Tomorrow’s World · lld PwC Asia Pacific Real Estate Conference 2013 | Singapore •Regulatory landscape 3. State of the Australian Property market Tim Peel PwC Asia Pacific Real

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Tomorrow’s WorldAsia Pacific Real Estate Asia Pacific Real Estate Conference 20136 December 2013

Investment in Real Estate in Investment in Real Estate in Australia

Tim PeelTim PeelJoshua CardwellChristian Holle

PwC Asia Pacific Real Estate Conference 2013 | Singapore

AgendaAgenda

State of the Australian Property Market

• Recent headlines

• Australian economy

• Performance by sector

• Capital flows

Australian tax considerations

• Core rules

• ‘Active’ vs. ‘Passive’ investment

• Stamp duty

l l d


• Regulatory landscape

3

State of the Australian Property State of the Australian Property market

Tim Peel

PwC Asia Pacific Real Estate Conference 2013 | Singapore 4


Australian economyAustralian economy


Sources: RBA, ABS

Property investment performanceProperty investment performanceProperty market softening due to weak demand fundamentals

Total return for direct commercial property19.5%

15.0%

20.0%

15.0%

20.0%

Total return for direct commercial propertyAnnual return on quarterly periods to September 2013

9.0%

5.0%

10.0%

5.0%

10.0%

-5.0%

0.0%

-5.0%

0.0%

-15.0%

-10.0%

-15.0%

-10.0%

6.4%

• Annualised income returns were 7 2% and capital return of 1 8% to give a total return of 9 0%

Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

Income return Capital return Total return Long run average


Source: IPD ResearchNote: Direct property returns based on PCA/IPD Index

Annualised income returns were 7.2% and capital return of 1.8% to give a total return of 9.0%

Investment returns across property sectorsInvestment returns across property sectorsIndustrial maintains strength, while the retail moderates

9 9% 9 9%

12.0%12.0%

Performance across property sectorsAnnual return to September

9.6%9.0%

9.9%9.2% 8.9% 8.7%

9.7% 9.9%

8.0%

10.0%

8.0%

10.0%

6.0%

4 0%

6.0%

2.0%

4.0%

2.0%

4.0%

0.0%0.0%2012 2013 2012 2013 2012 2013 2012 2013

All Property Of f ice Retail Industrial

Income return Capital return Total return


Source: IPD Research.


Trends in industry growthTrends in industry growthGrowth in private new capital expenditure vs. growth of industry

Bubble size reflects

R)

total new capital expenditure over last 5 years

MiningProf, scientific & tech services

10%Growing IndustryDeclining Investment

Growing IndustryGrowing Investment

dd (5

yea

r CA

GR

Elec gas water & waste services

Construction

Wholesale trade

Retail trade

Transport, postal, warehousingFinancial, insurance services

Rental, hiring, real estate services

5%

ndus

try v

alue

ad

Food, beverage & tobacco manu

Wood & paper products

P i ti d d d di

Petro, coal, chemical & rubber manu

Non-metallic minerals manuMetal product manu

Machinery & equipment manuElec, gas, water & waste servicesRetail trade

Infor & telco

0%-30% -20% -10% 0% 10% 20% 30%

erm

gro

wth

in in

Textile & clothing manu

Printing and recorded media

-5%

Sho

rt te Textile & clothing manu

-10%Declining Industry Declining Investment

Declining Industry Growing Investment


Short term growth in new private capital expenditure (5 year CAGR)Sources: ABS

The two speed economyThe two speed economyDiffering levels of growth amongst the mining states (WA and Qld) and the non-mining states, but starting to slow.

250

State Final Demand, to March 2013

Mar 2000 = 100

210

230

150

170

190

Inde

x

110

130

150

90

110

2000 2002 2004 2006 2008 2010 2012

Year

New South Wales Victoria Queensland South Australia


Western Australia Tasmania Northern Territory Australian Capital Territory

Office property sector performanceOffice property sector performanceWeak fundamentals, modest returns, especially in resource –led markets

14.4%14 0%

16.0%

14 0%

16.0%


10.0%9.2%

8.4% 8.4%

10.4%9.9%

12.6%

8.6%

11.6%

8.3%10.0%

12.0%

14.0%

10.0%

12.0%

14.0%

8.3%7.1%

6.0%

8.0%

4 0%

6.0%

8.0%

0.0%

2.0%

4.0%

0.0%

2.0%

4.0%

-2.0%-2.0%2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013

Total Sydney Melbourne Brisbane Perth Canberra





Retail property sector performanceRetail property sector performanceSoftening phase coming to an end?

16.0%

14 0%

16.0%


8 9% 8 8% 8 9% 9 0% 9.3% 8 9%9.6%

8 8%9.3% 10.0%

12.0%

14.0%

10 0%

12.0%

14.0%

8.9% 8.8% 8.9% 8.5% 8.6%8.1%

9.0% 8.9% 8.8%

6.0%

8.0%

6.0%

8.0%

10.0%

2.0%

4.0%

2.0%

4.0%

0.0%0.0%2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013

Total SM Regional Regional Sub Regional Neighborhoods Bulky Goods





The Retail IndustryThe Retail Industry

CAGR retail turnover and proportion of total retail sales over the last five years, at June 2013

Liquor retailingCafes, restuarants &

takeaway food services6%

7%

2013

Supermarket & grocery stores

takeaway food services

Food retailing

5%

6%

stores

Other retailing

3%

4%

year

CA

GR

Household goods

Clothing, footwear & personal accessory

1%

2%

5

Department stores

-1%

0%0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Proportion of total retail sales (5 year)


Proportion of total retail sales (5 year)

Retail ca ses for optimism?Retail – causes for optimism?

Established House Price Index, to June 2013

30

40

50

60

ondi

ng q

uarte

r ye

ar

-10

0

10

20

30

2003 2005 2007 2009 2011 2013

hang

e fro

m c

orre

spof

pre

viou

s y

-10

% C

h

Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra


Sources: ABS, Housing Industry Association, RP Data-Rismark

Industrial property sector performanceIndustrial property sector performanceStrength in distribution and warehouses

18.0%18.0%


9.7% 9.9% 9.4%10.4%

11.4%

9.9%

11.5%13.0%13.0%

9.4%8.1% 8.4%

7.3% 8.0%8.0%

3.0%3.0%

-2.0%-2.0%2012 2013 2012 2013 2012 2013 2012 2013 2012 2013

Total Distribution Industrial Estate Warehouse Other



Source: IPD Research Source: Savills Research


Transactional activity for propertyTransactional activity for propertySWF, superfunds and REITs back in the market

$

$5,000

Net transactions by property vehicleannual amounts on quarterly periods to September 2013

REITs back in playAcquisition phase “Swap” phase

$2,000

$3,000

$4,000

tions

($m

)

phaseREITconsolidation

UWPFconsolidation

Swap phase

$(1,000)

$0

$1,000

ual n

et tr

ansa

ct

GFC

$(4,000)

$(3,000)

$(2,000)

Ann

u

SWF & super moneyLehman Broscollapse

$(5,000)Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

Other REITs Unlisted wholesale funds Unlisted retail funds


Source: IPD Research

Australian tax considerationsAustralian tax considerations

Joshua Cardwell Ch i ti H llChristian Holle


AgendaAgenda

Core rules

‘Active’ investment

‘Passive’ investment

Stamp duty

Regulatory landscape


Core rulesCore rules


Core RulesCore Rules

Entity types

• Companies

• Limited Partnership

• Trusts

Income and gains

• Rental income

• Interest income

• Trading profits

• Capital gains


Core RulesCore Rules

Deductions• Capital allowances

• Interest:

– Debt/equity

– Thin capitalisation

T f i i– Transfer pricing

Withholding tax & exemptionsWithholding tax & exemptions• Dividends

• Interest (128F FSF SWF)Interest (128F, FSF, SWF)

• Trustee WHT

• MIT


• Sovereign immunity21

‘Active’ vs ‘Passive’‘Active’ vs ‘Passive’

Primarily for the purpose of deriving rent...


‘Active’ investment‘Active’ investment


‘Active’ investment‘Active’ investment

Financing

Tax losses


‘Active’ investment: joint venture‘Active’ investment: joint venture

Aust Co Foreign

$100Debt

$100Debt

$150Equity

$150Equity

JV CoBank$500

A t

$1,000

Asset


‘Active’ investment: tax consolidation‘Active’ investment: tax consolidation

Aust Co

FundShares - 50% economic

Note – 50% economic

Foreign$100Debt

$100Debt

$150Equity

JV CoBank$500

$150Equity

AssetAsset


‘Passive’ investment‘Passive’ investment


‘Passive’ investment: direct holding‘Passive’ investment: direct holding

Foreign • Net rental income

• Tax deferred

• Financing

• Capital gain


‘Passive’ investment: Australian company‘Passive’ investment: Australian company

Foreign

• Tax deferred

Aust Co

• Capital gain (asset/shareholding)

Aust Co


‘Passive’ investment: Non MIT Trust (ungeared)‘Passive’ investment: Non-MIT Trust (ungeared)

• Net rental incomeForeign

• Tax deferred

• Financing

• Capital gain (asset/unitholding)Aust Trust

Net Rent $100Interest $0Interest $0Cash $100Depreciation ($25)

Taxable $75Tax @ 30% ($23)Net Cash $78

Effective tax rate 23%


‘Passive’ investment: Non MIT Trust (geared)‘Passive’ investment: Non-MIT Trust (geared)


• Tax deferred

• Financing

Debt

• Capital gain (asset/unitholding)Aust Trust

Net Rent $100Interest ($50)Interest ($50)Cash $50Depreciation ($25)

Taxable $25Tax @ 30%/10% ($13)Net Cash $88



‘Passive’ investment: MIT (ungeared)‘Passive’ investment: MIT (ungeared)


• Tax deferred

• Financing

• Capital gain (asset/unitholding)

• ‘Green’ MIT

Aust Trust

Net Rent $100Interest $0Cash $100Depreciation ($25)

Taxable $75Tax @ 15% ($11)Net Cash $89



‘Passive’ investment: MIT (geared)‘Passive’ investment: MIT (geared)


• Tax deferred

• Financing

Debt

• Capital gain (asset/unitholding)

• ‘Green’ MIT

Aust Trust

Net Rent $100Interest ($50)Cash $50Depreciation ($25)

Taxable $25Tax @ 15%/10% ($9)Net Cash $91



MIT RequirementsMIT - RequirementsKey features Type of scheme

Retail registered Wholesale registered Wholesale unregisteredRetail registered Wholesale registered Wholesale unregistered

Fund is a managed investment scheme

Relevant connection to Australia: Australian resident trustee or central control in Australia

MIT is operated or managed by the holder of an Australian Financial Services Licence

Operated Operated or managed Operated or managed

Substantial proportion of investment management activities in Australia

Widely held requirement Listed, at least 50 members or satisfies

‘25/60’ % rule

At least 25 wholesale members or satisfies

‘25/60’ % rule

At least 25 wholesale members

Exclusions –not MIT if:

A closely held trust 20 or fewer persons with 75% more participation

interests

10 or fewer persons with 75% or more

participation interests

10 or fewer persons with 75% or more

participation interests

A foreign individual holds 10% or more of participation interests

interests

A trading trust


MITMIT

‘Qualifying investors’

Investment management:

• What is it?

• Club deals

• Outsource model

• Australian office


Widely held testWidely held test

FCo Foreign Fund

A+REIT

20%

25% 55%

AustTrust


MITMIT

Trading Trust

• Car parks

• Electricity and telecommunications

• Hotels

EOI

• Orphans

• Blockers


Hotel investmentHotel investment

Foreign Foreign Fund

Aust

AustCoAustMIT

RentLicence

Customers


Stamp dutyStamp duty

• State/Territory based tax – 8 different sets of rules

• Typically paid by the purchaser

• Applies to:

- direct real estate acquisitions

- indirect acquisitions where shares / units in a vehicle holding real estate is acquired (effectively “looks through” the vehicle)

vehicles indirectly holding Australian real estate “long arm” tax- vehicles indirectly holding Australian real estate – long arm tax

• Rate varies depending on the state but is up to 5.75%

• Typically charged on the higher of the GST inclusive purchase price • Typically charged on the higher of the GST inclusive purchase price or gross market value of the real property and related assets

• Limited forms of exemption for related party transactions


p p y

39

Stamp duty (cont’d)

Asset Transactions Eff ti d t t | 5 45%

Asset TransactionsEffective duty rate | 5.75%

QueenslandNorthern Territory

Stamp duty (cont d)

Effective duty rate | 5.45% Share/Unit TransactionsShare/unit transfer duty | NilLandholder thresholdsLand value threshold | $500,000% of land/adj total property | Nil Effective duty rate | 5.45%

Share TransactionsShare transfer duty | NilLandholder thresholds Land value threshold | $2,000,000% of land/adj total property | NilEffective duty rate | Unlisted 5.75% | Listed 0.575%Unit Trust Transactions

Asset TransactionsEffective duty rate | 5.15%Share/Unit TransactionsShare/unit transfer duty | NilLandholder thresholds

Unit Trust TransactionsTrust “look through” duty | YesEffective duty rate | 5.75%

Asset Transactions

New South Wales

Western Australia

D t ratesLand value threshold | $2,000,000% of land/adj total property | NilEffective duty rate | 5.15%

Asset TransactionsEffective duty rate | 5.5%Share/Unit Transactions1

Share/unit transfer duty | 0.6%Landholder thresholdsLand value threshold | $2,000,000% of land/adj total property | NilSouth Australia

Duty rates and thresholds 31 October 2013

Asset TransactionsEffective duty rate | 5.5%Share/Unit Transactions1

Share/unit transfer duty | 0.6%Landholder thresholds Land value threshold | $1,000,000% of land/adj total property | Nil

Effective duty rate | Unlisted 5.5%| Listed 0.55%

Asset TransactionsEffective duty rate | 5.5%S /

Asset TransactionsEffective duty rate | 5.5%Share/Unit TransactionsShare/unit transfer duty | Nil

ACTVictoria

% of land/adj total property | NilEffective duty rate | Unlisted 5.5% | Listed 0.55%Unit Trust TransactionsTrust “look through” duty | YesEffective duty rate | 5. 5%

Asset TransactionsEffective duty rate | 4.5%Share/Unit TransactionsShare/unit transfer duty | NilLand rich thresholds

Share/Unit TransactionsShare/unit transfer duty | NilLandholder thresholdsLand value threshold | Nil% of land/adj total property | NilEffective duty rate | 5.5%

y |Landholder thresholdsLand value threshold | $1,000,000% of land/adj total property | NilEffective duty rate | Unlisted 5.5% | Listed 0.55%

Tasmania


Land value threshold | $500,000% of land/adj total property | 60%Effective duty rate | 4.5%

Notes:1 Abolition deferred indefinitely

Stamp duty (cont’d)Stamp duty (cont’d)

• IPOs

• IPO restructuring usually dutiable with limited scope for exemptions in all states

• Victoria imposes duty on IPOs – 0.55% of gross market value of Victorian land


Stamp duty (cont’d)Stamp duty (cont’d)

Singapore REIT IPO

Initial Sing InvestorsListing

Singapore REIT IPO

• SPC transfers Aus Trust to Sing Trust

• Same Initial Investors SPC Singapore • Same Initial Investors

• Listing of Sing REITAustralia

Singapore

Singapore Unit Trust

• CGT consequencesAus Trust

Asset


Regulatory landscapeRegulatory landscape

Legislative Agenda

• Foreign superannuation funds as MIT investors

• MIT Regime

• Thin capitalisation

• Withholding tax on CGT for non-residents vendors

ATO activity

• MIT classification

• MIT withholding

• Trading trusts


Th k Thank youTim PeelTim [email protected] +61 2 8266 0728

Christian [email protected] +61 2 8266 5697

Josh Cardwelljosh cardwell@au pwc com +61 2 8266 0532

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No

i ( i li d) i i h

[email protected] +61 2 8266 0532

representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Australia, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. p y

© 2013 PwC. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. 44

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Tomorrow’s World · lld PwC Asia Pacific Real Estate Conference 2013 | Singapore •Regulatory landscape 3. State of the Australian Property market Tim Peel PwC Asia Pacific Real