Bills Digest no. 113 2008–09
Australian Business Investment Partnership Bill
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
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Investment Partnership Bill 2009
Date introduced: 12 March 2009
House: House of Representatives
Portfolio: The Treasury
Commencement: The day after the Act receives the
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
To provide for the establishment of the Australian Business
Investment Partnership Limited (ABIP), a company under the
Corporations Act 2001, to address the potential risk of
the funding gap in the commercial property sector due to an
anticipated reduction of foreign banks’ level of
As at December 2006, the estimated size of the Australian
investment market was A$6.1 trillion of which the Australian
commercial property component represents A$288 billion
(approximately 5 per cent). The private equity and debt market for
property comprises approximately 49 per cent, being nearly equally
distributed with the publicly traded market (Real Estate Investment
Trusts) representing the largest component at 47 per cent. In
separating the equity, property and securitised debt components,
the size of the Australian investment market for these assets can
be compared to the global equivalent e.g. the proportions of the
Australian market are similar to those of other markets.
The total value of the global investment market is A$152
trillion, and is apportioned equities (39 per cent) debt securities
(55 per cent) and commercial property (6 per cent). The comparable
Australian market share is A$2.5 trillion and represents just below
2 per cent of the global investment market. The percentage ranges
across the different investment sub-markets with the commercial
property sector accounting for 2.4 per cent of the global property
market. This is relatively high and is due to the significant
proportion of Australian investment grade property owned by
The Australian commercial property sector has bank debt
totalling $165 billion, according to the Australian Prudential
Regulatory Authority (APRA) figures, of which $30 billion is
provided by foreign banks.
Investment bank UBS reported that foreign banks financed 71 per
cent of the $23 billion syndicated debt of listed property
In one of its first indications of the slowing market, an
article in the March 2008 issue of ASX Investor newsletter, Daryl
Wilson, CFO and Director of Cromwell Group hinted that:
…certainly the recent climate, and the accompanying major
fall in A-REIT stocks [previously known as listed property stocks],
is not in line with historical behaviour at this point in the
economic cycle. In the past, the A-REIT sector has been a
defensive haven in volatile times. This time around, along
with the broader financial services sector, it has been one of the
hardest hit with the S&P/ASX 300 A-REIT index down 23% in the
12 months to 31 January 2008.
…the current crop of A-REITS are a very diversified bunch
indeed. Some characteristics which have been introduced into
the sector, or grown in nature in the past 10 years, are:
Higher gearing - the disquiet surrounding the
A-REIT sector started back in December 2007, when the market became
concerned about some A-REITs being caught with high gearing at a
time when it became much more difficult to obtain debt funding,
particularly in the US. While there are some extreme
examples, in recent years, it has become relatively common for
gearing levels of some A-REITs to be 50% or higher. With the
sub-prime crisis unfolding in the US in the later half of 2007, and
having a flow-on global effect, those A-REITs with higher gearing
levels have suffered.
Certainly since September 2008, after the
collapse of the large US investment Bank- Lehman Brothers, and
the resulting crisis in the global financial markets, there has
been a lingering uncertainty in the highly leveraged commercial
property sector in Australia.
On 5 November 2008, another indication of the market slide
appeared in the Brisbane Business News. According to its dispatch,
the market was poised to slow down with dramatic impact. It
Queensland’s property industry faces its biggest year of
change in 16 years, CB Richard Ellis has warned Brisbane industry
Speaking at CBRE’s annual Market Outlook breakfast in
Brisbane, executive director of research and consulting Kevin
Stanley says while Queensland will remain near the top of growth
rankings in the year ahead, it remains ‘very
Expect reduced investment activity.
Until issues with strong credit availability are resolved, this will be the overall trend.
In a dispatch from Western Australia on 9 December 2008, the ABC
reported that the credit squeeze was stalling the growth of the
commercial property market:
The credit squeeze is being blamed for an increasing number of
construction projects in Perth being abandoned. (ABC: Graeme
Western Australia’s commercial property sector is feeling
the brunt of a credit squeeze with companies putting off
multi-million dollar projects.
Of late, the investment market in commercial property stocks has
shown a surge in volatility. In a news item on 5 March 2009,
The Australian reported:
THE listed property sector was hit by a fresh wave of selling
yesterday, pushing the unit prices of key stocks Stockland, Goodman
Group and GPT to all-time lows and wiping about $2.6billion from
Market watchers thought the GDP figures or a potential lift of
the short-selling ban could partly explain why the benchmark
ASX/S&P A-REITs 200 Index dropped by 6.1 per cent, but the
general equities index dropped just 1.6 per cent.
The sector has fallen by $127billion since the peak in February
2007. Stockland fell 20c, or 7.25 per cent, to close at $2.56 --
the lowest in over 17 years; while GPT was down 8.5c, or 24 per
cent, to close at 27c and Goodman Group dived 19 per cent (4.5c) to
19c. Market leader Westfield Group lost 58c, finishing the day at
$9.92c a unit. Even the two strong Australian-focused trusts,
Colonial First State Retail Property Trust and Commonwealth
Property Office Fund, fell more than 9c.
Stockland is the second-largest shareholder in GPT with more
than 11 per cent stake, acquired from Perennial Investment for $544
million in November.
An offshore portfolio manager for A-REITs said
investors were concerned about liquidity and capital management of
trusts, like Goodman. Combined with poor global sentiment, these
concerns of refinancing and funding weighed heavily over the
sector, the manager said.
On 24 January 2009, the Prime Minister announced that:
Commercial property projects that could be supported by this
initiative include shopping centres, office towers and factories
under construction, as well as existing properties of that nature.
Without action, a combination of weak demand and tight credit
conditions could see up to 50,000 people in this sector lose their
jobs, according to Treasury, with flow-on effects to jobs in other
parts of the economy.
Small and medium size businesses which service the commercial
property sector could also be devastated by weak demand and tight
credit conditions in the sector.
The Government will not sit idly by and watch these jobs and
small and medium size businesses be wiped out by fluctuations in
global credit markets.
The commercial property sector employs about 150,000
people in Australia. Many of the 150,000 workers employed in the
commercial property sector are tradespeople, such as plumbers,
electricians and carpenters. Without action, a combination of weak
demand and tight credit conditions could see up to 50,000 people in
this sector lose their jobs, according to Treasury, with flow-on
effects to jobs in other parts of the economy.
Small and medium size businesses which service the commercial
property sector could also be devastated by weak demand and tight
credit conditions in the sector.
The Partnership will be structured to minimise the exposure risk
to Australian taxpayers. It will not allow the major banks to
pass on any underperforming assets to the Australian
Government. Safeguards will ensure the banks continue to
finance the projects to be supported, and that projects will only
be considered where a member of a syndicate has actually decided to
Given the backdrop of such development, the Rudd
Government’s intervention in the market is seen as an attempt
to mitigate any fallout from the withdrawal of foreign banks from
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ABIP will be established under the Corporations Act
2001 and will be a public company limited by shares. The
members (shareholders) of ABIP will be the Commonwealth of
Australia (Commonwealth) and Australia’s major domestic
banks: Australia and New Zealand Banking Group Ltd (ANZ),
Commonwealth Bank of Australia, National Australia Bank Ltd and
Westpac Banking Corporation. 
The Government and the major banks will provide initial loan
funding to ABIP and an amount for working capital. The Government
will provide $2 billion and the major banks will provide $500
million each. Accordingly, on its establishment, ABIP will have
access to $4 billion in un-drawn loan facilities, less an amount
for working capital, expected to be $4 million.
The financing provided by the major banks will not be guaranteed
by the Government.
ABIP will only be able to enter into new refinancing
arrangements of commercial property assets for two years from the
date of its establishment.
If additional financing is required beyond this initial $4
billion, ABIP will be able to issue up to $26 billion of government
guaranteed debt to create up to $30 billion of loanable
The Partnership will provide financing on fully commercial terms
for commercial property that meet ABIP’s lending criteria,
determined by its shareholders, and where the underlying assets,
and the income streams from those assets, are financially
The Partnership will be limited to the re-financing of existing
Australian commercial property syndicated loans on commercial terms
when the withdrawal of funding by a participant of the syndicate
threatens the refinancing of the loan.
The Partnership will focus on completed commercial property
investments and partly completed development projects with secured
pre-commitments (for example, retail shopping centres, commercial
office and industrial property). It will be structured to allow
sufficient flexibility to provide financing in other areas of
commercial lending, should the need arise and the Government and
four major banks jointly agree.
Completed commercial property projects would be included in this
partnership to ensure that systemic instability in the commercial
property sector does not undermine investor confidence.
On 20 February 2009, the Government announced that Ahmed Fahour,
then Executive Director of the National Australia Bank, would take
up the position of interim CEO of ABIP.
At the time of writing, the Bill had not been referred to any
committee. The Senate Selection of Bills Committee is due to met on
17 March 2009, but is unknown whether the Committee will consider
the Bill at that meeting.
In a press release following the
introduction of the Bill, Property Council of Australia Chief
Executive, Peter Verwer, said that the ‘Ruddbank’ was
an essential mechanism to inject stability and confidence into the
economy. The Council noted that: 
Australia has a significant exposure to foreign lenders.
The commercial property sector has bank debt totalling $165
billion. $30 billion (18%) of this total commercial lending is
provided by foreign banks (source: APRA).
Australian real estate investment trusts have syndicated
borrowings of $23 billion. $16 billion (71%) of this is syndicated
debt provided by foreign banks (source: UBS).
“There is clear and present risk of foreign lender
withdrawal from Australia. Foreign banks have been told to focus on
homeland markets by their new owners - foreign
“The Property Council has this week surveyed its members
and they report that over 20 foreign banks from Europe (43%), USA
(26%), and Asia (31%) have signalled plans to reduce their exposure
to Australian commercial property funding, or have already
Domestic banks can't fill the void, which means owners will be
forced to needlessly liquidate their assets. There is virtually no
capacity in the Australian debt market. The commercial
mortgage-backed securities (CMBS) and corporate bond markets are effectively closed
to commercial property funding.
On 29 January 2009, in welcoming the Government’s 24
January announcement, the Sydney Morning Herald reported
Without an alternative source of funding our local banks would
need to take up the slack and pump more credit into a sector to
which they are already overexposed or take the risk that many
property companies will suffer a funding crisis. This would result
in commercial property prices falling and the sector moving further
Australian banks have already had to wear big losses in the
commercial property sector, and without some kind of assistance the
losses would be greater.
The retreat of foreign banks from lending to Australian
companies is not confined to property; they are systematically
pulling out of lending in all sectors but property is one of the
more highly geared industries where lenders are simply unwilling to
increase their exposure.
The potential collapse in commercial property is something the
Government is clearly wanting to avoid even if it requires using
taxpayers’ money to achieve it.
The Government has cited employment concerns as its primary
motive. However, the damage that a collapse in the commercial
property market would have on the financial system is probably more
Kevin Rudd has already demonstrated this desire to ensure retail
and commercial credit lines remain open by guaranteeing bank
deposits and wholesale bank lending. Propping up commercial
property is just the latest move in the list of piecemeal proposals
designed to keep the good ship Australia afloat.
The Australian Financial Review on 13 March 2009 in an
article report titled ‘Ruddbank’s scope widens’,
stated that the scope of the ABIP as contained in the Bill
introduced in the Parliament on 12 March 2009 goes beyond the
Government’s initial announcement on 24 January 2009. The AFR
The government … introduced legislation yesterday that
would enable the investment partnership to replace local lenders in
banking syndicates, going beyond its initial mission of filling the
gaps left by foreign banks that scale down their lending in
But the government yesterday tabled legislation and a 40-page
shareholders’ agreement setting out objectives that go beyond
that initial plan.
The first objective is to refinance loans
for commercial property when finance is not available from other
lenders and the assets would otherwise be financially viable. The
second objective in the legislation and shareholders agreement is
to ‘provide finance in other areas of commercial lending
through financing arrangements of a kind unanimously agreed by the
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The Leader of the Opposition, The
Mr Malcolm Turnbull MP, said that the extended scope would
exceed the Government’s initial commitment and create an easy
source of finance that would distort the finance sector and make it
easier for foreign banks and other lenders to leave the
The Greens said on 12 March 2009 that they had concerns about
the legislation but had yet to decide their position. Independent
Senator Nick Xenophon and Family First’s Steve Fielding have
yet to declare their positions.
The Bill will require an appropriation totalling $2 billion,
consisting of a loan facility to ABIP ($1.998 billion) and an
equity contribution to meet the Commonwealth’s share of
ABIP’s operating costs ($2 million). It will also require an appropriation
for claims covered by the Government guarantee on any debt that
ABIP issues up to a maximum of $26 billion, plus any interest that
may be payable in relation to the principal debt issues.
The loan facility and equity contribution themselves will have
no impact on the underlying cash balance. However, interest
received on the loan facility and dividends on the equity
contribution will improve the underlying cash balance, and these
will be offset by interest costs paid on financing the loan and
equity contributions. Non-repayment of loan (or equity) can impact
on the underlying cash balance and fiscal balance depending on the
circumstances under which it occurs.
A contingent liability may arise out of the Government’s
debt guarantee of $26 billion. If the guarantee is called upon at
any time, there will be implications to the underlying cash
balance. Conversely, the guarantee fee will improve the cash
Applicants for financing from ABIP will not incur additional
compliance costs over and above those they would have incurred had
they applied for refinancing from another commercial lender. The
impact is low.
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The growth of Australia’s economy is inexorably dependent
on the growth of the services sector which dominates the economy
with an overwhelming share of about 77 per cent. Not surprisingly,
the importance of the property and business services sector (about
14 per cent share in the economy in 2008) is an integral part of
this growth momentum. The property and business services sector
registered about 4.6 per cent average annual growth since 1991
compared to 3.6 per cent growth of the economy during the same
So the stakes for ignoring the importance of the property and
business sector are definitely high.
Clause 5 requires the Commonwealth to register
ABIP as a company under the Corporations Act 2001.
The Bill does not actually spell out who, besides the
Commonwealth, would be members (that is, shareholders) of the ABIP.
However, this detail is spelt out in the Shareholders’
Agreement, which is the subject of clause 6, and a
draft of which was released when the Bill was introduced. Clause 6
does not require such an agreement, but provides an
indicative list of issues that the members may agree upon,
including the operation of ABIP’s business; the control,
management and funding of ABIP: and the rights and obligations of
its members. Any shareholders agreement, including any subsequently
amended version, must be published, either on the internet or
Clause 7 sets out the two objects of ABIP.
- To provide refinancing for loans relating to commercial
property assets in Australia in situations where both (a) finance
relating to the assets is not available from commercial providers
other than ABIP Limited and (b) the assets would otherwise be
financially viable, and
- to provide financing in other areas of commercial lending
through financing arrangements of a kind agreed to by the
members of ABIP Limited in accordance with
proposed paragraph 8(3)(b).
Clause 8 supplements clause 7 by setting out
limitations on the situations where ABIP may provide
Financing arrangements can only be entered into if they are for an
object mentioned in clause 7. In relation to the second object
mentioned above, paragraph 8(3)(b) does not provide any real detail
of the limitation, other than allowing the ABIP to agree to other
kinds of specified financing agreements, as long as this is
unanimous and agreed in writing. In such cases, the ABIP may
subsequently enter into a financing arrangement that is of the
specified kind. Any arrangements must be entered into within two
years of the Act commencing, and run for no more than either three
years, or any longer period specified in the regulations.
Finally, due to limitations on the Commonwealth’s
constitutional power, subclause 8(2) provides that
the financing arrangement must involve at least one of the
- at least one other party to the arrangement must be a
- the arrangement constitutes, or is for the purpose connected
with, interstate or overseas trade or commerce, or trade within or
by a Territory,
- the arrangement is entered into in a Territory, and /or
- the arrangement is for a purpose connected with the supply of
goods or services to the Commonwealth, or a Commonwealth authority
ABIP may borrow money for the purpose of entering into, or
meeting obligations under, financial arrangements permitted under
clause 8, but only up to a limit of $26 billion, and where all
members have agreed: subclause 9(1). Any funds
lent separately to ABIP in accordance with any ABIP
shareholders’ agreement(s) does not count towards the
subclause 9(1) limit: subclause 9(2).
Clause 10 requires ABIP to have a constitution
that contains certain matters. Notably these include:
- ABIP must have five directors
- the director that represents the Commonwealth on the ABIP
board, or the Commonwealth appointed alternate director, shall be
- actions requiring Board resolutions must be passed unanimously,
except in the case of ‘enforcement’ resolutions –
in the later case, a 80 per cent vote is required, including that
of the Commonwealth director
- an audit committee with specific functions including assisting
ABIP and its directors comply with obligations under the
Corporations Act, and providing a forum for communication between
the directors, the senior managers of ABIP and the auditors of
- directors are required to have ABIP’s financial
statements audited by the Auditor-General, and that the
Auditor-General’s report and the financial statements must be
given to the Treasurer (as the responsible minister).
The Treasurer must table in both Houses of Parliament copies of
ABIP’s financial report, directors’ report and
auditor’s report as soon as practical after receiving them:
Clause 13 appropriates $2 billion from the
Consolidated Revenue Fund (CRF) for the dual purposes of
subscribing for shares in ABIP and providing a loan to it. It also
provides for a standing appropriation for both (a) paying
claims on funds borrowed by the ABIP under a Commonwealth Deed for
Guarantee under clause 9, and (b) repaying, and paying interest, on
any money borrowed by the Commonwealth under clause
15 for the purpose of paying claims on money borrowed by
the ABIP under clause 9.
Part IV of the Trade Practices Act 1974 (TPA)
deals with restrictive trade practices as such anti-competitive
behaviour, price fixing, misuse of market power etc. Section 51(1)
of the TPA specifies a range of matters that ‘must be
disregarded’ in determining whether a person has contravened
Part IVA. Subparagraph 51(1)(a)(i) includes in this range of
matters anything specifically authorised by a Commonwealth Act.
Clause 16 of the Bill effectively brings
activities undertaken by ABIP, its shareholders, Directors,
officers, agents and employees within the scope of the subparagraph
51(1)(a)(i) of the TPA and hence not subject to the
various prohibitions of restrictive trade practices under Part IVA
of the TPA.
Clause 17 is a standard power to make
regulations prescribing matters under the Act.
David M. Higgins,
commercial property in the Australian capital market, RICS
Research paper series, Volume 7 Number 12 September 2007,
University of Technology Sydney, Australia.
Florence Chong and Sara Rich,
Property firms hail kick-start to lending, The
Australian, January 26, 2009
State of the property sector, ASX Investor, March
Brisbane Business News,
Commercial property sector should batten down the hatches warns CB
Richard Ellis, 5 November 2008
squeeze blamed for commercial property slump, 9 December
Florence Chong, ‘Listed
property sector suffers price freefall’, The
Australian, 5 March 2009.
The Hon K Rudd, Prime Minister,
Release, 24 January 2009.
Australian Business Investment
Partnership Bill 2009, Explanatory Memorandum, p. 3
ibid, p. 4
The Hon Wayne Swan, ‘ABIP interim CEO
Media Release 20 February 2009.
Property Council of Australia,
Bi-partisan support urged for ABIP, Media Release, 13 March
CMBS is actually a type of mortgage-backed
security that is secured by the loan on a commercial property.
A CMBS can provide liquidity to real estate investors and
to commercial lenders. As with other types of mortgaged backed
securities (MBS), the increased use of CMBS can
be attributable to the rapid rise in real estate prices over
the years. Because they are not standardized, there are a lot of
details associated CMBS that make them difficult to value.
However, when compared to a residential mortgage-backed security
(RMBS), a CMBS provides a lower degree of prepayment risk because
commercial mortgages are most often set for a fixed term.
Finance concerns behind Government’s commercial property
fund, Sydney Morning Herald, 29 January 2009
David Crowe and Paddy Manning, ‘Ruddbank’s
Scope Widens’, Australian Financial Review, 13
The Hon Malcolm Turnbull MP,
JOBS FOR AUSTRALIA. FORUM, TAX CUTS, RUDD BANK, 30th January
David Crowe and Paddy Manning, ‘Ruddbank’s
Scope Widens’, AFR, 13 March 2009
Explanatory Memorandum, pp.4–5
Explanatory Memorandum, pp.4–5
Australian Bureau of Statistics, National
Accounts, December quarter 2008
The terms ‘commercial property
assets’ and ‘financially viable’ are not defined
in the Bill, but paragraph 9(1)(a) requires that ABIP, in
refinancing a loan, must be satisfied of the financially viability
of both the commercial property asset and its income stream.
It does not apply to any borrowings by ABIP:
Regulations may also stipulate how the
membership of the committee is to be made up
Clause 11 also deals with auditing matters by
Borrowings under clause 15 cannot be for a term
of more than 24 months: subclause 15(2). Paragraph 1.11 (page 8) of
the Explanatory Memorandum comments that ‘borrowing includes
raising money or obtaining credit, whether by dealing in securities
Kali Sanyal and Angus Martyn
17 March 2009
Bills Digest Service
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