Understanding investment 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 Chinese investors to invest in Australian real estate.

Torrens title and common law

Nearly all land in Australia is registered under the Torrens system, under which title to real estate is created by the act of registration in a central register. Normally the person who is recorded as the owner of a parcel of land cannot have their title challenged or overturned. Each state and territory has its own real estate legislation and 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. Some areas of land, typically rural, have not yet been converted to the Torrens system and remain under old system (common law) title.

The Torrens system is based on a guarantee of registered title by the states and territories. Legislation in most states and territories provides for the compensation of persons who suffer loss as a result of the operation of the system in certain circumstances. 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, and the interest will be defeated by the registration of a later dealing. The interests that can be registered vary between states and territories. Some rights that are purely contractual between the parties and which are not capable of being registered include licences, rights of first refusal to acquire land and options to purchase.

Rights over land

The principal rights over land which are recognized in Australia include:

• 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; and
• Leasehold estates.

Some other rights over land that are capable of being registered are mortgages, easements and restrictive covenants.

Native title

The Australian Commonwealth government 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 entities related to the Commonwealth or state government.

Structures for investing in Australian real estate

A 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; and
• real estate investment trusts (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 various legal, accounting and taxation implications.

Unit trusts

A unit trust is a trust in which the beneficiaries’ interests are divided into units. A trustee is necessarily involved and it is the trustee which owns the legal title to the assets. The trustee is often the manager of the investment as well.

Establishing or registering a company

Companies are regulated in Australia under the Corporations Act 2001 (Cth), which allows for the incorporation of certain types of companies. Those most relevant for real estate investors are:

• a company limited by shares;
• a company limited by guarantee; or
• a company with unlimited liability.

A foreign company conducting business in Australia, other than through an Australian subsidiary, must register as a foreign company under the Corporations Act. A foreign company wishing to apply for registration must appoint a local agent to represent the company in Australia.

Once registered, the company is required to lodge copies of its annual financial statements and comply with various other obligations in the Corporations Act.

REITs

Australia has one of the largest, most sophisticated and transparent REITs markets in the world with more than 80% of institutional grade real estate
securitized.

In Australia the main legal vehicle used for both listed and unlisted REITs is the trust.

Overlaid onto the general law of trusts is a detailed regulatory structure implemented through the Corporations Act. All REITs, and some unlisted real estate funds, must be registered and are regulated as managed investment schemes (MISs) under the Corporations Act. MISs are also subject to the provisions in the Corporations Act concerning takeovers and related party transactions.

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

Foreign institutional investment in REITs in Australia does not usually give rise to issues under Australia’s foreign investment laws because the investment usually falls 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.

Michael Wadley heads Blake Dawson’s China Practice.

PC Feng is a legal consultant in Blake Dawson’s Shanghai office.