ACBC Western Australia Branch Significant and Premium Investor Visa Programmes: Second Round of Stakeholder Consultations

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1 ACBC Western Australia Branch Significant and Premium Investor Visa Programmes: Second Round of Stakeholder Consultations

2 Table of Contents Table of Contents 2 Introduction & Methodology of Submission 3 Comments and suggestions on the draft complying investment options for the SIV. For example, comments on what is proposed to be included or excluded, and whether the quantums and measures listed are appropriate 4 The Exclusion of Direct Investment Into Pty Ltd Companies 5 Mandatory Percentages of Particular Complying Investments 8 Comments and Suggestions on Box 1 Regulatory Requirements for the SIV and PIV 9 Comments and Suggestions on Box 2 Mandatory Investment in Venture Capital Funds as Part of the SIV Comments and Suggestions on Box 3 Mandatory Investment in Small and Micro Capital Funds as Part of the SIV Comments and Suggestions on Box 4 Balancing Investment Items for the SIV Comments and Suggestions on Box 5 Design of the PIV 13 Conclusion 14 page 2

3 Introduction & Methodology of Submission The Australia China Business Council ( ACBC - WA Branch) welcomes the opportunity to participate in the second round of Stakeholder Consultations on the Significant and Premium Investor Visa programmes. This Submission was prepared by members of the ACBC (WA Branch) Executive Committee, and included consultation with members in the form of interviews, meetings and surveys. As stated in the first submission to Austrade, Western Australia enjoys a strong partnership with China, and ACBC WA has played a leading role in promoting the business relationships between Western Australia and China. WA represents a wide variety of businesses actively involved with China and we have had a strong response to the proposed changes to the SIV programme. At a breakfast some of our members attended in October 2014, Assistant Minister for Immigration and Border Protection, Senator the Hon Michaelia Cash announced that the SIV programme had been highly successful, with more than 90% of applicants being from Mainland China. We are of the opinion that a large, if not majority share of PIV applicants will likewise be from the Greater China region and it is in this light that we believe the Australia China Business Council has some worthwhile input in the matter. This submission follows the suggested format provided by Austrade as follows: 1. Comments and suggestions on the draft complying investment options for the SIV. For example, comments on what is proposed to be included or excluded, and whether the quantums and measures listed are appropriate. 2. Comments and Suggestions on Box 1 Regulatory Requirements for the SIV and PIV. 3. Comments and Suggestions on Box 2 Mandatory Investment in Venture Capital Funds as part of the SIV. 4. Comments and Suggestions on Box 3 Mandatory Investment in Small and Micro Capital Funds as part of the SIV. 5. Comments and Suggestions on Box 4 Balancing Investment Items for the SIV. 6. Comments and Suggestions on Box 5 Design of the PIV. 7. Other comments or suggestions. page 3

4 Comments and suggestions on the draft complying investment options for the SIV. For example, comments on what is proposed to be included or excluded, and whether the quantums and measures listed are appropriate In a survey to WA member firms (which we will be citing throughout this submission) we had 17 responses from a broad range of industries, including: 33% from Accounting firms, 25% from Law firms, over 16% from Mining & Resources firms, over 16% from Property Developers and over 8% from Investment Banking firms. ACBC WA Survey Respnses by Member-firm Industry 8.33% 16.67% Accounting 33% Legal Services Mining & Resources Property Developers 16.67% 25% page 4 Investment Banking

5 The Exclusion of Direct Investment Into Pty Ltd Companies The decision to remove direct investment into Pty Ltd companies came as a surprise to most stakeholders. Of the above-mentioned member firms that participated in the survey, we received the following result: Do you believe that the current SIV complying investment option of direct investment into a Pty Ltd company should no longer be a part of the SIV complying investment framework, and/or should be excluded from the PIV? No 94.12% Yes 5.88% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% % It was the opinion of some of our members that small companies should have access to this type of funding. In addition to this, Chinese entrepreneurs may prefer to be able to directly invest into a business in which they can play an active role; i.e. a privately owned Pty Ltd company. It was also noted by one of our members that Pty Ltd s are the engine room of our economy and increasing the sources of equity for such companies is better done through direct investment than through large Venture Capital funds. page 5

6 A WA perspective According to the Small Business Development Corporation, the breakdown of investment into WA by SIV applicants is as follows: Of the 59 SIVs that have been nominated by the government of Western Australia (with 15 approved to date) since 2012, the breakdown by type of complying investment is: Western Australia Western Australian State Government bonds Of the approved 15 visas, 13 have invested in Government bonds, of those awaiting approval 33 intend to invest in Government bonds. Australian Securities and Investment Commission (ASIC) regulated managed funds Of the approved visas, 2 have invested in ASIC managed funds, of those awaiting approval 16 intend to invest in ASIC managed funds. Direct investment into Australian proprietary companies. Around 24% of the SIV applications received so far have proposed to invest in private companies, including mining businesses, however where they initially invest their money can change once they receive their visa. There is also an emerging trend where around 50% of the investors proposing government bonds as their initial complying investment are now redirecting their investments into private companies. Assuming these figures represent an accurate number of final approvals, this is over $295,000,000 invested into Western Australia purely in complying investments, not to mention the on-flow effects of such high-net-worth individuals moving to Western Australia. One of our member firms in property development has said that behind one investor migrant from China you will find many investors ready to follow that are the friends of the first person. Again using the above-figures, it is important to map out the on-flow effects in Western Australia from the suggested changes. As at the 31st January 2015, there were 876 SIV applications lodged that were pending final approval. 44 of these are from Western Australia. page 6

7 876 PENDING SIV APPLICATIONS NATIONALLY $4,380,000, PENDING APPLICATIONS INTO WESTERN AUSTRALIA $220,000,000 0% PTY LTD COMPANIES 75% GOVERNMENT BONDS 25% MANAGED FUNDS $165,000,000 IN WA GOVERNMENT BONDS 50% PTY LTD COMPANIES= $82,500,000 50% REMAIN IN GOVERNMENT BONDS As you can see above, the current investment choice in Western Australia is a low-risk choice into government bonds. This represents what we already understood about individual Chinese investors - that they are generally risk-averse, non-sophisticated investors. A major concern we have is that of removing BOTH government bonds and direct investment into Pty Ltd companies from the complying investment framework. We believe it will be detrimental to WA s already struggling share of SIV applicants, and detrimental to the programme as a whole. page 7

8 Mandatory Percentages of Particular Complying Investments Whilst a number of members have commented that the inclusion of such funds in the complying investment framework is a good thing, the key issue that has been raised by our members on this point is that the mandatory requirement of high-risk investments as part of the SIV framework effectively renders it a non-commercial product. One of our members from investment banking has commented: VC and SMC are both high-risk investment categories. The average investor would have far less than 50% of their total portfolio invested in these asset classes locally, let alone in foreign jurisdictions where they have limited knowledge. VC typically has a time horizon of greater than 4 years, which presents another challenge for potential SIV/PIV applicants. Ultimately, the proposed changes will prohibit SIV/PIV applicants from considering Australia as an investment destination due to the high-risk nature of the proposed complying investments. Another member from the Property industry noted: Forcing applicants to invest in high risk investments is going to have several negative impacts... It will reduce the number of people wanting to apply for the SIV/PIV as they will be concerned about losing their capital in high risk investments... After dealing with many Chinese investors over the last 5+ years we have built up a reasonable understanding of their likes and dislikes when it comes to investment. Based on our experience this high risk investment requirement will not be well received. The people applying for these visas may be wealthy but like anyone, they do not want to invest into anything that has a high probability of losing money. page 8

9 Comments and Suggestions on Box 1 Regulatory Requirements for the SIV and PIV Before commenting on the specific points in Box 1, it is worth mentioning the following statistical response from our survey to members: Do you believe a significant refinement is needed of the SIV complying investment framework, or should the complying investment framework just be 'tweaked'? 100% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.00% 87.50% Only a tweaking required 12.50% Significant Refinement needed Series 1 We are glad that Austrade is running a second round of submissions, as it is our belief that most participants in the first round were taken by surprise when the proposed changes to the SIV framework were released by Austrade. The impression we have received from all involved members we have spoken to, is that the terms of reference for the first submission were worded and presented in such a way that it appeared stakeholder consultation was being sought on the inclusion of a broader range of complying investment options; not such a significant overhaul as has now been presented to us. Given the strong success of the SIV programme, we were surprised that such a significant refinement was being considered. Upon consulting with our members on the proposed new framework, there has been overwhelming support of exclusions of loan-back schemes and encouragement of tighter FIRB regulation. However, there is a major concern with the proposed broad-brush approach to the issue of Residential Real Estate. page 9

10 Residential Real Estate The Australia China Business Council WA understands that there is some concern in the market regarding international (in particular Chinese) tourists coming to Australia and purchasing expensive existing dwellings in cities such as Sydney and Melbourne. We understand that there is a common belief that Chinese investors are also adding to property price inflation. When we surveyed our own membership, there was a broad range in opinion: Do you believe that Significant Investor Visa applicants are inflating the prices of real estate property in Australia? Other 5.88% Yes 17.65% Maybe 11.76% Neutral 23.53% Maybe Not 5.88% No 35.29% 0.00% 10.00% 20.00% 30.00% 40.00% We can see from this response that there is uncertainty as to whether investors such as SIV visa holders are a cause of residential real estate price inflation or not. It is on this note that we believe FIRB regulations be tightened and penalties imposed on those that seek to buy an existing dwelling and who do not hold a relevant temporary or permanent residence visa for Australia. We understand that in order to combat the artificial inflation of property prices that it would be a good idea for managed funds or businesses that trade purely in the buying and selling of existing dwellings be excluded from the complying investment framework, or as you have put in the draft structure, that indirect exposure through investment vehicles (i.e. managed funds) is to be restricted to less than 10% of the vehicle s net assets for existing dwellings. However, we do NOT believe that residential real estate developments such as apartment blocks, high-rise dwellings and other new residential areas be excluded from the complying investment framework. A simple equation of economics tells us that the more these developments are underway, the cheaper it will become for local Australian citizens or permanent residents to buy a new dwelling. page 10

11 When surveying our membership, this is what we found: Do you believe that foreign investment in new residential real estate developments (such as high-rise residential developments and apartment blocks) through the Significant Investor Visa or Premium Investor Visa programmes will be bad for Australia's econ New residential real estate developments will be extremely bad for the economy 0.00% New residential real estate developments will be slightly bad for the economy 6.25% Neutral 0.00% New residential real estate developments will be slightly good for the economy 31.25% New residential real estate developments will be extremely good for the economy 62.50% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% As you can see from this response, whilst 29.41% of respondents said either yes or maybe to the question of whether Chinese investors are causing property price inflation, ONLY 6.25% said new residential real estate developments would be bad or extremely bad for Australia s economy (vs % saying that new real estate developments are either slightly good or extremely good for Australia s economy). It is our belief that excluding new property developments (be it residential or commercial) from being a part of the SIV complying investment framework (either through Managed Funds, OR through direct investment into Pty Ltd) is a broad-brush approach that will cause severe detriment to a number of major projects in WA. In an interview with one of our members in the property development and construction business, the ACBC WA learned that pre-sales for new infrastructure developments / apartment developments in WA are currently down. Without a set % of presales, the developers struggle to secure capital funding from banks. SIV applicants currently represent an important alternative to capitalize projects, and get them off the ground. In the interview with this member, we were informed that one project they are currently using SIV funding for in WA will employ around 300 tradespeople and workers in the local market over a period of around 24 months. Instead of asking the question how many SIV applicants do you have in the market right now doing these developments?, we believe the question should be why would you want to take away a lucrative source of investment income when we are just starting to gain trust and traction in the Chinese market? page 11

12 Comments and Suggestions on Box 2 Mandatory Investment in Venture Capital Funds as Part of the SIV Comments and Suggestions on Box 3 Mandatory Investment in Small and Micro Capital Funds as Part of the SIV Comments and Suggestions on Box 4 Balancing Investment Items for the SIV As mentioned earlier in this document, there was a strong reaction to ANY mandatory element to the SIV complying investment framework. As mentioned earlier in this submission, this is some of the feedback we have obtained from respondents. One of our members from investment banking has commented: VC and SMC are both high-risk investment categories. The average investor would have far less than 50% of their total portfolio invested in these asset classes locally, let alone in foreign jurisdictions where they have limited knowledge. VC typically has a time horizon of greater than 4 years, which presents another challenge for potential SIV/PIV applicants. Ultimately, the proposed changes will prohibit SIV/PIV applicants from considering Australia as an investment destination due to the high-risk nature of the proposed complying investments. Another member from the Property industry noted: Forcing applicants to invest in high risk investments is going to have several negative impacts... It will reduce the number of people wanting to apply for the SIV/PIV as they will be concerned about losing their capital in high risk investments... After dealing with many Chinese investors over the last 5+ years we have built up a reasonable understanding of their likes and dislikes when it comes to investment. Based on our experience this high risk investment requirement will not be well received. The people applying for these visas may be wealthy but like anyone, they do not want to invest into anything that has a high probability of losing money. Over 86% of respondents believed that a mandatory requirement to invest into Venture Capital / Micro Capitalized Company funds should not be required for the SIV complying investment framework.investment framework. page 12

13 $100m FUM requirement Whilst we understand that it is intended for integrity purposes, there is concern that the $100m firm-wide funds under management (FUM) proposal will have a serious negative impact on Western Australia, Queensland and South Australia. Out of all of our respondents, 82.35% either said that the FUM requirement is either set too high, or shouldn t be there at all, 11.76% said they didn t know and 5.88% said they felt the benchmark would be useful for integrity purposes. One of our participants commented that such a requirement serves no purpose, other than to line the pockets of the big end of town fund managers. It will lock out many small and medium businesses - these businesses are just as entitled (as the larger fund managers) to benefit from the SIV/PIV program. We fail to see what benefit this requirement will have to the Australian economy. Whilst this may not be the policy intention, it appears that the direction is to give the ability to host these funds to a limited number of larger banks and financial institutions the very institutions that have been providing loan-back schemes. Comments and Suggestions on Box 5 Design of the PIV The key concern about the design of the PIV as it currently sits is that it is an exclusive, closed-door nomination process where only Austrade will be able to nominate an applicant. According to our understanding, the only advice / suggestions for nominations that will be accepted by Austrade will be those that come from states and territories or peak industry bodies. This is a serious concern to those law firms, accounting firms, migration firms (etc) that are on the ground in the market promoting investor migration opportunities to Australia. Until now, there has not been any nomination process discussed as to how Austrade will work with current industry players such as registered law firms, accounting firms and migration firms (as state and territory governments currently do) in the processing of nomination applications. We encourage Austrade to think through a broader spectrum of industry involvement in the PIV nomination process. As discussed earlier, the exclusion of residential real estate is welcome if it is in reference to existing dwelling / personal dwellings of the applicant; however this exclusion should not extend to new residential real estate developments, such as high rise apartments. page 13

14 Conclusion In conclusion, we would like to reiterate that the proposed changes to the Significant Investor Visa framework, as they stand, propose a significant threat to the programme and its chances of ongoing success in the Chinese and other markets. We believe that the removal of government bonds as a gateway complying investment option in itself is agreeable, however coupled with the removal of direct investment into Pty Ltd entities represents a real problem in the attractiveness of this product in China. We believe that any mandatory requirement of investment into VC or SMC funds is going to have a negative result on the salability of the SIV / PIV product in China, however if there is to be a mandatory inclusion of Venture Capital investment, a low percentage may be acceptable to Chinese investors. We believe that the exclusion of residential real estate from the SIV complying investment framework is a good idea, as long as such exclusion is limited to existing dwellings, or personal dwellings of the applicant. This should in no way stop investment into property development (i.e. new development projects) by SIV and PIV visa holders being used towards their complying investment requirements. ACBC WA would like to once again thank the Austrade Investor Visa Unit for taking the time to read our submission. Given that China represents over 93% of current applicants, we sincerely hope that you will continue to include us in dialogue on these issues, and ask that you contact James Clarke or Adam Handley (whose contact details are on the next page) if you have any questions about this submission. page 14

15 KEY CONTACTS Adam Handley President WA Branch Australia China Business Council (WA) Mobile: James Clarke Executive Committee Member Australia China Business Council (WA) Australia China Business Council (Western Australian Branch) Level 4, 77 St Georges Terrace Perth WA 6000 GPO Box 2550, St Georges Terrace Perth WA 6831 T: F: E: acbcwa@acbc.com.au