State of Queensland No. 2 (1992) 175 CLR1 where the High Court found that the Miriam People held native title to certain land that survived European settlement, subject to the sovereignty of the Crown.

In response to this case the Commonwealth passed the Native Title Act 1993 (Cth) which came into force on 1 January 1994. The States and Territories also passed their own legislation to implement the national scheme. This legislation governs the validity of land dealings affecting native title and establishes a native title claims process.

Native title law in Australia is still developing and as such, it is prudent to take native title into account in relation to most land dealings to ensure their validity. Native title is particularly relevant in relation to non-freehold land and land owned by the Commonwealth or State government related entities.

Native title rights and interests cannot be transferred but can be compulsorily acquired or surrendered in certain circumstances.

Key issuesCentral to Australian real estate law is the Torrens Title system.

The Torrens Title system is based on a guarantee of registered title by the States and Territories. While all jurisdictions are covered by Torrens Title, registration requirements vary.

When investing in Australian real estate foreign investors should ensure they are familiar with the registration requirements in the State or Territory in which they are investing.

It is also important to understand the legal rights applicable to specific real estate investments.

Native title law, for example, is a developing area and it is prudent to take this issue into account when considering land dealings, particularly in relation to free-hold or Commonwealth or State government land.


Leases deal comprehensively with the rights and obligations of the landlord and tenant. However, a landlord will generally have few obligations under a lease. Typically, the landlord will have its own form of lease for the building or shopping centre and it will be difficult to negotiate substantial changes unless the tenant has bargaining power, either as a result of its position as an anchor tenant for a shopping centre or a key major tenant for a new development or project.

Each Australian State except Tasmania has specific retail tenancy legislation which applies to specialty retail shops and is primarily introduced to protect the interests of small or specialty retail tenancies. In Tasmania, the Fair Trading (Code of Practice for Retail Tenancies) Regulation 1998 governs the relationship between retail tenants and landlords. In the ACT, the Leases (Commercial and Retail) Act 2001 also applies to commercial office premises if they are no more than 300 square metres in size. In Victoria, the Retail Leases Act 2003 applies also to premises used for the retail provision of services in some circumstances. The retail tenancy legislation generally includes a wide range of requirements and obligations which are required to be complied with by landlords, as well as provisions which override specific clauses in the actual retail leases.

Commercial leases generally contain detailed clauses covering most aspects of the landlord/tenant relationship. In the absence of express agreement, the applicable legislation and the common law will imply some covenants into the lease such as a covenant for quiet enjoyment granted by the landlord in favour of the tenant or a covenant of non-derogation from the grant by the landlord. The case law of judicial precedent is therefore important in the area of leasing. However, in practice the subject of the implied covenants is usually expressly dealt with in the lease or is regulated by legislation.

typical lease termsThe various terms and conditions in commercial leases vary across the different States and Territories. The following descriptions outline the terms of a typical lease in NSW. There are likely to be variations for leases in other States or Territories.

length oF term

For specialty retail premises, the length of term typically varies from three to five years with one option of renewal. For major retail tenancies such

as supermarkets and department stores, lease terms can exceed 15 years and include a series of options.

For commercial premises (office and industrial), the lease terms vary depending upon location. For example, major commercial leases in the central or major business districts or industrial precincts would have terms exceeding five years and of up to 10 years with or without further options to renew.

rent increases

Rent increases for specialty shop retail leases will normally have either fixed annual percentage increases, increases annually linked to movements in the consumer price index or simply amounts nominated for each year. Commonly, a market rent review is applied upon exercise of the option of renewal.

For commercial leases, if the lease is for a term of five years or greater, then there are likely to be fixed annual increases with a market rent review mid-term and then again if an option of renewal is exercised. It is also common to have market rent reviews every two years in lieu of fixed annual increases.

For office or industrial premises, it is common to have a clause applying to a market rent review which would prevent the rent from going down, commonly known as “ratchet” clauses.

For major retail tenancies, rent is commonly also payable and increased by reference to the tenant’s turnover from those premises.

For small retail premises, retail tenancy legislation applying to specialty shop tenancies in most States and Territories will prohibit or restrict the method, frequency and manner of rent increases that may apply and indeed will expressly require that rent increases tied to market or changes in the consumer price index should permit the rent to decrease as well.

tenant’s right to assign or suB-lease

Generally, the tenant may not assign the lease or grant a sub-lease without obtaining the landlord’s consent. Typically, as a condition of consent, the lease will provide that the landlord will need to be satisfied as to the ability of the incoming tenant to meet its obligations under the lease and will require the incoming tenant to enter into a deed with the landlord. The landlord may also require the incoming tenant to provide security in the form of a bank guarantee or personal guarantees by directors of the tenant.


leasesthe general real estate legislation reFerred to in the previous section applies to commercial leases and the torrens title legislation applies to their registration.

Generally, a landlord will not consent to the assignment of the lease to the buyer of the tenant’s business unless the tenant releases the landlord in respect of any pre-sale non-compliance under the lease. On the other hand, the practice is for the landlord not to release the outgoing tenant so that the outgoing tenant remains liable for both its pre-sale non-compliance and for post-sale non-compliance by the incoming tenant.

The outgoing tenant would require the buyer to indemnify it against post-sale non-compliance.

For retail leases, retail tenancy legislation can regulate the process of the proposed assignment, as well as the terms upon which the parties may or may not negotiate.

changes during term oF lease

Change of control of the tenant• – a change of control of the tenant generally requires the landlord’s consent as if it were an assignment of the lease

Transfer of lease as a result of a corporate •restructuring – a transfer of lease as a result of a corporate restructuring such as a merger generally requires the landlord’s consent as if it were an assignment of the lease.

repairs

Generally the tenant must keep the premises in good repair excluding fair wear and tear and damage caused by events beyond the tenant’s control. Normally, the tenant is not responsible for work of a capital or structural nature unless the work is required because of the tenant’s default. Leases often contain a provision requiring the tenant to redecorate the premises at specified intervals (including on expiry or earlier determination of the term) and to make good the premises (by removing all items installed at the premises and returning the premises to their original condition) at the end of the lease.

Some different forms of structured leases have been utilised typically for purpose-built specialised tenancy uses, or for purposes of securitisation and financing of construction. This may involve placing the structural and capital maintenance obligations on the tenant rather than the landlord.

termination oF a leaseCommercial (major retail, office and industrial) leases usually terminate on their expiry. Generally, commercial and retail leases can contain one or perhaps more options to renew, giving the tenant the right to renew the lease for a further term on the same lease conditions.

Commercial leases generally do not contain a provision for one party to be compensated by the other on termination of the lease except where the lease is terminated because of default. Most

commercial leases do not generally contain specific obligations on a landlord and it is usually difficult for a tenant to terminate a lease as a consequence of a landlord’s default. In this event the defaulting party is liable for damages. Rights for early termination of a lease by a tenant can be negotiated but will normally require the tenant to pay compensation to the landlord for such circumstances.

However, compensation rights do exist for tenants of retail specialty shops under retail tenancy legislation in various jurisdictions, where those leases give the landlord an express right to terminate the lease if the landlord intends to demolish the premises or shopping centre for redevelopment.

taxes on leasesThere are a number of taxes payable on leases.

goods & services tax (gst)

The landlord is liable for GST on the rent and other consideration received from the tenant. Landlords are not able to seek reimbursement of GST from tenants unless the lease contains an express provision to do so.

Therefore, the practice is to include provisions in leases requiring the tenant to pay GST on the rent, contribution to outgoings and other consideration for supplies under the lease as a separate additional obligation (see GST in the chapter on Tax on page 50).

lease duty

The grant of a lease at a premium generally attracts stamp duty in all States. The rate of duty is the same as for a transfer of land (see Stamp Duty in the chapter on Tax on page 50).

In VIC, the grant or transfer of a lease for any consideration other than rent can attract duty by reference to the value of the leased property.

Key issuesLeases deal comprehensively with the rights of the landlord and the rights and obligations of the tenant.

The case law of judicial precedent is also important in the area of leasing.

Each Australian State except TAS has retail tenancy legislation that applies to specialty retail shops.


real estate transactions and processesin australia there are a numBer oF parties involved in real estate transactions in addition to the Buyer and seller. the parties involved, as well as the processes undertaken, while suBstantially consistent throughout australia can vary slightly across the various states and territories.

the stakeholders

There are many stakeholders involved in real estate transactions in Australia, other than the buyer and seller.

selling and purchasing agents

Real estate is generally sold through selling agents or real estate agents. Private sales are uncommon. The real estate agent advertises the real estate and introduces the buyer to the seller. Beyond this, the extent of the agent’s role depends on the States and Territories.

Purchasing agents are used occasionally when a buyer wishes to acquire a specific piece of real estate or consolidate properties for a particular purpose such as land to make up a shopping centre site.

Selling agents are generally remunerated by the payment of a commission following the completion or closing of the sale. In addition, the seller pays the agent’s expenses for advertising. The fees of a purchasing agent are usually based on a negotiated success fee.

lawyers

In all jurisdictions, transactions involving commercial real estate involve lawyers. Lawyers are closely involved in the sale process for most residential and all commercial real estate asset classes as they prepare the contracts for sale, undertake legal due diligence, undertake negotiations and arrange for contracts to be signed and manage the transaction through to completion or closing.

Building consultants

Buyers will generally engage a building consultant to give them a report on the condition of a building. This applies to both residential and commercial (retail, office and industrial) buildings.

For major commercial buildings, it is not uncommon for the seller to provide the market with a comprehensive building condition report including the building structure, mechanical and engineering services, and compliance with the Building Code of Australia. This is in order to enable the market to more accurately price the real estate.

specialist consultants

The involvement of other specialist consultants is determined by the issues or potential issues with a property. For example, a geotechnical engineer’s report would be obtained if the property was in a land subsidence area, or an environmental consultant’s report would be obtained if there were contamination issues with a property.

Generally, consultants charge a negotiated fee based on the extent of their work.

surveyors

In some jurisdictions such as in NSW, it is common practice for the seller to obtain a survey report to include in the contract showing the location of the buildings on the property in relation to the boundaries.

the local municipal council

The legality of the buildings on the property is established through enquiries at the local municipal council. In some jurisdictions this takes the form of inspecting the building file at the council, while in others it includes obtaining a certificate from the council that the building has been built in accordance with council-approved plans or, if it has not, that the council does not require any unauthorised building work to be demolished.

The councils have fees for the inspection of building files and/or for giving certificates as to the legality of buildings and such fees vary between councils.


the processes involved in Buying and selling real estate The minimum formalities for sale and purchase of Torrens Title system land are as follows:

pre-exchange oF contracts

In States and Territories (other than NSW and VIC) where disclosure material is not attached to the contract for sale, the normal practice is for the buyer to obtain title searches and other information including a planning certificate for the property, a building condition report and information as to the legality of the buildings before contracts are exchanged or entered into. Where tenanted commercial buildings are involved, this will also include as a minimum investigating the leases, service contracts and management agreements.

In NSW and VIC title searches, zoning certificates and seller disclosure material are included in the contract, so these pre-contract searches are not always necessary but would be carried out in any event as part of the pre-contract investigations where the transaction involves a major commercial asset.

exchange oF contracts

The next step is exchange of a written contract for sale which identifies the parties, the property, the price and when completion or closing is required to take place. There are standard form contracts in all Australian jurisdictions which deal comprehensively with the rights and obligations of the seller and the buyer. Some additional terms, conditions and warranties are included depending upon the type of the asset and the nature of the transaction.

On exchange of contracts, the buyer pays a deposit to be held by the selling agent or another stakeholder such as the seller’s

lawyer. The deposit is generally 10% of the price. However this may alter depending upon the size and type of transaction.

The deposit is sometimes invested and there are specific requirements regarding the manner in which the deposit is held, how it is invested and who will be entitled to the accrued interested on the investment of the deposit.

post-exchange

After exchange of contracts, additional property information is obtained, including the amount of council rates, water rates and whether any land tax is charged against the real estate.

settlement

The usual completion or closing periods vary across different jurisdictions and according to the type of asset being transacted and the circumstances of the sale. Generally, these periods are between 28 days in the ACT to 42 days in NSW. Closing periods may be linked to the time it takes to get FIRB approval or to raise equity or debt finance.

Following completion or closing of the sale, the buyer’s lawyer lodges the Torrens Title transfer of the real estate for registration in the applicable land registry.

In some jurisdictions, the land registry notifies authorities such as the council and the water rate authority of the transfer of ownership of the real estate, while in others, the buyer’s lawyer notifies the relevant authorities.

... the normal practice is before contracts are exchanged to obtain title searches and other information including a planning certificate for the property, a building condition report and information as to the legality of the buildings.


what Buyers and sellers must discloseNSW, VIC and SA have seller disclosure legislation which require a seller to provide detailed information on the seller’s title, the planning controls and other matters relating to the property before the contract is entered into or settled.

For example, in NSW the Conveyancing Act 1919 and the Conveyancing (Sale of Land) Regulation 2000 provide that the documents that must be attached to a contract include:

a planning certificate•

a sewerage service diagram•

searches of the certificate of title and •deposited plan for the property

copies of all easements, profits à prendre, •restrictions on the use of land and positive covenants which benefit or burden the land.

If the seller fails to attach the required documents to the contract for sale the buyer has the right to rescind the contract within 14 days after the contract is entered into.

The general principle relating to misrepresentation by a seller is that if the misrepresentation is fundamental to the sale then the buyer may rescind the contract, regardless of whether the misrepresentation was made fraudulently or innocently. However, the buyer will only have a cause of action at law against a misrepresenting seller if there is strong evidence that the buyer only entered into the agreement because the seller had promised that the misrepresentation was in fact true. In instances where, despite a misrepresentation having been made, the buyer receives substantially what was bargained for, compensation by the seller for the value of the deficiency is considered to be an adequate remedy.

While the courts will not compel the buyer to proceed with a contract when the buyer has entered into the contract in reliance on a misrepresentation, the buyer has a duty to exercise reasonable caution. A suspicious buyer who does not make all the inquiries that the courts consider a reasonable person would make will not be able to take proceedings after the sale has been completed on the grounds that false representations induced the buyer into the purchase.

Under the Trade Practices Act 1974 (Cth) and fair trading legislation of each State and Territory, it is an offence to make false or misleading statements in the course of trade and commerce, including in the disposition of an interest in land. A buyer (or seller) who suffers loss arising from a false or misleading misrepresentation is entitled to recover compensation for the amount of that loss or damage.

contractual warranties

In commercial real estate transactions contractual warranties by the seller are not uncommon and may include the following:

where real estate is tenanted, warranties such as those •stating that the leases are in force, the tenancy details (including rent) disclosed in the contract are correct and the seller has disclosed all material information

where real estate may have had some industrial •use or may have been exposed to contamination, warranties relating to the state of the property and existence of contamination.

Remedies for breach of a contractual warranty are usually damages.

The function of the warranties in this context is to give buyers comfort in relation to aspects of the information relating to the property which the buyer has relied on and which the buyer has not been able to independently verify through their own pre-contractual investigations.

While in some cases, more extensive warranties from the seller can be negotiated, generally the seller’s warranties are not a complete substitute for the buyer carrying out its own due diligence.

statutory warranties

Some jurisdictions have statutory warranties. For example, in NSW, the Conveyancing (Sale of Land) Regulation 2005 contains warranties to the effect that the land is not subject to any adverse affectation. This could include such events as a road widening proposal, a proposal by the State government to compulsorily acquire the property, or an order to demolish or repair a building which has not been complied with.

The statutory warranties will also cover other matters such as those relating to the zoning status of the land.

The buyer’s remedy for a breach of a statutory warranty is the right to rescind the contract at any time before the contract is completed.

Statutory warranties were introduced to shift the burden of disclosure on to the seller.

The practice, particularly on the acquisition of residential real estate, is for the buyer to carry out searches after exchange of contracts to verify the correctness of the statutory warranties. Therefore the warranties are not a substitute for the buyer carrying out its own due diligence.


liaBilities

sale By landlord

After the real estate has been sold, the seller/landlord protects itself from ongoing liability by requiring the buyer of the real estate to indemnify the seller/landlord for any post-sale non-compliance. The practice is for the seller/landlord to remain responsible for pre-sale non-compliance.

risk oF property

The standard form contracts used in the different jurisdictions provide that on completion or closing the seller must give the buyer legal title to the real estate.

In some jurisdictions the risk of the real estate on some asset classes passes to the buyer on exchange of contracts while in other jurisdictions the risk passes on completion or closing.

Accordingly, the issue of insurance is important. In NSW the practice is to effect insurance from completion or closing as title and risk only passes at that time.

rates

Council rates and water rates are adjusted on completion or closing between the seller and the buyer.

land tax

If the seller is liable to pay land tax on the real estate, the general practice is for the land tax to be adjusted between the seller and the buyer on completion or closing even if the real estate will not be liable to land tax in the buyer’s ownership (see Land Tax in the chapter on Tax on page 51).

Key issuesIn Australia the key parties involved in real estate transactions vary according to the type and complexity of the transaction. They include:

purchasing and selling agents•

lawyers•

building consultants•

specialist consultants where necessary•

the local municipal council.•

The processes involved in real estate transactions are governed by a combination of legislation and commercial practice. However, disclosure requirements vary across the different States and Territories and it is important to be familiar with these variations.


Structures for investing in Australian real estatea Foreign investor may invest directly or indirectly in australian real estate through a numBer oF diFFerent structures.

The most common choices of vehicles used to make direct and indirect real estate investments are:

unit trusts•

a wholly or partially owned subsidiary company •(where the Australian entity is financially independent from its parent)

direct foreign investment or a branch of a foreign company•

REITs including wholesale real estate fund structures. •

The choice of structure most suited to a foreign investor’s particular circumstances will depend on various factors including the commercial opportunity and the different legal, accounting and taxation implications (see chapter on Tax on page 47).

Particular regulation also applies to the acquisition, issue and holding of securities in Australian public companies, wholesale real estate funds and REITs. This is discussed in the chapter relating to Australian Real Estate Investment Trusts on page 38.

unit trusts

A unit trust is a trust in which the beneficiaries’ interests are divided into units. As with all trusts, a trustee is necessarily involved and it is the trustee (invariably a company) which owns the legal title to the assets. The corporate trustee is often the manager of the investment as well. Otherwise the trustee appoints a manager to undertake and manage the investment.

The unit trust deed provides the mechanics for the creation and transfer of the units and investment of the trust funds. The shareholders in the trustee and the management

company can be the same parties as the unit holders in the unit trust. This is an attractive factor as it allows the parties to control the management of the investment business while at the same time affording them the benefits of being beneficiaries of the unit trust. These relationships and the management of the enterprise are governed by the unit holders agreement between the unitholders/shareholders. This agreement will often also include the management company as a party.


Generally, the business of investing in and owning units in a private unit trust is not governed by the Corporations Act 2001 (Cth). (The Corporations Act regulates investment in public unit trusts.) However, the management of the trust business is usually undertaken by a corporate vehicle and so the provisions of the Corporations Act with respect to the management of the business itself apply if the corporate vehicle is incorporated in Australia. The comforts and certainties discussed below regarding companies are therefore still available with respect to the conduct of the investment.

The unit holders may be fully liable for the debts of a unit trust where recourse to the venture itself does not satisfy the debt. It is usual to include a provision in the unit trust deed seeking to limit the liability of the unit holders and the use of a corporate manager can assist in limiting this liability.

Tax treatment of unit trusts is a mix of the tax treatment of companies and partnerships. Where income is earned by the trust and distributed to unit holders, the position is similar to a partnership. The various unit holders include the income in their individual tax returns. The trustee files a tax return but is itself not taxable on income which it has distributed to the unit holders.

If the income is not distributed to the unit holders then the trustee is liable for tax on the income. In the case of losses, the position is the same as that with respect to a company: losses are not available to the unit holders but stay in the trust and may be carried forward for offsetting against the trust’s income in future years. Many of the restrictions that exist in the case of a company carrying forward tax losses do not apply to trusts in a tax loss position.

estaBlishing a company in australia Companies are regulated in Australia under the Corporations Act. The Australian Securities and Investments Commission (ASIC) has general responsibility for administration of the Corporations Act. ASIC has business centres throughout Australia.

The Corporations Act allows for the incorporation of certain types of companies. Most relevantly for real estate investors:

a company limited by shares•

a company limited by guarantee•

a company with unlimited liability.•

The liability of the members of a company limited by shares or by guarantee is limited to the amount agreed to be contributed by the members by way of share capital or guarantee. The liability of the members on the winding up of an unlimited company is unlimited.

An Australian subsidiary of a foreign corporation may be any of the above types of company. The most common type of company is the company limited by shares, which may be either a proprietary (private) company or a public company.

A proprietary company may not have more than 50 non-employee shareholders, and is relieved from some of the accounting and administrative requirements imposed on public companies. The proprietary company is the most common type of company because it has the advantages of being simpler to manage and less expensive to administer.

A company with limited liability for its members must include “Limited” or “Ltd” at the end of its name.

A proprietary company must include “Proprietary” or “Pty” in its name.

A company must have at least one Australian resident director and maintain a registered office in Australia. A company must also appoint an Australian resident “public officer” for tax purposes.

An investor may either incorporate a company (which may be done within a few days) or acquire a shelf company, which is an existing company, recently incorporated and available “off the shelf” (that is, immediately).


incorporated Joint ventureAn incorporated joint venture is operated by a special purpose joint venture company (JVC) in which the joint venture participants are shareholders. The joint venture has its own separate legal identity. A shareholders agreement between the participants is entered into and, at the same time, a company is formed to own and control the investment with an agreed number of directors appointed by each party.

If the JVC is an Australian incorporated company, in addition to being governed by the contract between the participants, the JVC, as a separate legal entity, is subject to the Corporations Act. This brings a large degree of certainty, uniformity and accountability to the operation and a well-known structure of management and administration.

The liability of the participants in a JVC (as shareholders) is limited. They may agree to take a greater risk than their status as shareholders imposes – for example, by providing security for the JVC’s borrowings. Further, directors appointed by the participants must be aware of their obligations under the Corporations Act to the JVC and take care not to act in such a way as to make the shareholder they represent liable for any of the JVC’s debts. As shareholders, the participants do not have special or fiduciary duties to each other, although the provisions of the shareholders agreement will almost certainly create mutual obligations.

As ownership interests are held by way of shares in the JVC, the shareholders agreement will regulate the participants’ rights regarding transfer of interests.

Any profits to be distributed will be by way of dividends which will be distributed after the JVC has itself paid tax. However, any losses of the JVC cannot be offset against the participants’ own income. As a corporation, the JVC can retain profits.

unincorporated Joint ventures (not a partnership)In an unincorporated joint venture, the participants agree to co-operate in relation to a commercial undertaking or real estate investment, and to hold their interests and entitlements in the investment separately as to their respective shares rather than jointly.

As there is no company structure, the contract between the participants will contain all the terms governing their relationship, the operation of the venture and their obligations to each other. Each participant receives its benefit from the undertaking in kind. The output from the venture is shared in a pre-determined way and each participant disposes of its share as it pleases. This form of joint venture is therefore most applicable to mining and resources operations.

One of the main attractions of this structure stems from the potential for taxation advantages. The joint venture itself does not receive income. Each participant’s income from the venture arises only if and when it sells its interest in the investment. As this income flows directly to a participant, it can be treated along with all other income – and losses – of that participant. Similarly, if the participant suffers a loss from its involvement in the investment, the loss will also be treated along with that participant’s income from other sources. Each participant can potentially make an independent election as to depreciation, depending on its own situation.

This structure allows for the limitation of a participant’s liability. The participants own the assets of the joint venture as tenants in common and each participant will not be liable for the debts and obligations of either the investment or the other participants beyond this interest. While this is subject to agreement between the participants, such limitations are common in joint venture agreements and the liability of the participants is usually expressed to be several rather than joint.

It is usual for the participants to agree that they cannot bind or act as agent for either each other or the venture itself except as specifically provided in their agreement. This is to avoid a defining characteristic of partnerships – the mutual agency of the participants.

It is quite usual for an unincorporated joint venture to have a manager – often a nominee corporate entity – which acts as agent for the participants. The manager can take responsibility for all of the day to day activities relating to the investment. This helps to avoid duplication and inefficiencies. However, such arrangements need careful planning and documentation to ensure that they do not constitute a partnership. Importantly also, if the manager contracts with a third party expressly on behalf of all the participants, there is a risk that each will be liable for the whole of the debt to the third party, unless the contract expresses the nature of their relationship and that their liabilities are limited to their respective shares.

The duties owed to the other participants are recorded in the joint venture or ownership contract. The range of fiduciary duties owed under partnership law is largely excluded.


partnershipsPartnerships are also unincorporated joint ventures. A partnership joint venture will be governed not only by the contract between the parties but also by both legislation and the common law relating to partnerships.

As with other unincorporated joint ventures, the main advantage of this type of structure is that the partnership itself is not a taxable entity (although the partnership files a tax return). Both income and losses are included along with other income and losses each partner may have.

A major distinction between partnership and non-partnership joint ventures is that with a partnership, each partner has unlimited liability for all of the partnership’s debts. Further, a partner generally has power to pledge the credit of fellow partners within the scope of the partnership business. This can be limited by agreement between the partners but will not be effective against a third party if that third party does not know of the limitation.

Partners have both common law and statutory duties to one another. A partnership is a fiduciary relationship of mutual confidence and trust.

A partner has no title to specific partnership assets. A partner’s interest is merely a right on the dissolution of a partnership to a proportion of the surplus remaining after realisation of all assets and payment of partnership liabilities.

Forms of limited partnership are available in all Australian jurisdictions. They are intended to limit the liability of passive investor partners (known as “limited partners”). However, the limited partners lose the tax advantages otherwise enjoyed and income is taxed at the corporate rate.

individualsDirect investment in real estate by an individual foreign investor would be unusual except for off the plan acquisitions of residential real estate, as an individual would not have limited liability or the potential for effective taxation structuring.

registering a Foreign companyA foreign company conducting business in Australia, other than through an Australian subsidiary, must register as a foreign company with ASIC. A foreign company wishing to apply for registration must:

reserve the company’s name with ASIC•

lodge with ASIC a certified copy of •its certificate of incorporation and constituent documents together with an application form setting out various particulars relating to the company

appoint a local agent to represent •the company in Australia.

If ASIC is satisfied with the application and supporting documentation, registration usually occurs within approximately two weeks. Once registered, the company is required to lodge copies of its annual financial statements and comply with various other obligations contained in the Corporations Act.

Key issuesWhen choosing an investment structure, you need to ensure that the structure will serve, rather than obstruct, your proposed objectives in Australia.

Your choice of investment structure should only be made after you have also considered the taxation consequences of investing in Australia (see Tax chapter on page 47).


Australian Real Estate Investment Trusts (REITs)

investor Friendly The Australian legal and regulatory framework for the REIT market is investor focused and investor friendly. The legal framework has allowed flexible investment structures supported by well established and detailed legal principles, while at the same time requiring rigorous disclosure and corporate governance. These features have allowed the market to meet investor criteria such as liquidity, security of title, tax pass through treatment, expert management, and the requirement for a transparent and responsive corporate governance.

The legal framework is responsive to cross border investment. The REITs listed on the Australian Securities Exchange (ASX) include a number of funds with substantial or exclusive offshore assets (eg mandates focused solely on US, European or Japanese assets).

The main legal vehicle used for both listed and unlisted REITs in Australia is the trust as understood and developed in common law systems.

legal and regulatory FrameworkIn Australia REITs are a specific application of the general law of trusts. This differs from jurisdictions such as Japan where the legal vehicle is a special form of corporation supported by the statute under which it is formed.

The general law of trusts provides a comprehensive set of core legal principles governing the relationship between trustees (as the holder of the fund), the investors (as beneficiaries) and the fund assets, including issues such as:

who owns the assets and what kind •of real estate interests they have

powers of the trustee to deal with the assets, •to borrow and generally to manage the fund

kinds of securities that the trustee •can issue (ie units in the trust)

fiduciary duties owed by the trustee to •the investors (ie the unitholders)

tax treatment of the revenue, gains •and losses derived from or incurred in relation to the assets

rights and remedies of unitholders on an •ongoing basis and on the closing of the fund

liabilities of unitholders.•

australia has one oF the largest, most sophisticated and transparent reits markets in the world with more than 80% oF institutional grade real estate securitised. australia’s First listed reit was estaBlished in 1971 and real estate Funds now extend across most real estate asset classes.


Overlaid onto this general law is a detailed regulatory structure implemented through the Corporations Act 2001 (Cth). REITs are regulated under this legislation as managed investment schemes (MIS). They are required to be registered, to have a responsible entity to manage the fund, to issue a product disclosure statement when interests in the fund are offered for investment, and to comply with the ongoing management and disclosure requirements applying to managed investment schemes.

MIS are also subject to the provisions in the Corporations Act concerning takeovers and related party transactions. Recent consolidation of funds in the industry has put particular focus on these aspects of the law.

As listed entities, REITs are also subject to the rules of the Australian Securities Exchange (ASX).

Aside from the general trust law aspects, special features which distinguish Australia’s REITs from REITs in other jurisdictions include:

the principle of external management and its •recent restructuring through stapled securities

the impact of Australian takeovers law •on the terms of underlying co-ownership and asset management agreements

the impact of tax and stamp duty on •the structure and activities of funds.

external management and stapled securitiesThe idea of an external manager is deeply rooted in the legal structures used for real estate funds in Australia. In the classic structure the real estate is held on trust for the investors by a trustee and the business of managing the fund is carried on by a separate manager. More recently for REITs and for some unlisted real estate funds such as wholesale real estate funds, the role of the trustee and manager has been combined into a single responsible entity. This is still external management. The ownership and control of the manager is separate from the ownership and control over the real estate assets.

In the classic structure, the trustee’s role is passive. It holds the assets for unitholders and distributes the net income of the fund to them. The manager makes all the decisions concerning the operation of the fund and undertakes all negotiations, reporting and other activities to implement those decisions.

In the new structures using responsible entities, the responsible entity performs both the passive trustee role and also provides (as part of its own business, not the business of the trust) fund management services for the benefit of the unitholders. Its function is therefore still to act as an external manager.

However, the principle of external management has recently become qualified by the market practice of stapling securities. The shares in the manager and the units in the REIT are both listed and they are quoted and traded on the ASX as if they were a single security. They cannot be traded separately.

The stapled structure effectively changes the REIT to an internal management structure for investor purposes. This has developed in the market in recent years partly in response to investor demand for returns to the manager to be more closely aligned with investor interests and partly due to the vulnerability of managers in REIT takeovers.

The stapled structure is preferred in Australia to a simple corporate structure where a listed company holds the assets. This is because of the tax advantages where the assets are passively held on trust for unitholders and the active management is undertaken by a separate vehicle.


tax treatments oF reits in australiaaustralia’s tax and trust laws have Been instrumental in creating a class oF proFessional Fund managers skilled at long-term ownership oF real estate assets and a market that relies heavily on eQuity For reits Financing.

The tax structure requires the real estate holding vehicle to be a passive fund and allows the fund to distribute 100% of the cash it derives from its assets. This allows Australian REITs to maximise their yields but it is in turn dependent on their ability to raise equity in the market for refurbishment and other management requirements. The regulatory structure supports this raising of equity through rigorous disclosure, licensing and registration requirements, all designed to promote transparency and investor confidence. See also the section on taxation of REITs in the tax chapter on page 49.

net income, depreciation and cash distriButions

Under Australia’s tax laws, a trustee will not normally be liable to pay income tax on the income of the trust to the extent that unitholders are presently entitled to the income of the trust. Instead, the unitholders are taxed on the share of net income distributed to them.

Significantly for real estate funds, the deduction for depreciation allowed to owners of real estate is included in the calculation of the net income of the fund. Thus, from a tax perspective, investors in real estate funds effectively enjoy the same tax treatment for depreciation on real estate assets as direct owners of real estate.

As a result, the cash available for distribution may be higher than the net income for tax purposes. If the amount distributed to unitholders is greater than the net income for tax purposes, it is treated for tax purposes as a distribution of capital and reduces the unitholders’ cost base in its investment (which is relevant only to non-resident unitholders if the investment qualifies as “taxable Australian property” the capital gains in respect of which are taxable in the hands of the non-resident). Unitholders do not pay tax on this part of the distribution until they sell their units in the trust and then only at the concessional capital gains tax rate for individuals.

stapled securities

The stapled security structure allows the trust component of the stapled security to enjoy the tax treatment available to passive trusts. By contrast, that tax treatment would not be available to a single company holding and managing the real estate assets. In the case of REITs with stapled securities, the dividends derived from the shares in the responsible entity are subject to the usual tax treatment of corporate dividends, including franking credits.

division 250

Very broadly, capital allowance deductions available to a taxpayer may be denied or reduced under the new rules in Division 250 of the Income Tax Assessment Act 1997 (Cth) where (among other things) the relevant asset is being put to a “tax preferred use” by a tax exempt entity or a non-resident for an arrangement period greater than 12 months, and where the taxpayer who would otherwise claim capital allowance lacks “predominant economic interest in the asset”. (For example if an Australian trustee of a trust acquires Australian real estate with more than 55% limited recourse funding and leases the land to a non-resident it would be necessary to consider Division 250.) Further advice should be sought on whether Division 250 applies in the circumstances of the individual taxpayer.

puBlic trading trusts

This general tax treatment does not apply to public trading trusts which are treated as companies for income tax purposes. A public trading trust is a public unit trust which, at any time during the relevant year of income, either carried on a trading business itself, or directly or indirectly controlled the affairs or operations of another person who was engaged in a trading business. A trading business does not include a business consisting wholly of investments in land for the purpose (or primarily for the purpose) of deriving rent. For this reason, REITs are structured so that the trust holds the real estate as an investment in land for the purpose of, or primarily for the purpose of, deriving rent. However, certain “excluded rent” is treated as part of a trading business. If the rent is worked out by reference to profits of an entity using land, and such rent is under an arrangement that is designed to result in the transfer of all or substantially all of what would otherwise be the profits of the entity to another party to the arrangement, that rent is excluded rent.


stamp duty

State governments in Australia impose duty on conveyances of real estate at maximum rates of between 4% and 6.75% of the unencumbered value of the real estate. In addition, a land rich or landholder duty is imposed at the conveyance rate on certain acquisitions of equity interests in private corporations or trusts which, directly or indirectly, hold land. In some States, the landholder provisions apply to the takeover of a listed entity, as well as to the issue or transfer of interests in unlisted funds. In general, they do not apply to a transfer of units in a widely held REIT which does not involve a significant change in interests, but they have had an impact on the preferred arrangements for wholesale funds and for the intermediary vehicles (such as sub-funds) through which a REIT may invest. See further details regarding the operation of the land rich duty provisions in the Tax chapter on page 51.

transparency and investor conFidenceIn Australia the reliance of the REIT market on equity financing requires a high level of investor confidence. This is promoted through the regulation of REITs as managed investment schemes and by the high level of transparency. The REIT market is one of the most analysed sectors of the economy. Analysts are assisted by a title registration system that requires significant detailed disclosure of real estate dealings and by continuous disclosure requirements for securities, including REIT units that apply to listed and certain other entities.

regulation oF managed investment schemesMost real estate funds will be managed investment schemes for the purposes of the Corporations Act. This is because they involve the pooling of money for investment in a scheme (deriving a return from real estate) where the members of the scheme do not have day-to-day control over the operation of the scheme.

registrationAll REITs, and some unlisted real estate funds, will need to be registered as managed investment schemes under the Corporations Act. In general, a managed investment scheme must be registered under the Act if:

it has more than 20 members;•

it was promoted by a person, or •an associate of a person, who was in the business of promoting managed investment schemes when the scheme was promoted; or

it has been identified by the •Australian Securities and Investments Commission (ASIC) as part of a group of closely related managed investment schemes that together have more than 20 members.

If a person operates a managed investment scheme in breach of the registration requirement, ASIC, the operator or any member of the scheme can apply to the Court to have it wound up.

compliance plan and other reQuirementsA registered management investment scheme must have a constitution and a compliance plan which meet the requirements of the Corporations Act, and an auditor must be appointed to review the adequacy of the compliance plan and compliance with it. At least half of the responsible entity’s board members must be composed of external directors or the responsible entity must establish a compliance committee, the majority of whose members must be external.

responsiBle entityThe aim of the Australian legal and regulatory framework is to locate in one clearly identified entity (ie the responsible entity) full responsibility for the management of registered managed investment schemes on behalf of the members.

This makes the responsible entity the pivotal entity in the legal and regulatory framework for registered managed investment schemes. It has strong decision making authority but this authority comes with heavy duties and obligations. These include:

the responsible authority is •obliged to operate (ie manage) the scheme and perform the functions conferred on it by the scheme’s constitution and the Corporations Act

it holds the scheme assets on trust •for the members, and thereby undertakes fiduciary obligations to them. In many (but not all) cases it is obliged to employ a custodian of the scheme assets. This is an additional layer of investor protection and does not replace the responsible entity’s own fiduciary obligations

it is personally liable to a member •for any loss or damage suffered by the member because of conduct of the responsible entity that contravenes the relevant provisions of the Corporations Act. This general liability is supplemented by a series of specific duties which are noted in a following section.



licensing reQuirementsThe responsible entity must be a public company that holds an Australian financial services license authorising it to operate a managed investment scheme.

To obtain a license the applicant company will need to satisfy financial requirements and a series of non-financial criteria administered by ASIC. The financial requirements for a licensed operator of a real estate fund include:

risk management systems•

positive net assets, solvent, sufficient •cash resources for three months (including cover for contingencies)

net tangible assets of up to •A$5 million

surplus liquid funds of A$50,000.•

The non-financial criteria focus on systems, supervision, training and adequate staff, IT and other resources.

disclosure reQuirements

initial oFFer oF interests

Where an interest in a managed investment scheme is offered to a retail client, a product disclosure statement (PDS) must be given to the retail client.

The PDS must include certain information and statements about the product as reasonably required for the purpose of making a decision as a retail client whether to acquire the product. This includes information about benefits, risks, costs, commissions, significant characteristics, significant tax implications, dispute resolution, cooling off periods, and the extent to which labour, environmental, social or ethical standards are taken into account in the investment decisions of the scheme.

This obligation does not apply where the offer or issue is made to a professional investor or a person with net assets or gross income above the prescribed threshold (currently A$2.5 million and A$250,000 respectively) who is not acquiring it for use in a business, or in other circumstances that do not constitute an offer or issue to a retail client. There are also exemptions for small scale offerings, takeovers and other specific situations.

ongoing disclosure

There are ongoing disclosure requirements applying both in relation to the managed investment scheme and also to the PDS.

Annual audited financial and directors’ reports as well as the usual financial reporting obligations of the responsible entity as a public company are required for managed investment schemes. The responsible entity must also provide an annual report to members and a statement as licensee to ASIC. A REIT (and any other registered managed investment scheme which is a disclosing entity) must also provide half-yearly audited financial reports and directors’ reports.

In the case of ASX-quoted managed investment products, such as units in a REIT, there are further obligations which essentially require disclosure of information that is not generally available and that a reasonable person would expect to have a material effect on the price or value of the REIT units. REIT units, where they are enhanced disclosure securities, also attract periodic reporting obligations.


mergers, takeovers reconstructionsOver the last few years there has been consolidation in the REIT sector in Australia giving rise to both friendly and hostile takeover bids, and more recently reconstruction and recapitalisation activity.

There are three main legal techniques that have been explored in Australia to take control of a REIT. These are a takeover bid, a scheme and a change of responsible entity.

A takeover bid – this involves a potential acquirer making an offer to all unitholders of a target REIT to acquire their units in the REIT on the same terms. The bid may be made off market (involving written offers to all unitholders) or on market (where the bidder’s broker stands in the market for a minimum period of one month and offers to buy all securities offered at the bid price). On market bids are relatively rare because they must be for cash and unconditional.

Schemes – a REIT can takeover another REIT by agreement through a Scheme approved by a special resolution of the members of the target REIT (Trust Scheme). The Scheme provisions are incorporated in the constitution of the target REIT. A Scheme can be used for either a listed REIT or an unlisted REIT. If the target REIT is listed, the Scheme would also need the approval of target members under the takeovers provisions of the Corporations Act. The responsible entity of the target REIT may choose to apply to the Court to approve the Scheme under the Trustee Act but this is not an essential step for a Scheme. Where the proposed transaction involves a company (or other registrable Australian body) as well as a REIT, the Trust Scheme for the REIT could be combined with a member and court approved scheme of arrangement for the company (or other registrable Australian body) under the arrangement and reconstruction provisions in the Corporations Act 2001 (Cth).

Replacing the responsible entity – the third technique is to replace the responsible entity. The responsible entity of a REIT can be replaced by a resolution of unitholders. If the acquirer’s aim is to takeover the business of managing the REIT, rather than ownership and control of the REIT itself, it will usually be cheaper and faster for it to seek to be appointed as responsible entity of the REIT in place of the current responsible entity at a unitholders’ meeting. In essence the takeover becomes a proxy battle.

These techniques have also been considered for reconstructions, along with recapitalisation by way of rights issues and private placements.

In all three cases the REIT’s constitution is a key factor in the legal analysis, particularly as to the powers of the responsible entity (as a trustee), and the extent of the unitholder approvals required for the proposed transaction.

Other issues of significance in REIT mergers and takeovers include:

Pre-emptive rights• – the impact of pre-emptive rights in co-ownership and management agreements exercisable upon relevant changes in control

Fees• – whether the existing fee arrangements will apply to the benefit of the new responsible entity and its group after the proposed transaction is implemented

Related party transactions• – whether the proposed transaction involves any related party transactions that require unitholder approval

Voting rights• – whether the REIT’s constitution needs to be amended by unitholder resolution and, if so, the analysis of voting rights

Issue pricing• – if the transaction involves the issue of units in the REIT the constitution – which regulates the issue price – may require amendment to enable the issue to proceed

Statutory novation• – whether the statutory novation of the responsible entity’s rights, obligations and liabilities extends to all relevant liabilities

Tax• – the tax implications of stapling arrangements for the structure of transaction

Stamp duty• – the stamp duty implications of any pre-transaction restructuring and the process of privatisation or delisting

Conflicts of interest• – the arrangements required to address potential conflicts of interest where the new responsible entity continues to be the responsible entity of another REIT

Financier consents• – whether any change of responsible entity or change in control triggers any financier consent requirements

FIRB approval• – where the proposed acquirer or new responsible entity is foreign owned or controlled, whether approval is required under Australia’s foreign investment laws (see the chapter on Foreign investment in Australian real estate on page 19).


Foreign investment in reits in australiaForeign institutional investment in REITs in Australia will not usually give rise to issues under Australia’s foreign investment laws because the investment will usually fall below relevant thresholds. However, foreign control over Australian real estate funds or fund managers, and changes in controlling interests in a responsible entity, may do so (see the chapter on Foreign investment in Australian real estate on page 19).

Key issuesREITs are a very important aspect of real estate investment in Australia, with more than 70% of institutional grade real estate securitised.

The Australian legal and regulatory framework for the REIT market:

is investor focused and investor friendly•

allows flexible investment structures •

requires rigorous disclosure and corporate governance•

is responsive to cross border investment.•

These features have allowed the market to meet investor criteria such as:

liquidity•

security of title•

tax pass through treatment•

expert management•

transparent and responsive corporate governance.•

The regulatory structure supports raising of equity through rigorous disclosure, licensing and registration requirements, all designed to promote transparency and investor confidence.


Finance and bankingaustralia has an extensive, competitive and well developed Banking system as well as deBt derivatives markets, comprising Both Bank and non-Bank sectors.

Australia’s efficient State and Territory based Torrens Title systems also provide a security for both buyers of real estate and finance providers. A real property mortgage can be granted by the relevant landowner in favour of a financer and registered with first ranking priority over the title to the corresponding real estate. A combination of a sophisticated banking sector, secure titles systems and a robust legal system creates a highly efficient commercial and legal environment structure for financing real estate, thus boosting investor confidence and facilitating real estate investment.

the Banking sectorThe bank sector consists of:

the Reserve Bank of Australia (RBA) – Australia’s central bank

the Australian Prudential Regulation Authority (APRA)

a number of banks licensed to carry on banking business under the Banking Act 1959 (Cth)

foreign banks licensed to operate through a branch in Australia

Australian-incorporated foreign bank subsidiaries.

The non-bank sector consists of numerous types of financial institutions, including:

merchant/investment banks•

finance companies•

building or cooperative societies•

credit unions•

friendly societies•

mortgage originators•

insurance companies•

institutional funds.•


regulatory FrameworkRegulation of the banking and finance system in Australia is split between the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). Whilst there is a certain degree of overlap in functions performed, ASIC has primary responsibility for market integrity and consumer protection, while APRA is primarily responsible for the prudential supervision of deposit-taking institutions (banks, building societies, credit unions and friendly societies), life and general insurance companies and superannuation funds.

The Reserve Bank retains its central banking functions including responsibility for payment systems.

APRA has issued capital adequacy guidelines for banks following consideration of the Basel guidelines. All financial institutions regulated by APRA are required to report on a periodic basis to APRA.

Financial intermediaries, such as merchant banks and investment banks (which do not otherwise operate as banks or deposit-taking institutions) are neither licensed nor regulated under the Banking Act and are not subject to the prudential supervision of APRA. They are required to obtain licences under the Corporations Act 2001 (Cth) or other Commonwealth or State legislation, depending on the nature of their business activities in Australia.

Most, if not all, of the merchant and investment banks are registered under the Financial Sector (Collection of Data) Act 2001 (Cth). This Act requires registered financial corporations to provide statistical information to APRA.

credit Facilities and Financial marketsBorrowers in Australia can raise debt finance either from banks and other credit providers or direct from domestic and/or offshore capital markets. The Consumer Credit Code of each State or Territory regulates loans for any purpose to individuals resident in those jurisdictions. The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) applies to all lenders, whether loans are made to individuals or other entities.

reQuirements For real estate FinanceThe minimum formalities for real estate lending are as follows:

obtaining a valuation •of the real estate

undertaking title searches and •due diligence of the real estate

being granted security in •the form of a preferably first ranking real property mortgage over the real estate which is registered in the applicable State of Territory Land Titles or Registrar General’s office

requiring the borrower to insure •the improvements with an insurance policy which notes the lender’s interest and if applicable, notes the lender as loss payee

entering into appropriately •tailored facility and related documentation in connection with the real estate financing.

To protect themselves from default by the borrower a lender for real estate investment would also typically:

obtain or require a valuation of •the real estate and only lend up to a certain percentage of its value

obtain a registered mortgage •over the real estate as security, preferably from a priority perspective, a first registered mortgage

if the borrower is a special •purpose vehicle, obtain an ASIC registered all assets fixed and floating charge and, if the structure of the transaction permits, a registered equitable mortgage of the shares in the borrower (assuming it is a corporate entity acting in its own capacity) and / or an equitable mortgage of units over the units in a Unit Trust (if the borrower is established as trustee of a special purpose unit trust)

undertake stringent credit checks •and assessment of borrower and other security providers (for example, guarantors) and / or project which the real estate lender is seeking to finance. This could include cash flow, interest cover, loan to value ratio and similar analyses

obtain or require personal •guarantees from the directors/principal shareholders if the borrower is a private company.

Key issuesAustralia’s banking system and debt and derivatives markets provide a secure basis for investor opportunities, offering a wide range of sophisticated products.

Australia’s efficient and secure real estate titles systems also provide security for both buyers of real estate and finance providers.

When making the decision to invest in Australian real estate you will need to consider your financial management strategy including funding options and typical requirements of lenders.


Taxaustralia’s three levels oF government – Federal, state and local – all impose taxes on real estate transactions and investment. in order to Facilitate cross Border investment the australian government has also estaBlished taxation agreements with numerous Foreign governments to simpliFy the taxation oF Foreign investors and avoid douBle taxation.

The main taxes that apply to real estate investment and transactions for both local and foreign investors in Australian real estate include:

Income tax – which encompasses capital gains tax (CGT) and withholding tax for foreign investors

Goods and services tax (GST)

Stamp duty

Land tax.

income tax Income tax is imposed by the Australian government and is levied on individuals, companies, superannuation funds and, in some circumstances, trustees. The income of partnerships (other than limited partnerships) and trusts (other than certain public unit trusts) is generally taxed in the hands of partners or beneficiaries.

Income tax is levied on taxable income, being assessable income less allowable deductions. Assessable income includes net capital gains under the capital gains tax (CGT) rules.

Taxable income is generally calculated for an income year, which is the year ending 30 June, unless the taxpayer has been given leave by the Commissioner to adopt a substituted accounting period. Leave will usually be granted for an entity with a foreign parent to adopt an accounting period that ends at the same time as its parent’s, or a few months earlier. The taxpayer will then be treated as completing its income year up to six months earlier or later than other taxpayers.

A tax loss may arise for an income year if the allowable deductions exceed the total assessable and exempt income for the year. Such losses may be carried forward and deducted in future years, subject to satisfying certain tests in the case of companies and trusts.

taxation oF real estate transactionsGains on the disposal of real estate can be taxed as ordinary income or as capital gains.

The company tax rate on income is 30% and the top marginal tax rate for individuals is 45%. From an income tax perspective, both an Australian resident taxpayer and a foreign resident taxpayer can be subject to capital gains tax on interests in Australian real estate holding companies or entities.

Foreign investors are usually subject to tax on the disposal of Australian real estate.

Individuals are generally exempt from tax on gains made from selling their principal residence.

Where the seller is an individual, trust or Australian complying superannuation fund and has held the real estate for at least 12 months, a discount may apply so that only 50% (or 33 ⅓Ä% in the case of a superannuation fund) of any capital gain will be subject to tax.

The following sections outline taxation regulations for different entities. Please also see the chapter on REITs for more detailed information on the taxation of investments in REITs on page 40.


income tax rates – resident individuals Taxpayers who are residents of Australia are liable to tax on income derived from all sources, whether in or out of Australia.

The marginal rate of tax applicable to an Australian resident individual is scaled according to his or her annual taxable income. The resident individual tax rates for the 2008/09 tax year are as follows:

resident individual tax rates 2008/09 taxaBle income Band ($)

marginal rate*

0-6,000 0%

6,001-34,000 15%

34,001-80,000 30%

80,001-180,000 40%

>180,000 45%

*These rates do not include the Medicare levy.

Income “averaging” applies to certain classes of “special professionals” (eg authors, inventors, performing artists and sportspersons) to prevent them from being pushed into higher tax brackets when their professional income for a year exceeds their average professional income. Higher tax rates apply to certain income of minors.

income tax rates – non-resident individuals Non-residents are liable to tax only on income derived from Australian sources. The non-resident individual tax rates for the 2008/09 tax year is as follows:

non-resident individual tax rates 2008/09 taxaBle income Band ($)

marginal rate*

0-34,000 29%

34,001-80,000 30%

80,001-180,000 40%

>180,000 45%

* Non-residents do not pay the Medicare levy, nor are they entitled to rebates.

Non-resident individuals are taxed on their Australian source income (apart from dividends, interest and royalties, which are subject to withholding tax) at the above rates. In some situations a non-resident individual may be relieved from Australian tax under an applicable double tax agreement (see page 50).

companies

taxation oF australian resident companies

An Australian resident company is liable for tax at the rate of 30% on its worldwide taxable income.

A company is defined for tax purposes as including all bodies corporate and unincorporated but excluding partnerships (other than limited partnerships, which are generally taxed like companies). Certain public unit trusts are also taxed like companies.

taxation oF non-resident companies

A non-resident company is taxed on its Australian source income (apart from dividends, interest and royalties, which are subject to withholding tax) at the same rate as resident companies. A non-resident company may be relieved from Australian tax under a relevant double tax agreement.

Certain foreign hybrid entities may be treated as companies or partnerships for tax purposes at the election of the Australian shareholder or partner.

trusts Investors in a resident trust are generally taxed on the share of the net taxable income equal to the share of trust income they are presently entitled to receive. If no beneficiaries are presently entitled to receive income of the trust estate the trustee must pay income tax (potentially at the top marginal rate for individuals).

The net income of a trust estate is generally the difference between its assessable income (including net capital gains) and all allowable deductions, calculated as if the trust was a resident taxpayer. A net loss of a trust is not deductible to beneficiaries. Resident

beneficiaries, whether individuals or companies, are required to include in their assessable income the share of the net income of a resident or non-resident trust estate equal to the share of the trust income to which they are presently entitled, and are subject to tax on their share of the net income at the rates generally applicable to them.

Non-resident beneficiaries who are presently entitled to a share of the trust income are subject to tax on their share of the net income of the trust estate that is attributable to sources in Australia, at the rates applicable to non-residents.

australian real estate investment trusts (reits) Australian REITs are a specific application of the general law of trusts in Australia. The tax structure of REITs requires the real estate holding vehicle to be a passive fund and allows the fund to distribute 100% of the cash it derives from its assets. This allows REITs to maximise their yields but it is in turn dependent on their ability to raise equity in the market for refurbishment and other management requirements. The regulatory structure supports this raising of equity through rigorous disclosure, licensing and registration requirements, all designed to promote transparency and investor confidence.

Foreign investors in Australian REITs are subject to the following:

Australian tax on their share of •the REIT’s net income attributable to Australian sources

Withholding tax of 10% on interest •and 30% on unfranked dividends. This may be reduced by double tax treaties (if applicable)

Capital gains tax on Australian real •estate held directly or indirectly through an interposed entity. Individuals may quality for the 50% capital gains tax discount concession.

In the 2008 Federal Budget, the Federal Government announced that a new managed investment trust withholding tax regime will apply to distributions of certain Australian source income (other than dividends, interest and royalties) of Australian managed investment funds to foreign residents. Where


the foreign resident is a resident of a country with which Australian has an “exchange of information” agreement, the following rates will apply:

22.5% (non-final) for payments •of the first income year after the enabling legislation receives Royal Assent (2008-09)

15% (final) for payments of the •second income year (2009-10)

7.5% (final) for payments of the •third and later income years.

Residents of jurisdictions without an “exchange of information” agreement with Australia will be subject to a 30% final withholding tax. The new rates will apply from the first income year in which the enabling legislation receives Royal Assent. Please refer to the chapter on REITs on page 38.

Foreign investors A foreign investor’s Australian assessable income in a given year of income can include any capital gains and losses from an investment in taxable Australian real estate.

Taxable Australian property includes shares or other interests in Australian land-rich companies or entities with 50% or more (measured by market value) of its assets consisting of Australian property holdings. The foreign resident will only be taxed however if two additional conditions apply:

firstly, the foreign resident must •hold more than 10% of the shares or interests in the Australian land-rich company or entity

secondly, the 10% plus holding •test must be satisfied at the time of the disposal or the CGT event, or alternatively must have been satisfied throughout a 12 month period that began no earlier than 24 months prior.

Other items of taxable Australian real estate include direct holdings in Australian real estate. It also includes any property that the foreign resident had used at any time in carrying on a business through a

permanent establishment, as defined in the Tax Acts, in Australia.

Foreign investors are generally liable for a final withholding tax as follows:

franked dividends – no •withholding tax is payable

unfranked dividends (ie •dividends paid out of profits on which no company tax has been paid) – withholding tax is payable at the rate of 30%

interest is subject to withholding •tax at the rate of 10%

royalties are subject to withholding •tax at the rate of 30%.

The double tax agreements generally reduce the tax on unfranked dividends to 15% (and in some cases to 5% or nil under the US and UK agreements) and on royalties to 10% (5% under the US and UK agreements). The tax on interest is generally not reduced below 10% (although it may be reduced to nil in some circumstances under the US and UK agreements).

douBle tax agreements Australia has entered into agreements with various countries for the purposes of avoiding double taxation of income. The general effect of a double tax agreement is to limit Australia’s taxing rights in respect of certain classes of income derived by a resident of the other country and vice versa.

Although similar, the double tax agreements are not all identical and similar payments may lead to different Australian tax consequences, depending on the country of residence of the taxpayer.

For residents of countries with which Australia does not have a double tax agreement, Australia will generally tax Australian source income derived by such a person determined in accordance with Australia’s domestic source rules. Passive income, such as dividends, interest and royalties, is subject to withholding tax as described below.

transFer pricingInternational transfer pricing rules are contained in both Australian domestic law and double tax agreements. These rules allow the Commissioner to determine and substitute an arm’s length price for Australian tax purposes if the Commissioner is satisfied that the parties are not dealing at arm’s length in relation to an international transaction. Parties will broadly be dealing at arm’s length with each other if they deal with each other as if they were independent persons entering into transactions at market value.

In order to satisfy the Commissioner that an acceptable arm’s length pricing methodology has been adopted in relation to such a transaction (in accordance with OECD guidelines), sufficiently detailed documentation must be maintained.

Foreign exchangeComprehensive rules for translating foreign currency amounts into Australian currency for income tax purposes, and for taxing foreign exchange gains and losses, took effect from the first income year beginning on or after 1 July 2003 (subject to a transitional election). They replace the old rules.

goods and services taxTransfers of real estate are subject to Australian Goods and Services Tax (GST) if the requirements for a taxable supply are satisfied. A supply is defined very broadly and includes the supply of goods, services or real estate and the creation, grant, transfer, assignment or surrender of any right.

GST, generally calculated as 10% of the selling price of the real estate, is imposed on the seller, but in non-residential real estate the cost is normally passed to the buyer under the contract (who can usually claim input tax credits for the GST).

The concessional margin scheme can apply to reduce GST on the transfer of real estate, subject to agreement by the seller and buyer. Under this scheme GST is paid on the difference between the price paid to acquire real estate


and the price received when selling. Where the seller acquired the real estate after 1 July 2000 (when GST was introduced), this price difference, or margin, is calculated by using the actual selling price. Where the seller acquired the real estate prior to 1 July 2000, the margin is generally calculated by reference to the value of the real estate as at 1 July 2000. The margin scheme can only be applied on their sale where the margin scheme was applied to their acquisition.

While the margin scheme can reduce the GST payable, the buyer cannot claim input tax credits for GST paid if the margin scheme applies. Because of this, in practice, the margin scheme is generally only applied where the real estate will (or may be) ultimately redeveloped and sold as new residential premises (as buyers of new residential premises will generally not be entitled to claim input tax credits and so GST will need to be absorbed into the end sale price).

Transfers of farm land and grants of vacant land by government can be GST-free if specific conditions are satisfied. Land transferred as part of a sale of an enterprise (including an enterprise of leasing the land) can also be GST-free under an exemption for the supply of a going concern.

Transfers of residential premises, other than new residential premises or commercial residential premises, are input taxed and so do not attract GST (but input tax credits are generally denied for GST paid on acquisitions in respect of such input taxed supplies).

A transfer of shares or units is also input taxed and so does not attract GST.

stamp dutyAustralian States and Territories impose stamp duty at varying rates on land and certain other property transferred with the land. This may include goods and certain business assets sold with land.

The rate of stamp duty is charged on an increasing scale. As an example, the rates in NSW start at 1.25% and gradually increase to a top rate of 5.5% for land with a dutiable value in excess of A$1,000,000. The rate may also vary depending on the characterisation of the land. For example, the purchase of a principal residence may be subject to concessional rates.

Stamp duty is usually payable by the buyer, although in some States both parties to the transaction are liable. It is normal commercial practice for the buyer to bear the duty.

Stamp duty is payable from one to three months after the contract for sale (or in the case of VIC, the transfer) is signed, depending on the States and Territories. Penalties can apply for late payment. In VIC there are extensions of time for payment of duty on off-the-plan purchases. The land transfer can not be registered until duty has been paid.

transFer duty (excluding shares/units)

Top sliding scale rates for transfers of dutiable property 1, including freehold land (please note that concessional rates of duty may apply to property that is intended to be a home).

state value oF dutiaBle property rate oF duty

ACT More than A$1,000,000 6.75%

NSW More than A$1,000,000 5.50% 2

NT More than A$525,000 4.95%

QLD More than A$980,000 5.25%

SA More than A$500,000 5.50%

TAS More than A$225,000 4.00%

VIC More than A$960,000 5.50%

WA More than A$500,000 5.15%

1 The categories of dutiable property differ among the States and Territories but typically include certain estates and interests in land, goods transferred with land and, in jurisdictions other than VIC, ACT and TAS, intellectual property and goodwill.

2 Residential land with a dutiable value exceeding A$3,000,000 attracts a premium rate of 7% on the excess over A$3,000,000.

Some States and Territories do not impose stamp duty on transfers of shares or units, or impose duty at rates below the rates applicable to transfers of land. To prevent stamp duty on the transfer of land being avoided by interposing an entity, all jurisdictions apply land rich or landholder duty to the acquisition of shares in a private company, or units in a private trust which owns land. The acquisition of an interest in a landholding entity, whether by way of direct transfer or, for example, by means of the issue or the redemption of units or buy-back of shares, can result in a liability for land rich or landholder duty, which is calculated by reference to the proportionate interest in the underlying land at the land transfer rates.

The land rich duty provisions vary considerably from State to State. However, in general, the provisions only apply to changes in “significant” interests in private companies and trusts where land represents a substantial part of the entity’s total property. For example, the provisions in VIC apply to changes of interests of 50% or more in an unlisted company or wholesale unit trust (20% or more in a private unit trust) where land held by it, or entities linked to it, represents at least 60% or more of the value of all property.

However, in NSW, Western Australia, ACT and Northern Territory, the 60% land rich threshold has been removed. Under the landholder duty model, duty will apply to the acquisition of a significant interest in an unlisted entity which holds land with a value in excess of A$2,000,000 (A$500,000 in NT and of any value in Act) regardless of whether it is “land rich”.

In NSW, Western Australia and NT, the provisions have also been extended to the acquisition of a 90% or greater interest in a listed company or trust.

The table on page 51 summarises the current land rich/landholder duty thresholds.


land rich duty

state land rich threshold test 1

local land holdings value test

acQuisition threshold

ACT Nil Nil 50% or more for unlisted companies and wholesale unit trusts, 20% or more for private unit trusts

NSW Nil 2 $2,000,000 3 50% or more for private companies and private unit trusts, 90% or more for listed companies and listed trusts and widely held trusts 4

NT Nil $500,000 50% or more for private companies, private unit trusts and certain mergers of listed companies, 90% or more for listed companies and listed unit trust schemes 5

QLD 6 60% $1,000,000 50% or more for unlisted companies and public unit trusts. No thresholds for changes in interests in private trusts which hold dutiable property in Qld.

SA 7 60% $1,000,000 50% or more for unlisted companies and private unit trust schemes. No thresholds for changes in interests in certain trusts which are connected with SA.

TAS 60% $500,000 50% or more for unlisted companies and private unit trusts.

VIC 60% $1,000,000 50% or more for companies and registered wholesale unit trusts, 20% or more for private unit trusts

WA Nil $2,000,000 8 50% or more for unlisted companies and trusts, 90% or more if listed

1 Total land-holdings of the corporation within and outside Australia as a percentage of all of its property excluding certain “liquid” assets.

2 With effect from 1 July 2009.

3 However, if duty applies, it is calculated on value of land and dutiable goods from 1 July 2009.

4 With effect from 1 October 2009, duty is applied at a concessional rate of 10% of the duty ordinarily payable.

5 These thresholds have effect from the date of introduction into the Legislative Assembly being 6 May 2009.

6 Separate rules apply for trust acquisitions and trust surrenders in private trusts which hold Qld dutiable property.

7 Separate rules for trusts that are not registered managed investment schemes, approved deposit funds or pooled superannuation trusts.

8 If duty applies, it is calculated on the value of WA land and chattels.

Key issuesAustralia’s three levels of government – Federal, State and Local – all impose taxes on real estate transactions and investment.

A foreign investor’s Australian assessable income in a given year of income can include any capital gains and losses from an investment in taxable Australian real estate.

Foreign investors are generally not liable to pay income tax on dividends, interest and royalties derived in Australia. Rather, they are liable for a final withholding tax.

Australia has double tax agreements with other countries which will vary the amount of tax paid by foreign investors.

land taxIf the seller is liable to pay land tax on the real estate, the general practice is for the land tax to be adjusted between the seller and the buyer on completion or closing even if the real estate will not be liable to land tax in the buyer’s ownership.

In all States and the ACT, land tax is payable on an annual basis on the unimproved value of land, subject to certain exemptions eg for a principal place of residence or land used for primary production. Except in the ACT, tax free thresholds apply. These thresholds and land tax rates vary. In NSW the rate is 1.6%, while in VIC the top rate is 2.25% with a surcharge of 0.375% for landholdings held by certain trusts with an unimproved land value of between A$20,000 and A$3 million.


Environmental responsibility and land usethroughout australia there is increasing awareness oF environmental issues and a demand For more sustainaBle development and practices. this has meant Both an increase in opportunities For investment in sustainaBle development and more stringent environmental controls.

These controls regulate activity in the following areas:

development and planning regulation•

pollution and waste disposal•

impact on threatened species•

water access and usage•

European and Aboriginal heritage•

native title•

contaminated land and associated health impacts.•

Federal and state/territory regulationMost environmental controls are imposed by State or Territory legislation. However, the Commonwealth Environment Protection and Biodiversity Conservation Act 2000 (Cth) (EPBC Act) also regulates development having a significant impact on matters of national environmental significance including:

migratory species•

threatened species•

World Heritage properties•

wetlands of international significance•

Commonwealth property and marine areas•

the nuclear industry (including uranium mining). •

Areas of predominantly State or Territory based regulation are discussed below.


Generally, to find out what uses may be permitted on land, it is necessary to review the applicable environmental planning instruments. In NSW these are local environmental plans, regional environmental plans, and State environmental planning policies. The local environmental plans are the primary instrument for most developments. Typically they provide that the land will fall within a zone defined on a map and then prescribe what development may or may not be carried out on that land with or without development consent.

Development control plans may also be in place which contain guidelines for development within a particular local council area or zone. In some cases, these include a requirement that the project be commenced within a prescribed period. There may be further approval requirements before a project can proceed, such as the grant of mining leases or environment protection licences.

While assessment and approval of smaller developments is usually the responsibility of local councils, the relevant State or Territory government will usually be involved in the process of considering and approving large projects, and projects with regional significance. For example, in NSW, the Minister for Planning has extensive powers to assess and approve major projects of State or regional significance and to override other assessment and approval requirements.

For example, in NSW the Environmental Planning and Assessment Act 1979 (EP&A Act) regulates development through two main processes:

The development consent process• – under this process land is zoned by planning instruments and further controls are specified in development control plans. A consent authority, generally the local council, assesses development applications to determine whether the development should be permitted. The construction of the development is then regulated by a certification process and occupation is not permitted until an occupation certificate has been issued.

A process of major project approval• – under this process the Minister may declare types of projects or particular projects to be major projects. The Minister then becomes the approving authority. The State Department of Planning specifies assessment requirements and the assessment is carried out so that the Minister can determine whether to approve the carrying out of a project. For complex and multi-stage projects there are processes for assessment of concept plans.

Projects that are likely to have a significant environmental impact may require a detailed Environmental Impact Assessment (EIA). This may take the form of an Environmental Impact Statement (EIS). The level of detail required for an EIA is steadily increasing. For example, an EIA for a significant mining or infrastructure project typically runs to several volumes and is compiled by a team of planners, ecologists, engineers and other technical experts. The requirements for environmental impact assessment under the Environment Protection And Biodiversity Conservation Act are becoming increasingly relevant to major projects.

It is a common requirement that development must not be carried out without planning approval from the appropriate authority. There are exceptions to this where development might be exempt or complying under particular policies. Typically a planning approval is site specific, which means that successive owners and occupiers can rely upon it.

There are also concepts of existing use rights recognised in some jurisdictions. For example, in NSW these apply where a development was lawfully carried out prior to controls being imposed or where a development had a development consent and subsequently the planning controls were amended. Specific advice would need to be sought for the application of existing use right principles. It would not be wise to rely upon any implied permission being obtained from long use unless it is able to be clearly demonstrated that the use was lawful when commenced.

It is an offence to carry out development without the appropriate approvals and significant penalties may apply.

development and planning regulationIn Australia the zoning of land and control of development is primarily the function of the State and Local governments. Typically, land use is controlled at the broadest level by the division of land into zones. Depending on the zoning of land, a particular development may be permitted without regulatory approval, only permitted with regulatory approval, or prohibited. For example, land in an urban area may be zoned residential and only certain kinds of dwellings and associated infrastructure may be allowed with development consent from the applicable local council. The details of the controls vary from State to State.


The length of time taken for approval depends upon the complexity of the development. A straightforward application to local council should be determined within 40 to 80 days (but often takes longer). A more complex application may take significantly longer. Major projects will often be in the assessment and approval process for in excess of 18 months.

inFormation on land use and occupation

In Australia the primary source of information regarding controls on land use and building and the controls and occupation of buildings is the local council. There are processes for making applications for certificates and the provision of information from a local council.

For example, in NSW a certificate under section 149 of the EP&A Act can be obtained from the local council. That certificate specifies all of the environmental planning instruments that apply to the relevant land and other matters such as whether the land has been declared to be in a flood prone land. These certificates are commonly known as zoning certificates.

There are also separate regulatory agencies for the environment such as an environment protection agency or department of environment. In NSW there is the Department of Environment and Climate Change. These agencies and departments often keep registers and records of specific environmental matters such as contaminated land and licences that have been issued. The requirements for registers and the contents of the registers differ from State to State because of the different regulatory regimes that apply. The contaminated land registers are not comprehensive.

The simplest way for buyers to obtain information is to make the relevant applications to the local council. If there are particular concerns regarding the types of buildings, contamination or the impact of threatened species on development potential, then specialist advice may need to be obtained either from a planning or environmental consult or your legal advisors.

permits and licences For Building works and use oF real estate

For a building such as an office building or residential building the planning and environmental permits and licences that will need to be acquired will generally fall into the following categories:

planning approval (such as development •consent for a local council)

construction certificates to permit the •commencement of the construction

fire safety certificates•

occupation certificates.•

The names of these approvals, permits and licences will vary from State to State.

There are stringent requirements in respect of fire safety prior to the occupation of buildings and certification processes in each State require assessment of fire safety issues and structural matters as part of the approval process. Typically there are requirements for occupation certificates to be issued and a key element of the process for issuing the occupation certificate is the assessment of fire safety.

Other permits and licences may be required depending on the locality, site issues and title scheme.

As approvals can be granted subject to conditions, it is often necessary to prepare further plans and seek further permits or consents under the conditions of the planning approval. For example, it is frequently necessary to prepare an environmental management plan and a health and safety plan and have these reviewed and accepted by relevant authorities.

For other works such as industrial works there may be a range of other licences required including:

licences to pollute•

licences to discharge trade waste•

licences to connect to services and utilities•

water licences.•

Depending on the location it may be necessary to get other licences such as:

licences to disturb relics•

approvals under heritage legislation•

excavation permits•

licences to clear or pick vegetation.•

In addition, approvals may be required under the Commonwealth EPBC Act in respect of specific matters dealt with by that Act.

Fees and levies

Fees are payable when applications are made. The fee varies with the application. It may be necessary to pay multiple fees including, for example for the planning approval and for each certificate required.


A schedule of fees for lodging planning applications can be obtained from the relevant authorities, in particular through local councils where they are the approval authority or from the relevant government departments where they are the approving authority. The schedule may be varied.

Approvals can impose requirements that the applicant pay levies or contributions towards the provision of public services, infrastructure and amenities.

pollution and waste disposalThere are comprehensive pollution and waste disposal laws in most areas of Australia.

Typically, a an environment protection licence (a pollution licence) is required to authorise water pollution or for certain discharges or other impacts such as noise or vibration or to carry out specific activities listed in the legislation. Pollution licences impose discharge limits and regulate the polluting activity in some detail.

Pollution licences are generally granted by the relevant State or Territory environment protection authority (EPA). Each EPA periodically reviews the performance of licence holders. Managers or directors of licence holders may be required to certify compliance with relevant licence conditions on an annual basis.

A breach of a licence condition or of a control imposed by legislation is an offence. There is a range of enforcement options, including prosecution or the issue of penalty notices, including on the spot fines, for less serious contraventions. Significant penalties, including substantial fines and imprisonment, can be imposed by the environmental courts for major pollution offences. Generally, liability is strict, meaning that the fact of pollution is all that the relevant authority will be required to prove in any court proceedings. For the more serious offences, usually associated with maximum penalties of A$1 million or more, negligence or intent must be proved.

If a corporation commits an offence, then each person who is a director or person concerned in the management of the corporation is taken to have committed an offence, unless certain defences can be established. These defences require the exercise of due diligence. In some jurisdictions (for instance, TAS and SA), related corporations may also be liable.

Waste disposal is similarly regulated and disposal to licensed landfills or facilities is generally required. The owner of waste may in some cases be deemed liable for leakage or spillage and incidents on a “no fault” basis.

If an incident occurs which poses a risk to the safety of people, or harm to the environment, then notices can be served by an appropriate authority requiring the cleaning up of the incident and prevention of the incident in future. The approval authority will differ depending upon the incident. Typically:

local authorities will have powers in respect •of dangerous circumstances, for example, on building sites and to protect public safety

a State Department or EPA will have power •to issue prevention notices and clean up notices in respect of pollution incidents

a State Department or EPA will have •powers to issues clean up notices in respect waste or contaminated land.

A specific provision of a licence may require prevention and clean up as well. Each State has reporting obligations for certain incidents.

contaminated landWhere there is contaminated land, regulatory authorities will generally require clean up where there is risk to the health of people or to the environment. Generally, the process will include a process of consultation prior to the service of a clean up notice (except in the case of emergencies or where there are other factors to mitigate against the consultation process).

Where clean up and prevention orders are served it is an offence not to comply with them. The costs of complying with such orders may in some cases be recovered from the original polluter, if they can be located.

Contaminated land issues are particularly relevant where residential development is taking place on land previously used for commercial or industrial uses or for certain agricultural or institutional uses. In those circumstances, particular care needs to be taken to understand the history and condition of the site.

Legislation in most States and Territories regulates the use of contaminated land. The relevant EPA may have power to issue investigation or remediation orders in relation to contaminated land. Typically, the EPA can serve orders on the original polluter or on the owner or occupier of the contaminated land. Remedial standards vary across jurisdictions.

Numerous occupational health and safety issues arise in relation to work on a contaminated site, and State and Territory legislation deals with such matters.

Risk and liability containment issues become important where contaminated land is concerned, necessitating careful drafting of contracts for the purchase and sale of contaminated land.

impact on threatened speciesThere are increasingly restrictive regulations being imposed in most jurisdictions regulating development with an impact on threatened species. In NSW, for example, the Threatened Species Conservation Act 1995 (NSW) lists a large number of threatened species, populations and ecological communities. Development or activities impacting on the listed items is prohibited in the absence of a special licence or development consent, which is granted only after consideration of appropriate environmental impact assessment. Impacts on threatened species may trigger detailed assessment requirements before planning approvals can be granted.

The Commonwealth Environment Protection and Biodiversity Conservation Act requires assessment and approval of actions that are likely to have a significant impact on species and ecological communities listed under that Act.

water access and usageLicences are required from the relevant State or Territory department for the sinking and use of artesian bores and the use of river or stream water. Capacity limits will be imposed. Regulation is becoming more stringent, and there are plans under development to introduce a national water trading scheme. These proposals and other associated regulatory changes are expected to result in increases in the price of water for agricultural purposes in Australia.

european and aBoriginal heritageState and Territory legislation protects significant items of post-settlement European heritage. Regulatory approvals may be required if a proposed development may affect European heritage items. Such legislation is frequently based around a list of significant heritage items located in the relevant State or Territory. Some legislation allows the relevant State or Territory authority to issue stop work or protection orders to protect such items.

Aboriginal heritage is also given broad protection by Commonwealth, State and Territory legislation. Regulatory approvals are required before Aboriginal heritage objects and places are impacted by developments. Comprehensive Aboriginal heritage assessment and management is necessary for mining and other major developments. Impacts on Aboriginal heritage are also frequently matters of political sensitivity, which need to be carefully managed to ensure optimal project outcomes.

native titleNative title has become an area of major significance since the rights of indigenous groups to certain land were recognised by the High Court of Australia in the 1988 Mabo decision. Commonwealth legislation was introduced in 1993 to regulate dealings in land that may affect native title and grant procedural rights to those claiming native title. Native title has an impact on many mining and infrastructure projects. In many cases, a project developer must negotiate a suitable agreement with the indigenous groups claiming native title before the project can proceed.

climate change regulationThe Australian government ratified the Kyoto Protocol in December 2007. The Kyoto Protocol imposes binding commitments for the reduction of greenhouse gases (GHGs) generated by developed countries. Australia has committed to reducing national GHG emissions to a level equivalent to 108% of 1990 levels by 2008-2012. Australia is participating in international discussions concerning the GHG emission reduction targets beyond 2012. The Australian government is proposing a range of domestic measures to address climate change. The core policy measure is the proposed emissions trading scheme (known as the Carbon Pollution Reduction Scheme (CPRS)). The Government proposes that the CPRS will commence on 1 July 2010. The legislation implementing the CPRS is expected to be introduced into Parliament during 2009.

The National Greenhouse and Energy Reporting Scheme (NGERS), which will underpin the CPRS, has already commenced. NGERS requires certain corporations to report GHG emissions, energy consumption and energy production from their facilities on an annual basis. The reporting obligation relates to corporations which have operational control of facilities where the GHG emissions, energy consumption or energy production exceed the thresholds applicable to the facilities or the corporation’s group. GHG emissions, energy consumption or energy production associated with the construction and use of buildings are included under NGERS.

There are also legal obligations requiring additional sourcing of electricity from renewable sources under the Renewable Energy Target scheme.

These measures provide opportunities for businesses which are able to source energy from renewable sources and those that are engaged in activities that reduce GHG emissions or store carbon such as plantation forests and geosequestration.


green BuildingsIn Australia, sustainable building design is regulated at a State and Federal level.

The Building Code of Australia (BCA) sets out minimum energy efficiency requirements for all new buildings and major refurbishments in Australia.

At a Federal level, the Energy Efficiency Opportunities Act 2006 aims to improve the identification, evaluation and implementation of energy efficiency opportunities by large energy using businesses. Also, from 2010, energy efficiency disclosure obligations will apply to commercial office buildings.

Some States also regulate sustainable building design. For example, in NSW, there is a program known as the Building Sustainability Index (BASIX) which assesses a residential building’s energy efficiency and water reduction achievements. Every development application for a new home or residential flat building must be submitted to the local council with a BASIX Certificate. The design of residential buildings must meet minimum targets before a BASIX Certificate can be issued.

There are also a number of voluntary environmental rating tools that have been developed to assist in quantifying and comparing the “sustainability” of buildings, such as the NABERS Energy and Green Star rating tools. Increasingly, sustainability targets for commercial buildings are being imposed by consent authorities based on the NABERS Energy and Green Star rating tools.


Key issuesThere is an increasing awareness and demand for sustainable real estate development in Australia which presents both opportunities and increased regulation.

There are stringent land use controls in place to protect the health of the population and of the environment.

When planning to invest in Australian real estate it is essential to be aware of environmental laws and regulation of these laws.

Useful websitesBlake dawson

www.blakedawson.com The Blake Dawson website includes information about our firm, updates on recent legal developments, partner profiles and contact details.

Jones lang lasalle

www.joneslanglasalle.com This website includes information for real estate owners, occupiers and investors, as well as details about Jones Lang LaSalle’s advisory services.

property

www.propertyoz.com.au The Property Council of Australia is the peak industry body for the Australian commercial real estate sector.

Foreign investment

www.firb.gov.au The Foreign Investment Review Board examines proposals by foreign interests to undertake direct investment in Australia.

government inFormation

www.gov.au The Government Entry Point provides access to Australian Federal, State, Territory and Local Government websites.

www.business.gov.au The Business Entry Point is a government resource for business.

corporate regulation

www.asic.gov.au The Australian Securities and Investments Commission regulates Australia’s companies.

australian securities exchange (asx)

www.asx.com.au ASX operates Australia’s primary national stock exchange.

taxation

www.ato.gov.au The Australian Taxation Office’s website includes information for business, large corporates and multinationals.

environment

www.environment.gov.au The Environment Portal provides access to services and information provided by Federal, State and Local Governments.

australian Bureau oF statistics (aBs)

www.abs.gov.au The ABS website provides statistics for a wide range of economic and social indicators.

australian legal materials (legislation and case law)

www.law.gov.au An online resource providing information about the Australian legal system and relevant government organisations.

www.austlii.edu.au This website provides access to Australian legal materials.

tourism australia

www.australia.com This website is the gateway to Australian tourism information.


© BLAKE DAWSON AND JONES LANg LASALLE 2009

Blake Dawson DisclaimerAustralian laws and regulations are constantly changing. This publication is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this publication without first obtaining specific professional advice.

We invite you to contact us for any further information or assistance. This work is copyright. However reproduction of any part is welcome with prior permission from Blake Dawson. Requests and inquiries may be emailed to [email protected].

Jones Lang LaSalle DisclaimerThe information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part.

This report is confidential to the party to whom it is addressed for the specific purpose to which it refers. No responsibility is accepted to any third party and neither the whole of the report nor any part or reference thereto may be published in any document, statement or circular or in any communication with third parties without our prior written approval of the form and context in which it will appear.

Cover image: ASX building, 20 Bridge Street, Sydney

welcome to AustrAliAn reAl estAte: A legAl guide for foreign investors , one of the Publications in our series of real estate guides, Published in conJunction with Jones lang lasalle.

About Blake DawsonOur focus is getting to the heart of your legal needs and delivering commercially astute and practical solutions. We have a proud history, long standing client relationships, a passion for challenging conventions and thrive on cutting edge work.

We provide legal services to Australia’s leading corporations and institutions as well as global corporations and government. We are privileged to work with many of the organisations who are shaping tomorrow’s industries.

Blake Dawson delivers more than just the law. We value our relationships with our clients and look forward to working with you.

our real estate PracticeOur Real Estate practice has an established track record of assisting our local and international clients with domestic and cross-border transactions, REITs, developments, joint ventures, real estate based mergers and acquisitions, and capital raisings. We act as a bridge between legal cultures and advise on highly complex transactions both domestically and across multiple jurisdictions. According to Chambers Global 2008, clients commend our ability to “provide impressive advice in narrow and pressured time frames” and work with “100% accuracy and timely reporting.”

For further information, please visit our website, www.blakedawson.com.

About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a professional services firm specialising in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2008 global revenue of US$2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.3 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than US$46 billion of assets under management.

Jones Lang LaSalle has over 50 years of experience in Asia Pacific, with over 17,500 employees operating in more than 80 offices in 13 countries across the region. We were the first commercial property firm to establish an Australian presence in 1958 and currently employ over 1,500 employees throughout our 13 offices across the country.

For further information, please visit our website, www.joneslanglasalle.com.

Jones Lang LaSalle offices in Australia


adelaide

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liverPool

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north sydney

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brisbane

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mascot

Level 3 Sydney Airport Centre 15 Bourke Road Mascot NSW 2020

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Parramatta

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brookvale

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melbourne

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Perth

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canberra

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mona vale

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sydney

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glen waverley

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newcastle

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t 61 2 4929 1205 f 61 2 4929 2437 www.joneslanglasalle.com.au

John Talbot Head of Capital Markets

+61 2 9220 8486

[email protected]

Simon Rooney Retail Investment

+61 2 9220 8497

[email protected]

Stuart Crow Asia Capital Markets

+65 6494 3888

[email protected]

Australian Real Estate – A legal guide for foreign investors – September 2009

for further details Please contact:

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Des

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135

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adelaide

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brisbane

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canberra

Level 11 12 Moore Street Canberra act 2601

t 61 2 6234 4000 f 61 2 6234 4111

melbourne

Level 26 181 William Street Melbourne vic 3000

t 61 3 9679 3000 f 61 3 9679 3111

Perth

Level 32 Exchange Plaza 2 The Esplanade Perth wa 6000

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sydney

Level 36 Grosvenor Place 225 George Street Sydney nsw 2000

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Port moresby

Mogoru Moto Building Champion Parade (po box 850) Port Moresby Papua New Guinea

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shanghai

Suite 3408-10 34th Floor, CITIC Square 1168 Nanjing Road West Shanghai 200041, prc

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singaPore

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associated office Jakarta

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For more information please contact:

Les KoltaiPartner, sydney real estate

t 61 2 9258 6113

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Michael RylandPartner, sydney corPorate

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Documents

legal guide

bridge street

legal advice

sydney real estatet

foreign investors blake

george street sydney

pirie street adelaide

sydney welcome