Chapter 2

Note: Chapter 2 was amended on 6 July 2006 (Chart 2.1 has been replaced)

Foreign investment proposals

This chapter provides an overview and statistical information on the proposals that were approved in 2004-05.

Features of these statistics

While this chapter provides a useful source of data on foreign direct investment in Australia, the Board urges particular caution in the use of these statistics, including when making comparisons with earlier years. As set out in Chapter 4 of this Report, there are also substantial differences between the Board’s statistics and those from the Australian Bureau of Statistics (ABS), which seek to measure a wider range of investment transactions between residents of Australia and non-residents.

The statistics contained in this Report are not a comprehensive measure of total foreign investment in any year, nor do they purport to measure changes in levels of foreign ownership of particular industries. The data is restricted to those investments that fall within the scope of the Foreign Acquisitions and Takeovers Act 1975 (FATA or the Act) and the Government’s foreign investment policy (the policy). In addition:

• The data does not cover foreign investments below the exemption thresholds that apply under the Act and the notification thresholds set by the policy, including for new businesses and acquisitions by foreign governments. Nor does the data cover expansions of existing foreign-owned businesses (both in existing areas and into related areas). The current exemption thresholds for the various sectors are specified in the summary of the policy, a copy of which is at Appendix A.
• The figures are based on the investment funds being sourced from overseas. The extent to which approved investment proposals will actually result in foreign capital inflows depends not only upon whether the proposals are implemented, but also upon the proportion that is financed from foreign sources. Some (and in some cases all) of the proposed funds to be invested may be contributed by Australians, for example, where they are in partnership with foreign interests or the investment is financed from existing Australian operations.
• Each foreign investment proposal is categorised into a single industry sub-code and hence does not accurately reflect proposals that span several industries or where the target is a diversified company.
• The data do not reflect all changes in foreign ownership as, in some cases, both the vendor and purchaser are defined as a ‘foreign person’ under the Act.

The Board’s statistics are also not a reliable indicator of trends in foreign investment inflows because:

• they include proposals that are approved but which may not actually be implemented, or could be implemented in a later year, or over a number of years;
• they are inherently irregular and can be skewed due to very large investment proposals; and
• major liberalisations of foreign investment policy that have occurred since the mid-1980s limit comparability over time.

– For example, the increase in the notification exemption threshold from $5 million to $50 million in 1999 has acted to reduce the number of proposals.

The term ‘proposed investment’ is used widely throughout this Report. Proposed investment is the aggregation of the proposed:

• acquisition costs (including shares, real estate or other assets);
• development costs following the acquisition; and
• cost of both establishment and development in the case of new businesses.

Applications decided in 2004-05

Chart 2.1 depicts the number of applications decided over the past seven years, classified by real estate and other sectors. Chart 2.2 shows the value of proposed investment associated with decided applications.

Chart 2.1: Applications decided — number

Note: link to revised Chart 2.1 (amended on 6 July 2006)

Chart 2.2: Applications decided — proposed investment

The number of applications decided during 2004-05 was around 2 per cent lower than in 2003-04. The value of proposed foreign investment associated with decided applications was 21 per cent higher than in 2003-04.

A breakdown of the outcome for applications considered over the last four years is provided in Table 2.1.

Table 2.1: Applications considered (number and proposed investment) 2001-02 to 2004-05

Note: Totals may not add due to rounding.

- Indicates a figure of zero and ‘0.0’ indicates a figure of less than $50 million.

(a) In 2004-05, includes one case which was not considered a serious business investment but which resulted in formal rejection under the Act.

(b) The proposed acquisition cost and development expenditure is not recorded for withdrawn applications.

Of the 4,360 applications approved in 2004-05, 3,233 were approved subject to conditions and 1,127 without conditions being imposed. All but 64 of the conditional approvals were in the real estate sector, where 80 per cent of all approvals were subject to conditions. These included conditions relating to the period during which development must commence (usually 12 months), requiring temporary residents to reside in and sell established dwellings when they cease to reside in them, and the imposition of reporting requirements on advanced ‘off-the-plan’ approvals. For the majority of conditional approvals outside the real estate sector, the condition related to the period that the approval would stand, ordinarily 12 months.

The value of proposed investment approved in 2004-05 was $119.5 billion, a 21 per cent increase from 2003-04. The majority of the increase was in the conditional approval category with an investment value of $59.1 billion compared with $40.1 billion in 2003-04. Further information and analysis of the approved investment amounts is provided in other tables in this chapter.

A total of 55 proposals were rejected in 2004-05 (that is, were the subject of a final order made under the Act) representing 1 per cent of all decided proposals.

In 2004-05, 287 proposals were withdrawn by the notifying parties. Foreign investors are encouraged to discuss proposals with the Board’s secretariat to ensure they are consistent with the policy. In some cases, the parties decide to withdraw proposals that would be inconsistent with the policy instead of proceeding to a formal rejection. In other cases proposals are withdrawn because they ultimately did not proceed for commercial or a variety of other reasons.

Approvals by sector

General summary

Table 2.2 provides approved investment proposals for 2004-05 by industry sector. Chart 2.3 depicts approved investment in each sector on a proportional basis by value. The majority of the total proposed investment is attributable to the proposed acquisition cost. The skewing of the foreign investment data towards the acquisition costs reflects the notification requirements — the expansion of existing businesses generally does not require foreign investment approval. Bearing in mind the limitations of the Board’s data, during 2004-05:

• the mineral exploration and development sector had the largest proposed investment, with approvals totalling $33.5 billion ($10.4 billion in 2003-04); and
• other sectors with significant proposed investment were services $30.5 billion ($34.8 billion in 2003-04), manufacturing $22.1 billion ($23.1 billion in 2003-04) and real estate $20.9 billion ($25.7 billion in 2003-04).

Table 2.2: Total approvals by industry sector in 2004-05 ($billion)

Note: Totals may not add due to rounding.

- Indicates a figure of zero.

(a) Data has been compiled by reference to the Australian and New Zealand Standard Industrial Classification published by the ABS, except proposals involving newspaper printing and publishing which have been allocated to service industries (the ABS classifies these under manufacturing). Acquisitions of diversified company groups are classified according to the industry of the major activity of the group. Acquisitions of real estate to be used for purposes incidental to the main business activity of the purchaser are classified according to that activity.

(b) Excludes 77 proposals involving financing arrangements and corporate restructures.

(c) Total proposed investment in the real estate sector may be overstated as it includes approvals for ‘annual programmes’ and ‘off-the-plan’ (OTP) approvals provided to real estate developers. A significant proportion of the dwellings covered by OTP approvals are not ultimately sold to foreign persons.

Chart 2.3: Approvals by industry sector in 2004-05 — by proposed investment value

Note: Totals may not add due to rounding.

Agriculture, forestry and fishing

During 2004-05, total proposed investment in the agriculture, forestry and fishing sector was $543.7 million, around 31 per cent lower than 2003-04 ($782.9 million). The largest proposal approved involved an investment of $198.7 million.

Finance and insurance

Total proposed investment in the finance and insurance sector increased significantly from $2.7 billion in 2003-04 to $11.2 billion in 2004-05. There were 27 proposals approved, of which 15 involved investment of $100 million or more. Four proposals were approved for the establishment of a new business, with total combined investment of $3.1 billion.

Manufacturing

Total proposed investment in the manufacturing sector for 2004-05 was $22.1 billion, a slight decrease from $23.1 billion in 2003-04. Proposals in the electricity and gas (generation and supply) industry accounted for 50 per cent ($11.1 billion in 2004-05 and $13.2 billion in 2003-04) of total proposed investment in this sector.

Table 2.3 gives a breakdown of approved investment in the manufacturing sector in 2004-05.

Table 2.3: Manufacturing sector approvals by number and total proposed investment in 2004-05 ($billion)

Note: Totals may not add due to rounding.

- Indicates a figure of zero.

(a) Acquisitions of diversified company groups are classified according to the industry of the major activity of the group. Acquisitions of real estate to be used for purposes incidental to the main business activity of the purchaser are classified according to that activity.

(b) Includes non-metallic mineral products, water, sewerage and drainage and miscellaneous manufacturing.

Mineral exploration and development

Total proposed investment in the mineral exploration and development sector increased significantly from $10.4 billion in 2003-04 to $33.5 billion in 2004-05. During 2004-05, 69 proposals were approved, comprising 10 to establish new businesses and 59 acquisitions of interests in existing businesses. There were 20 proposals involving total investment of $100 million or more, including five for more than $1 billion. The data includes two large proposals for the same target company: Xstrata Plc’s proposed takeover and BHP Billiton’s successful takeover of WMC Resources Limited which involved a total approved amount in excess of $17 billion.

Table 2.4 gives a breakdown of approved investment in the mineral exploration and development sector.

Table 2.4: Mineral exploration and development sector approvals by number and total proposed investment in 2003-04 and 2004-05 ($billion)

Note: Totals may not add due to rounding.

- Indicates a figure of zero and ‘0.00’ indicates a figure of less than $5 million.

(a) Acquisitions of diversified company groups are classified according to the industry of the major activity of the group. Acquisitions of real estate to be used for purposes incidental to the main business activity of the purchaser are classified according to that activity.

Services (excluding tourism)

During 2004-05, 119 proposals were approved for investment in the services industry sector (excluding tourism) with total proposed investment of $30.5 billion. Proposals in the communications industry accounted for around 50 per cent ($15.1 billion) of the total approved investment. There were 46 proposals involving proposed investment of $100 million or more, including four of $1 billion or more.

Table 2.5 gives a breakdown of approved investment in the services (excluding tourism) sector.

Table 2.5: Services sector (excluding tourism) approvals by number and total proposed investment in 2004-05 ($billion)

Note: Totals may not add due to rounding.

- Indicates a figure of zero and ‘0.00’ indicates a figure of less than $5 million.

(a) Acquisitions of diversified company groups are classified according to the industry of the major activity of the group. Acquisitions of real estate to be used for purposes incidental to the main business activity of the purchaser are classified according to that activity.

(b) Incudes road, rail, air and water transport services.

(c) Includes entertainment and recreational services, restaurants and clubs, and personal services.

Tourism

Total approved foreign investment in the tourism sector decreased from $1.5 billion in 2003-04 to $716 million in 2004-05. Of the 54 proposals approved, only two proposals were for investment of $100 million or more.

Real estate

Urban land is defined under the Act to be all Australian land that is not used wholly and exclusively for carrying on a business of primary production. Reflecting community concerns over foreign ownership of land, the policy places certain restrictions on acquisitions in this sector. As a result, all proposals relating to acquisitions of urban land must be submitted for examination, unless explicitly exempted by the Foreign Acquisitions and Takeovers Regulations 1989 (the Regulations, see Appendices A and E).

Table 2.6 gives a breakdown of approved investments in real estate in 2004-05. The number of approvals decreased slightly from 4,059 in 2003-04 to 3,949 in 2004-05. Total proposed investment associated with these proposals decreased from $25.7 billion in 2003-04 to $20.9 billion in 2004-05.

Table 2.6: Real estate sector approvals by type, number of proposals and total proposed investment in 2004-05 ($billion)

Note: Totals may not add due to rounding.

- Indicates a figure of zero.

Residential real estate

The Government’s foreign investment policy places certain restrictions on the purchase of developed residential real estate by foreign persons. A copy of the policy summary is located at Appendix A.

Developed

In 2004-05, 1,840 proposals were approved for acquisitions of developed residential real estate compared with 1,946 in 2003-04. Total proposed investment approved was $1.2 billion compared with $1.2 billion in 2003-04. There were 32 rejections of proposed acquisitions of developed residential property by temporary residents in 2004-05 (33 in 2003-04). The total potential acquisition cost involved in these rejected proposals was $21.6 million.

The rejections, in most cases, were for one or more of the following reasons:

• the prospective foreign purchaser did not hold a temporary resident visa that permitted continuous residence in Australia for a further period of 12 months or more;
• the foreign person was not going to use the property as their principal place of residence; and/or
• the applicant held a student visa and the value of the property they proposed to purchase exceeded the $300,000 general limit that is applicable to student visa holders.

For development

During 2004-05, 2,008 proposals were approved for the acquisition of residential real estate for development (including eligible redevelopment), a slight increase from the 1,999 that were approved in 2003-04.³ Total proposed investment approved was $13.3 billion compared with $14.1 billion in 2003-04. Proposed development expenditure decreased from $5.6 billion in 2003-04 to $3.2 billion in 2004-05.

Ordinary approvals comprise the purchase of vacant land generally for single dwelling construction, broadacre land for residential subdivision and integrated residential developments (such as the construction of townhouses and units). In 2004-05, 1,079 proposals (1,126 in 2003-04) to acquire residential real estate for development were approved, with total proposed investment of $4.3 billion ($6.6 billion 2003-04). Approvals are generally subject to a condition that continuous development commences within 12 months. In addition, the parties are required to report on the completion of development to demonstrate compliance with the development condition. The Government views seriously any breaches of conditions imposed under the Act on approvals (see section below on Residential Real Estate Compliance).

In 2004-05, 644 proposals from individuals were approved under the ‘off-the-plan’ arrangements, involving proposed investment of $351 million (compared with 573 and $280 million in 2003-04). These involve applicants that propose to purchase a newly constructed dwelling directly from a developer. There were also 275 proposals approved from real estate developers seeking ‘advance approval’ (compared with 292 in 2003-04). Such approval enables developers to sell up to 50 per cent of the individual dwellings in a new development to foreign persons, who are then not required to separately seek foreign investment approval. The developer is required to report completed sales to the Board. The value of such developments rose from $6.1 billion in 2003-04 to $7.0 billion in 2004-05.

Certain points should be noted in relation to the Board’s statistics for ‘off-the-plan’ applications. Firstly, the Board’s figures overstate the likely extent of actual foreign purchases: developers with ‘off-the-plan’ approval seldom sell to foreign purchasers the full 50 per cent of the dwellings for which they hold approval. In most cases the proportion is under 10 per cent. There is also a significant lag between the granting of approval, which usually occurs during the construction phase, and sales.

Secondly, the ‘off-the-plan’ category has the approved value attributed entirely to acquisition cost and not to proposed development expenditure. This reflects the fact that the approval relates to the purchase and expected sale price of completed dwellings.

The ‘annual programme’ arrangements allow developers to apply for annual approvals for a programme of land acquisition up to a specified monetary limit, on condition that they subsequently report to the Board on the actual acquisitions and developments undertaken. While the granting of such an approval relieves the developer of the requirement to seek approval for individual land acquisitions, it does not relieve them of responsibility for complying with the requirements of foreign investment policy and the conditions of their approval, for example remaining within the approved amount.

In 2004-05, a total of 18 annual programmes were approved, 10 for residential real estate and eight for commercial real estate (compared with eight and seven respectively in 2003-04). These involved proposed acquisition costs totalling approximately $1.1 billion and proposed development expenditure of $558 million (compared with total proposed investment of $691 million and $433 million respectively in 2003-04). This comprised $1.6 billion for residential and $72 million for commercial real estate.

There was a decrease in the number of rejections relating to the proposed acquisition of residential real estate for development from 26 in 2003-04 to 20 in 2004-05. The rejections, in most cases, were for one or more of the following reasons:

• the planned development expenditure was not considered sufficient in relation to the acquisition price for the property (the policy requires that proposed development expenditure is equivalent to at least 50 per cent of the acquisition cost or current market value of the land, whichever is higher);
• the proposed timetable for development was unsatisfactory given the normal requirement that it take place within 12 months;
• the property proposed to be acquired for the purpose of redevelopment was not considered to be uninhabitable, or at the end of its economic life, and consequently the proposed redevelopment would not result in an addition to the housing stock;
• the prospective foreign purchaser had not established that they had the technical and financial capacity, nor the necessary planning approvals, to undertake the proposed development within a reasonable timeframe;
• the property being purchased was a new dwelling and there was no other similar dwelling developed by the same vendor that met the required criteria for the purchase of new dwellings by foreign persons; and/or
• the applicant had breached conditions associated with a previously approved application.

Commercial real estate

Developed

In 2004-05, there were 36 approvals to purchase developed commercial real estate (for example, shopping centres, office buildings, warehouses) involving a total proposed investment value of $4.5 billion (compared with 51 approvals and an investment value of $4.4 billion in 2003-04). This data represents only part of the total foreign investment that would have occurred as the Regulations applicable during the reporting period exempt acquisitions of developed commercial property, excluding accommodation facilities, valued at less than $50 million, or $800 million for US investors.

For development

There were 57 approvals to purchase land for commercial development involving total proposed investment of $1.8 billion. Although the number of proposals approved increased slightly from 2003-04, total expected investment decreased by $4.1 billion (56 proposals and proposed investment of $5.9 billion in 2003-04). This was mainly attributed to the presence of a single proposal in 2003-04 which had a proposed investment value of $3.3 billion.

Real estate by State

Table 2.7 provides details of proposed investment of real estate for each State and Territory.

Queensland was again the main location of proposed foreign investment in real estate with 35 per cent of the total approved (44 per cent in 2003-04). Proposals for New South Wales represented 26 per cent (31 per cent in 2003-04) of the proposals approved while those for Victoria and Western Australia accounted for 8 per cent and 6 per cent respectively, (compared with 7 per cent and 8 per cent in 2003-04).

There was a significant increase in the value of the proposals approved that involved land acquisitions in more than one State or Territory, from 7 per cent of the total value in 2003-04 to 22 per cent in 2004-05. The increase was mainly attributed to a single proposal for the acquisition of an interest in various commercial properties valued at $2 billion. This single proposal distorts the percentage figures quoted above, for example removing it from the total results in Queensland and New South Wales having percentages in 2004-05 of 39 per cent and 29 per cent respectively.

Table 2.7: Real estate sector approvals by State and category in 2004-05 ($billion)

Note: Totals may not add due to rounding.

- Indicates a figure of zero and ‘0.00’ indicates a figure of less than $5 million.

(a) Comprises approved proposals where the investment is to be undertaken in more than one State or Territory.

Approvals by country of investor

Data on proposed investment associated with approvals in 2004-05 are shown by selected country, aggregated by State in Table 2.8 and by industry sector in Table 2.9.

• The United States of America (USA) was once again the largest source of proposed foreign investment in Australia. The other major sources of foreign investment were Switzerland, United Kingdom (UK) and Germany.
• Approved proposed investment from the USA increased from $29.9 billion in 2003-04 to $37.2 billion in 2004-05. This proposed investment was primarily in the services (excluding tourism) sector, accounting for 50 per cent of total US investment. Refer to Chapter 4 for further discussion on the USA/Australia foreign investment position.
• Switzerland is recorded as a significant source of approved proposed investment in 2004-05, accounting for a total of $20.3 billion. This included a single large proposal, namely Xstrata’s unsuccessful takeover of WMC Resources Limited.
• Approved proposed investment from the UK increased significantly from $6.8 billion in 2003-04 to $18.1 billion in 2004-05. The majority of UK proposed investment was in the mineral exploration and development sector, accounting for 55 per cent of total proposed UK investment. The increase included a single large approved proposal, namely BHP Billiton’s takeover of WMC Resources Limited.
• Germany continued as a major foreign investor in 2004-05 accounting for $7.6 billion of total proposed investment, mainly located in the finance and insurance sector.

Table 2.8: Approved investment by State and country in 2004-05 ($billion)

Note: Totals may not add due to rounding.

- Indicates a figure of zero and ‘0.00’ indicates a figure of less than $5 million.

(a) Comprises approved proposals where the investment is to be undertaken in more than one State or Territory.

(b) Investment identified as originating from Australia represents the contribution by Australian-controlled companies and Australian residents to the total investment associated with foreign investment proposals in which they are in partnership with foreign interests. It does not generally include the contribution attributable to minority Australian shareholders in companies with majority or controlling foreign shareholders.

Table 2.9: Approved investment by country of investors and industry sector in 2004-05 ($million)

Note: Totals may not add due to rounding.

- Indicates a figure of zero and ‘0’ indicates a figure of less than $0.5 million.

(a) ‘Off the plan’ approvals to real estate developers have been recorded as not allocated to country because the country of investors is not known in advance.

(b) The investment identified as originating from Australia represents the contribution by Australian-controlled companies and Australian residents to the total investment associated with foreign investment proposals in which they are in partnership with foreign interests. It does not generally include the contribution attributable to minority Australian shareholders in companies with majority or controlling foreign shareholders.

(c) These figures indicate the total number of proposals in which investors from the particular country have an interest. Proposals involving investment originating from more than one country count as one proposal for each of the countries concerned. Therefore, the number reported is greater than the number reported in Table 2.1.

³ The acquisition of house and land packages, where construction has not commenced, are treated as vacant land for development rather than falling under the ‘off-the-plan’ category.

Next: Chapter 3 - Overview of the Foreign Acquisitions and Takeovers Act 1975

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