AUSTRALIAN UPDATE: FIRB Provides Welcome Clarity For A-REITs
- There has been increasing uncertainty about the circumstances in which foreign investors in A-REITs need to notify their investment to FIRB and seek the Treasurer’s approval.
- To address this, FIRB has published a press release providing a safe harbour for foreign investors and issuers in which acquisitions of units in listed and other public A-REITs will not need to be notified to FIRB.
- The safe harbour applies to acquisitions:
– by foreign private investors;
– of passive interests (10% of a listed trust, 5% of other public trusts with more than 100 members);
– in a trust whose assets comprise predominantly non-residential real estate.
On 1 August 2013, FIRB issued a press release, ‘Treatment of Foreign Passive Investments in Public (Real Estate) Unit Trusts’, clarifying the circumstances in which acquisitions of units in Australian urban land trusts will not need to be notified to the Foreign Investment Review Board (FIRB).
The Treasurer also announced plans to amend the exceptions in the Foreign Acquisitions and Takeovers Regulations 1989 (Cth) (the Regulations) for acquisitions of interests in Australian urban land trusts after public consultation. These amendments, once in force, will replace the FIRB release, which applies in the interim only.
These measures provide welcome clarity both for investors in A-REITs as well as issuers. Recently the existing exemptions in the regulations had come to be increasingly narrowly applied, leading to uncertainty about when foreign investors need to notify FIRB.
Under section 26A of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the Act), acquisitions of interests in Australian urban land must be notified to FIRB and approved by the Treasurer. Failure to notify is an offence attracting potential penalties including fines and imprisonment. The Treasurer also has the power to make remedial orders to unwind acquisitions of Australian urban land which the Treasurer considers not to be in the national interest.
Interests in Australian urban land are defined so as to include, among other things, units in Australian urban land trusts (being trusts for which interests in Australian urban land comprise more than 50% of total assets).
This means that, unless an exemption applies, acquisition by a foreign investor of just one unit in an Australian urban land trust must be notified to the Treasurer under section 26A.
The Regulations provide a number of specific exceptions applicable to acquisitions of units in certain, primarily commercial Australian urban land trusts. However, these exceptions reflect the market conditions and regulatory regime of the time when they were introduced (1989) and have become increasingly difficult to apply.
Scope of FIRB release
The FIRB release provides foreign investors who acquire units in certain Australian urban land trusts with a safe harbour in which the Government will take no action.
To come within the safe harbour, an acquisition must satisfy all of the following conditions:
- Foreign private investor: The acquirer must be a foreign person or foreign corporation that is not a foreign government or related to a foreign government.
‘Foreign governments and their related entities’, as defined in Australia’s Foreign Investment Policy 2013 (the Policy), will continue to be subject to the stricter requirement under the Policy that they notify and obtain approval for any acquisitions of Australian urban land set out in the Policy.
- Passive interests: Only ‘passive interests’ will come within the safe harbour. For an acquisition to be passive, the holding of the acquirer, together with its associates, in the Australian urban land trust must not exceed:
– in the case of a listed trust – 10% of the units in the trust; and
– in the case of other public trusts with at least 100 members – 5% of the units in the trust.
However, an interest of less than the relevant percentage may be regarded as not being passive if there are special circumstances, (eg, where the investor is building a strategic stake, or is able to influence or control the trust beyond their ordinary voting power.
The approach taken is similar to that taken in the Policy to defining ‘direct investments’. In that context, an investment will be regarded as being direct, and not merely passive, where the interests acquired have preferential, special or veto voting rights, where the investor has the ability to appoint directors, or where there are other contractual arrangements (such as loans, services agreements and off-take agreements).]
- Predominantly non-residential land: The safe harbour is only available where the acquisition is of units in an Australian urban land trust which comprises predominantly non-residential land. Slightly different tests apply for listed trusts and other public trusts.
– For a listed trust, the portfolio must comprise predominantly non-residential property comprising office, retail, industrial or specialised properties (or a mix). Where a listed trust contains some residential property, it will be necessary to make an assessment whether non-residential property of the relevant types is predominant. If in doubt, investors are invited to discuss their situation with FIRB.
– For other public trusts, developed residential real estate assets acquired from non-associates must comprise less than 10% of the trust’s real estate assets. Residential real estate assets developed by the public trust itself or by associates can exceed that percentage.
Implications of FIRB release
The practical effect of the safe harbour provided by the FIRB release is that retail and institutional investors in listed and certain widely held unlisted A-REITs will generally be able to acquire and deal with their investments without having to notify FIRB so long as their stake remains below the relevant percentage. Only where an investor seeks to exceed that percentage, or seeks arrangements to exert additional control or influence over the A-REIT, will they need to notify FIRB and obtain approval.
These changes provide welcome certainty for international institutional investors, who can safely make and deal in passive investments in A-REITs. It also provides clarity to issuers, who can market a capital raising to foreign institutional investors and issue securities to them, without exposing the investors to the risk that they may need to notify FIRB and obtain approval before investing.