As of January 15, 2024, the Victorian state government has implemented a significant increase in the absentee owner surcharge for the 2024 land tax year. This surcharge, which applies to all types of Victorian land owned by absentee owners or foreign investors with holdings over $50,000, has been doubled from 2% to 4%.

The purpose behind this increase is multi-faceted: it aims to discourage property vacancies, recoup pandemic-related expenditures, and bolster the state's fiscal repair plan. However, the ramifications of this policy shift extend far beyond these immediate goals, particularly impacting the industrial real estate sector in Victoria.

Understanding the Tax Changes

The Victorian government's introduction of the higher absentee owner surcharge is part of a broader strategy to address housing availability and stimulate the rental market. By increasing the cost of absentee ownership, the government hopes to incentivise property owners to either sell or lease their properties, thus enhancing the active use of land and reducing vacancies.

This measure is also seen as a means to reclaim funds used during the COVID-19 pandemic and support the state's 10-year fiscal repair plan, which includes levies on big businesses and landlords.

Industrial Sector Implications

For the industrial sector, these changes represent a considerable shift.

Industrial properties, particularly those in logistics and warehousing, are often held by foreign investors who may not reside in Australia. The new tax structure places a heavier financial burden on these absentee owners, potentially making their investments less attractive and more costly to maintain.

Impact on Foreign Investors

The doubling of the surcharge is likely to deter foreign investors from entering or expanding in the Victorian market. Already, there are indications that investors are seeking opportunities in other states or even considering alternative investment vehicles. The Australian newspaper recently reported a notable increase in investor sales, driven by the heightened tax environment. This shift not only threatens to decrease the influx of foreign capital into Victoria but also risks a reduction in property values as demand wanes.

Competitiveness and Market Dynamics

Victoria's industrial real estate market, which has traditionally been robust, may face significant challenges in maintaining its competitive edge against other states. With the new tax regime, industrial property owners might find it more profitable to invest in regions with more favourable tax conditions, with any exodus potentially leading to a reduction in available industrial space in Victoria, impacting businesses that rely on logistics and warehousing facilities to operate efficiently.

Long-Term Consequences

The broader implications for Victoria's real estate market are concerning. As absentee owners reassess their holding structures and investment strategies, we may witness a contraction in the market. Property and business groups, as reported by The Age, have already expressed fears that the increased tax burden will result in higher rental rates and a tighter rental market. While some argue that the tax hike will not directly translate to increased rents, the overall pressure on landlords to pass on costs cannot be dismissed.

In summary, the Victorian government's increase in the absentee owner surcharge marks a seismic shift in the state's approach to land tax.

While the intent behind the change is understandable, its impact on the industrial real estate sector is profound. Foreign investors are likely to reconsider their positions, potentially leading to a downturn in investment and a less competitive market for industrial properties.

For Victoria to remain an attractive destination for industrial investment, it will be crucial for policymakers to carefully monitor these developments and consider the broader economic implications of their fiscal strategies given the shifting landscape and challenges no doubt ahead.

Disclaimers:

The postings by any individual on any blog do not necessarily represent the position of Savills, its strategies or opinions.