The reform of the overseas investment regime is proceeding through a series of parallel initiatives rather than through a single bill, which makes it hard to keep track of what is happening and where.
So we have prepared an overview, taking each asset class in turn.
A Bill was introduced late last year to make all acquisitions of residential and lifestyle land subject to consent via three specific consent pathways:
- an enhanced “commitment to New Zealand” test for buyers holding certain classes of residence visas who intend to reside indefinitely in New Zealand
- an “increased housing” test for buyers intending to expand the housing supply by building additional dwellings or long-term accommodation facilities, and
- a residual “benefit to New Zealand” test for buyers intending to convert residential or lifestyle land to an alternative beneficial use.
The Bill was referred to a truncated select committee process in December 2017, with an original closing date for submissions of 16 January and a report date of 20 February.
In the wake of the signing of the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) agreement, the timetable has been relaxed somewhat, with the committee now directed to report back by 31 May 2018.
239 submissions have been received, including one from Chapman Tripp.
Although the government is clear that the key policy rationale for the Bill is not up for debate, some submitters have criticised a lack of evidence supporting the proposition that overseas buyers materially affect housing affordability, and the limited consideration given to regulatory alternatives.
Other concerns have focused on the workability of the Bill.
- The requirement for foreign investors to on-sell residential developments within 12 months of completion, which could put overseas property developers off investing in the New Zealand market, and rules out build-to-rent and share home equity models, undermining the government's objective for increased housing. It would also deter sales off the plans, which tend to be more popular with foreign buyers than New Zealanders, and are often critical to getting the bank financing necessary to make a project viable.
- The overly broad definition of overseas person (25% foreign owned) which includes a range of companies headquartered in New Zealand, managed by New Zealanders, often listed on the NZX, and which provide services to New Zealanders. The Act already represents an undue compliance burden on these companies. Expanding the scope of the Act exacerbates that burden.
- Banning overseas acquisitions of residential land which prevents other non-speculative and productive uses of the land. For example, it would prevent oil and gas, mining companies and farm managers from buying houses to accommodate staff.
- The inclusion in the ban of luxury homes. This is a tiny market which does not affect the house buying opportunities available to the great majority of New Zealanders but is important to the economies of particular parts of the country (e.g. Queenstown).
- The impact on utility companies, which will be required to undergo a lengthy consent process to acquire land for the purposes of investing in essential infrastructure that serves the interests of New Zealanders.
- The proposed application to leases (including residential) of three years or more, which captures a range of transactions that do not confer any lasting influence or control over land.
- Insufficient resourcing of the OIO resulting in delays processing applications, which will only worsen with the inclusion of residential land in the Act.
Indications are that the government is considering softening the Bill in a number of ways. This was recognised as always on the cards given the short timeline within which the Bill was drawn up. Indeed the Cabinet Paper seeking approval of the Bill for introduction states explicitly that “significant new or amending material will be introduced to the Bill by way of SOP during its passage in the House".
Intriguingly, Treasury papers released under the Official Information Act in relation to the development of the Bill comment that Treasury was also to “provide [Ministers with] advice on a possible vacancy charge regime". This has not been picked up in the Bill at this stage.
Finance Minister Grant Robertson released a new Ministerial Directive Letter in November, directing the Overseas Investment Office (OIO) to have particular regard to whether foreign investments in rural land are likely to result in increased jobs, export receipts or primary processing in New Zealand or introduce new technologies or business skills, and/or the extent to which New Zealanders are able to participate in the investment.
This reflects scepticism on the government's part that foreign investment in the primary sector delivers benefits to New Zealand, given that New Zealand farmers already use world-leading farming practices.
Announcing the new directive, Associate Finance Minister David Parker said
“Too often we see investors buy a New Zealand farm, and then use existing systems, technology and management practices which don't substantially add anything new, or create additional value to our economy".
The new Directive Letter is clearly intended to raise the threshold for farm land acquisitions. What is not clear is whether Ministers intend to effectively close the door on future farm deals. What we do know is that no consents were issued for farm land between the date the Directive Letter entered into force (15 December) and the end of February.
The Directive Letter requires the OIO to have particular regard to whether a proposed forestry investment would increase log processing in New Zealand.
Separately, through the Bill, the government is bringing forestry cutting rights into the regime. Currently, they are expressly exempted, so this represents a significant tightening in policy. However:
- consent will not be required for acquisitions of forestry rights of less than 1,000 hectares per annum, or for a period of less than three years
- the Bill will provide for a streamlined approval pathway for forestry rights as well as leasehold and freehold interests in forestry land, and
- a standing consent system will be developed for forestry acquisitions.
The Act currently requires owners of 'special land' (foreshore, seabed, riverbeds and lakebeds) who are proposing to sell that land to foreign buyers to first offer it to the Crown.
The previous government's directive to the OIO contained an extensive discussion the burden of which was that only in limited circumstances would the Crown accept an offer of special land so, in most cases, the requirement to make the offer entailed an additional process step but did not otherwise affect the transaction.
The new Directive Letter simply states, without further qualification, that the government “places a high value on special land" and will acquire it if it is in the public interest to do so.
This may signal greater interest in acquiring special land as part of the OIO process.
Significant business assets
No changes have yet been proposed publicly by the government in relation to the assessment of significant business acquisitions (transactions involving assets over $100 million). But there are suggestions that future reforms might include the introduction of a “national interest" test for major transactions.
The outlines of such a proposal are unclear, but could be relevant particularly to transactions involving significant infrastructure assets. Both Labour and New Zealand First have in the past objected to such assets passing into foreign hands.
Separately, under the CPTPP, the Government has agreed to increase the screening threshold for significant business assets from $100 million to $200 million for CPTPP signatories.
Ministers may be prepared to differ from the OIO
With a few notable exceptions, the previous government tended to accept the OIO's recommendations. Although the sample set is small, the evidence to date suggests that current Ministers are prepared to exercise an independent mind and overrule the OIO when they disagree.
They did this in relation to Bathurst Coal Limited's application to purchase sensitive land including the Sullivan Mine on the Denniston Plateau. The OIO recommended that consent be granted because it would increase the likelihood that the mine could be re-opened in future.
The Ministers, however, took the view that, given current market conditions, the prospects of the mine re-opening at some future point were so uncertain that any resulting benefit could not be said to be substantial.
As expected, the change in responsible Ministers and the changes in policy have resulted in significant application processing delays.
If the Act is extended to residential land, then we expect those time lags to stretch out even further unless resourcing for the OIO is dramatically increased.