Accessing the Significant Investor Visa segment

What price Australian residency?

Well now we know. The Significant Investor Visa (SIV) was introduced 12 months ago to provide overseas investors with residency if they invest $5m in “eligible assets”. These types of programs are not uncommon around the world, but are usually targeted at entrepreneurs where investment will lead to job creation. Of course the more desperate the country’s financial situation (eg Greece, Portugal), the looser the rules.

The Australian SIV program has generated quite a bit of press, most of it focused on the impact on the real estate market, but in fact direct real estate isn’t one of the assets that count towards the $5m requirement. That said, there is a secondary impact on the real estate market as SIV recipients establish a presence in Australia.

The actual requirement for an SIV is $5m invested in Australian sovereign bonds, local (non-investment) private business, or Australian managed funds that invest in Australian assets. That is quite loose, and also highlights how this money can still find its way into the property market (ie via managed funds). You could even technically borrow the $5m overseas and just invest in Australian interest bearing assets, earning a positive carry (assuming you can manage the FX risk). That’s a pretty cheap road to Australian residency.

One of the strange quirks of the SIV program is that it is state based, ie applicants have to be nominated by a state or territory government, and the states can (and do) apply their own tilts on requirements. For example, in NSW, where the majority of applications have been received, at least 30% of the $5m must be invested in NSW Waratah bonds. Other states are less stringent but might still require an application to show how it will benefit the state, directly or indirectly.

Somewhat against our initial expectations, the SIV program has the potential to make a material difference to the net inflow position of the local asset management industry. This is because although asset management has a large installed base of assets, its net inflow position is relatively marginal. A significant new source of flow can have quite a large swing effect:

We are forecasting an average of ~$8bn pa of net inflows into the asset management industry over the next five years.

There are more than 300 SIV applications outstanding already; assume ~500 pa ongoing – that’s $2.5bn of incoming assets each year (and could be more of course).

If 40% of the minimum $5m investment goes into managed funds, we can expect an additional $1bn pa of inflows. When net inflows are under $10bn pa, that has a visible impact – around a12.5% uplift on our forecast for net inflows for the asset management industry as a whole.

The challenge for asset managers will be distribution. As ever, the real estate industry is well ahead of the wealth management industry, already partnering with Chinese firms to design and develop products (real estate focused of course) to their clients.

Compared to the largely regulation-free world of real estate agents, Australian financial services players face greater constraints. The typical model used by Hong Kong financial advisers to attract mainland Chinese clients, for example, sees more than half the advice income paid to local distribution partners who source new investors.

This type of model is of course inconsistent with the conflicted remuneration provisions of FoFA. The applicability and interaction of FoFA, not to mention local regulation applicable to distributing into major SIV destinations such as China or Hong Kong, are issues that participants will need to get up to speed on.

This means that while the SIV segment could provide a significant boost to the local asset management industry, achieving a worthwhile share of this new market will not be straightforward. You will need to be part of a group with a presence in key offshore markets, or have partners that do; and have a well-designed distribution model which also satisfies your legal and ethical requirements under FoFA.

Posted In: Trialogue