Australian sellers give up on auctions due to costly foreign investment regulations

Australia’s latest tightening of foreign investment regulations is leading to fewer farms being sold via auction, sources have told Agri Investor.

Foreign investors wishing to purchase a property that takes the value of their holdings in Australia to more than A$15 million ($11.1 million; €9.5 million) must apply for approval from the Foreign Investment Review Board, according to regulations that came into effect in 2015.

In addition, since February 1, 2018, all would-be foreign buyers of Australian agricultural assets have had to demonstrate that the purchase is the outcome of an “open and transparent” sale process, which in practice means listing it publicly for at least 30 days.

Auctioneers routinely require that successful bidders already have FIRB approval in place when they win an auction, meaning prospective buyers must complete a costly FIRB application before an auction has begun, despite the possibility they may lose out to another bidder.

In contrast, properties sold via expression-of-interest campaigns allow a foreign buyer to sign a conditional contract subject to FIRB approval, meaning that buyer can submit their FIRB application in the knowledge they are the preferred bidder for the property.

“The FIRB rules mean that a foreign investor will typically have to put in an application that costs around A$100,000,” one agent told Agri Investor. “So none really want to get involved in an auction if they’re not 100 percent sure they’re going to get the asset. It just isn’t an option for them.

“If they purchase through an EOI campaign, and sign a contract subject to FIRB approval, they can put in the application knowing they’re highly likely to get the asset.”

The fee for FIRB applications scales up based on the value of the agricultural land being acquired. The fee increases by A$10,000 per A$1 million of acquisition value, starting at A$10,000 for an acquisition of between A$1 million-A$2 million (the fee is A$5,000 for a transaction of A$1 million or less).

The maximum fee is A$100,000, which means any transaction valued at A$10 million or more will be subject to the full cost.

Another agent said they had “definitely” seen a decline in auctions since the new rules came into effect.

“It costs money to put the application in and bidders want to be sure,” he said. “Plus the EOI campaign of 30 days or more helps to satisfy the open and transparent stipulation in the FIRB regulations.”

EOI campaigns also give greater flexibility for the purchaser to look at different offers, including variations on whether plant and equipment are included, one agent said. “Foreign buyers often like to have that flexibility and it allows them to negotiate,” he said.

The FIRB rules have not been unanimously welcomed since they came into effect, with many criticizing the Australian government for singling out agriculture at a time when farmers need capital.

The government also announced in May that it intends to stop investments in agricultural land from accessing the 15 percent concessional Managed Investment Trust tax rate from July 1, 2019, a decision some commentators viewed as a “purely political move” that would deter foreign investment into the sector.