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International education is Australia’s third largest export industry after iron ore and coal, worth $32.4 billion to the economy, according to the Department of Foreign Affairs and Trade. (Depending on one’s definition of exports, other economists put education further down the list).

Students, particularly from China, have played an important role in propping up the property market in Australia’s major cities. Foreign parents, eager to both provide their children with a comfortable and desirable place to live and to invest their cash in a booming property market, have purchased apartments in numerous suburbs such as Green Park, Rosebery, Chippendale, Camperdown, Darlington, Pyrmont, Glebe, Kensington, Kingsford, Randwick, North Ryde and further west.

And while China has a whopping 285 billionaires, whose total wealth adds up to USD$996 billion, it also has a burgeoning middle class of now 600 million people. Many of the latter have a sizeable disposable income for the first time and are eager to invest in their children.

 What’s more, for many foreign students, in particular those from Asia, studying in Australia — known for its democratic institutions, low corruption, subsidised healthcare, the rule of law, sunny climes, high pay and job opportunities — is seen as a route to permanent residency and eventual citizenship. As students move into the job market, and become longer-term residents, they go on to buy their own properties.

So, despite attempts to cap foreign investment, Asian buyers have long played a pivotal role in Sydney’s dramatic rise in property prices. In New South Wales alone, foreign buyers bought a quarter of all new houses in 2017, when the property market boom was at its height. Like other global Western cities around the world – from London to Paris to New York – Sydney is a top destination for foreign capital.

There are signs, however, that the number of international students is dwindling. Worse still, as Curtis Associates pointed out in a previous special report on the flattening property market, published in April 2018, Australia might yet see an exodus of its foreign students. A series of scandals at Australian universities over Chinese interference, a tightening of visa rules by the Turnbull and Morrison governments, and increasing levels of quality higher education in their own countries are all having an impact.  

Salvatore Babones, an associate professor specialising in China at The University of Sydney and the author of ten books tells Sydney buyer’s agent, Curtis Associates that “the big fiscal risk is that, one day, the students simply won’t come. Australia relies on international students to a degree unprecedented in the Western world. Roughly one quarter of all university students in Australia come from overseas, a figure that ranges up to one half at some highly exposed universities.”

What does this mean for the property market in Sydney?

In this Curtise Call special report, buyer’s agent Curtis Associates investigates.

 How many international students are there?

A lot. In many of Australia’s top universities – including the Australian National University (ANU) – foreign students now account for over thirty percent of the student population. In business schools, that percentage is even higher, with international students often making up over two-thirds of the student body.

To put this into perspective Australia per capita has the largest number of international higher education students in the world: they make up 3.6 percent of Australia’s total population. Internationally, it has the third highest number of international students after the USA and UK.

The vast majority of these students are Chinese, with India second and Nepal third. 

At the University of Sydney, 24 percent of all students come from China; at the University of New South Wales (UNSW), 23 percent come from China and at the University of Technology Sydney (UTS) 17 percent come from China.

“There are more Chinese students at these three inner-Sydney universities than in all 33 public universities in the US state of California,” Professor Babones wrote in an opinion article for The Sydney Morning Herald (SMH) in August 2019. 

That’s a lot of international students. What’s in it for Australia?

It’s all about the money.

International students pay far higher fees than local students, thereby bringing much-needed cash to both the universities and the economy as a whole. And according to the Australian Bureau of Statistics, education as an export has doubled in the last five years. While China has been the primary driver, India is catching up as a newer source of revenue, with a mammoth 39 percent increase in student enrolments in Australia last year.

Much of that revenue is focused in New South Wales (NSW), where the international student education industry is worth $11.3 billion. The vast majority of that money is made in Sydney: a city favoured by foreign students for its top ranked universities and many other attractions, from lifestyle to work opportunities.

Indeed, over 98 percent of international students in NSW study in Sydney. Meanwhile, universities in Sydney are getting more prestigious. This year’s 2020 Times Higher Education (THE) World University Rankings saw the University of New South Wales (UNSW) jump 25 places from last year to 71. The University of Sydney, meanwhile, ranked third in Australia at number 60.

Universities justify the volumes of international students in their classroom by insisting that it creates valuable ties in the Asia-Pacific region.

 That sounds sensible. So what’s the problem?

Relying on international students to provide an economic boost is a risky investment.

Chinese students are particularly risky [to bank on economically], because China is ruled by an unpredictable single-party dictatorship,” says Professor Babones. Chinese numbers seem to have plateaued, as recruitment reaches saturation levels and the Chinese economy stalls. Visa grant data suggest that the number of Chinese students will fall next year.”

As a result of the trade war initiated by President Trump, the Chinese economy is looking shaky. And while China as a nation needs coal from Australia, education in a foreign country is, for much of the population, considered a luxury — not a necessity.  

Professor Babones explains: “If the Yuan continues to have problems, student numbers could fall very rapidly. The only thing keeping numbers up right now is the fact that the Australian Dollar is just as weak as the Yuan. That situation will change dramatically when the Reserve Bank shifts from lowering interest rates to raising them.”

Chinese universities, too, are becoming more prestigious, meaning more students may choose to study at home: Tsinghua University is ranked number 23 in the THE World University Rankings — squarely beating every Sydney university. Peking University is ranked at number 24 and the University of Science and Technology of China at number 80. Indeed, according to THE’s website, “higher education in China has gone from strength to strength in recent years.”   

 Australian universities: Putting too many eggs in one basket

As Professor Babones warns: “Australian universities should start dialling down their risky international exposure and refocus on domestic students.”

Dr Dallas Rogers, a senior lecturer who specialises in Asia-Australian housing, education and urban governance at the University of Sydney’s School of Architecture, Design and Planning, agrees.

“Having an international component to the university is always a risk: because international student markets change quite rapidly. They can fluctuate on regulatory environments in both countries: Australia, for example, can change their visa rules for students. Domestic changes can occur. Changes in the foreign investment rules can affect things as well,” he tells Sydney buyers’ agent Curtis Associates.

What might turn international students away?

Prime minister Scott Morrison has moved to cut the number of migrants who can claim permanent residency by 30,000. This, of course, removes one of the largest incentives to study here: the path to citizenship. If citizenship is no longer a viable option, many students will choose to study in other countries. 

In Australia, too, there is pressure from both domestic students and elsewhere to limit the numbers of international students. Indeed, well over half – some 54 percent — of Australians want the numbers of international students to be curbed, according to a survey done by UNSW.

Much of this comes down to complaints about the poor levels of English from many international students, who struggle to keep up and who, as a consequence, seemingly drag down education standards for everyone and torpedo university reputations.

It is a system Professor Babones has called a “ticking time bomb”.   

“Many universities, including most of Australia’s most prestigious, allow students to enter through [expensive] foundation programs with much lower English language skills than they require for direct admission to universities. In theory, they’re supposed to learn English in these programs. Often they don’t, but they are still allowed to progress to regular university studies — and are set up for failure,” he explains. 

Finally, concerns about Chinese interference in Australian universities have also raised alarm bells: fears include a recent massive data breach at ANU, which has been widely attributed to China.  

In an article published in June this year in the SMH under the title “Overseas students have delivered a cash bonanza to universities, but at what cost?” other concerns were raised. “Defence authorities are now worrying about something more difficult to define,” the article reads. “That the intensity of research collaboration with China is creating holes in Australia’s national security. They worry universities are unintentionally allowing sensitive technology and data to pass into the hands of a potentially hostile government.”  

 There is a cost, then, to an influx of international students. But how does this affect the Sydney property market?

Chinese investors have been critical to the property boom in Australia. In 2015, they invested $6.8 billion into both commercial and residential real estate. As foreign residential buyers are only allowed to purchase new builds in Australia, this, in turn, has helped spur on 28 years of uninterrupted growth by contributing to a buoyant construction sector.

If you look at why we saw such a construction boom across Australia, it was because we did have so many foreign buyers in the market. If you have a look at the number of projects that got kicked off that was because there was a very high commitment from offshore,” Nerida Conisbee, chief economist for the global online real estate company REA Group, tells buyers’ agent Curtis Associates.

Chinese developers  “were key to getting a lot of construction up and running… A lot was driven by Chinese money,” adds Ms Conisbee.

 Where do foreign buyers purchase properties?

Data from REA’s search engine shows most foreign nationals are attracted to buy in areas where there is already a high proportion of people living there from a similar background or nationalities.

 Whenever we look at foreign search in any country, the majority are generally searching in areas with high proportions of that country: the British search in Manly; South Africans look at St Ives [on the Upper North Shore]; Chinese like Chatswood [on the Lower North Shore], where there is a high proportion of Chinese born residents. There does tend to be a bit of a word of mouth element to it,” notes Ms Consibee.  

But while the Brits may want to live on the beach (Manly, Bondi and Coogee are popular amongst British expats), many Asian buyers prefer the inner city, often in clean, newly erected high-rise blocks.

 And yet Chinese investment seems to be stagnating…

Over the last decade, investors have been attracted to Australia for its high capital gains rates and high rental yields, which, in the past, have been as much as double the rental yields in China. The figures speak for themselves: Chinese developers purchased 38 percent of all development residential property sites in Australia in 2016.   

Yet Chinese investment in Sydney properties is stagnating.

“Chinese purchases have dropped off dramatically,” says Ms Consibee. In 2017 there were roughly 1,300 searches a day from China for residential property on REA Group’s property websites in Australia; today that number is down 70 percent.

What’s more, from 2016 to 2017 foreign residential real estate approvals numbered just over 13,000 (adding up to $25.2 billion) according to figures from the Foreign Investment Review Board. That is a significant drop from the 40,000 approvals, worth $72.4 billion, granted from 2015 to 2016.

 Why is China turning away from Australia?

A drop off in international students is one reason. But other factors are at play, too:

  • The rental housing market in China is becoming more mature: as such investing in real estate at home for many Chinese is becoming more attractive
  • As the Yuan depreciates during the trade war with America, Beijing is stepping up ways to stop capital from its citizens leaving the country: the upshot is it is harder to get money out of China
  • New South Wales and Victoria, among other states, increased their stamp duty for foreign residential purchases, by 8 percent and 7 percent respectively, largely to deter foreign buyers
  • Finally, the high price of many Australian properties has turned many foreign buyers off what can be viewed as an overblown market

“In most capital cities now there are taxes on foreign buyers – that led to an impact on the number of transactions taking place,” explains Ms Conisbee. Added to this is China’s Belt and Road Initiative, a massive infrastructure project designed to increase trade in the region. “Once it was introduced it became far harder for developers to get housing projects kicked off because many wanted to focus on infrastructure,” she says.   

To boot, “the sentiment has really switched in China,” adds Ms Conisbee. While in the past Chinese buyers and investors might have focused on a few core cities, including Sydney, now many are looking closer to home for property or development sites, either within China itself or in countries such as Thailand, Vietnam and Cambodia.

Finally, if parents “are sending children elsewhere for university there is not such a drive to buy in Australia,” says Ms Conisbee.

 Looking to India as an alternative

Indians make up the second highest number of foreign students in Australia. In order to capitalise on this universities such as UNSW now have a Indian Ten Year Growth Strategy; in 2018 they also opened an outpost in Delhi as part of a bid to attract more Indian students.  

It seems to be working: the number of Indian students who enrolled in Australian universities jumped 39 percent to 29,000 from 2018 to 2019, according to the Department of Education figures. Indian migrants have now overtaken British and New Zealand migrants to Australia.

But Professor Babone believes that relying on India as a source of revenue is a mistake.

“Australian universities think that India will be their next pot of gold, but India has roughly one-eighth as many families who can afford an international education for their children as China does. So in order to switch to India as a source country, Australian universities have to reach much deeper down into the available student pool,” Professor Babone tells buyer’s agent Curtis Associates.  

“As a result, standards for Indian student admissions tend to be lower than for Chinese student admissions, and worse, students are being admitted who can’t really afford to study in Australia,” he continues.

Put simply, only three million adults in India earn over $50,000 a year, compared to 24 million adults in China.

Meanwhile, the Australian government has a higher number of visa rejections for Indian nationals than for other nations, with the Department of Home Affairs rejecting one in every ten-student visa applications from India in 2018.  

Who is looking to buy Australian property, then, from abroad?

With the massive disruption and protests in Hong Kong over Chinese authoritarian control, property searches from Hong Kong have increased dramatically in Australia. Ms Conisbee notes that compared to September last year, searches are up 34 percent this September. (There are also “solid increases from the UK and New Zealand,” she says).  

Dr Rogers, too, has heard “reports from Hong Kong agents about new inquiries for Australian property following the Extradition Bill tensions with mainland China. So foreign real estate investment can change quickly and because of a myriad of reasons.”  

That said, while some Hong Kong citizens might invest in Australia – particularly as the future of Hong Kong remains in flux – “they’re not going to kick start a huge development boom,” insists Ms Conisbee. “It won’t be anywhere near as extreme as we saw from Chinese. Just the volumes of transactions we saw coming through that was quite incredible.”

This increase in foreign property searches has yet to translate into an influx of foreign Sydney property buyers on the ground.

“There are [also] more restrictions for Indian investors” says Ms Conisbee meaning that, as with Hong Kong, Indian buyers are unlikely to contribute to a new property boom.

“Will Indian students, if they do come, have the same real estate impacts Chinese students had over the last 5 or so years?” asks Dr Rogers. “Probably not. And one of the main reasons for this is because the property market is different. International students and their families work with the market conditions they find themselves in and they take advice from the real estate professionals around them. 2020 is a very different property landscape than 2013 to 2017, when the rise in Chinese student numbers occurred. If Indian students invest in real estate, they will do so according to a new set of practices, risks and opportunities.”

With foreign buyers going down, what does that mean for domestic Sydney property buyers? 

As Martin North, Principal of Digital Financial Analytics, told buyers’ agent Curtis Associates in a special report on the flattening Sydney property market in 2018, “The number of foreign buyers is definitely going down; those in student related categories have dropped considerably. It’s going to reduce [property] demand further.”

The same remains true today. If you’re a buyer it’s bad news: it means there is going to be less projects that get up and running and there are less developers in the market…If you have a look at the huge level of supply that was created during the apartment boom that’s dried up and it doesn’t look like that is coming back soon: there are big problems in the construction industry,” says Ms Conisbee. “Rents didn’t go up much over the last five years or so primarily because there was lots of new supply and investor activity and we’re not seeing that investor activity now.”

And if there is a reduction in demand, the knock-on effect will not be limited to new developments. It will also ripple through established residential and commercial properties in those many Sydney micro property markets and suburbs that now depend on or are heavily influenced by international students. If they go, then local businesses, a sense of vibrancy, amenity and community could soon follow.

One thing is certain: international students are now a hot local topic in a charged geo-political environment. It is a huge cohort no Sydney property buyer can afford to ignore.  

 

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