New Overseas Investment Restrictions– Major Direction Change for Offshore New Zealand Land Acquisitions
The Coalition Government has made its first big move to change the way in which rural land purchases by overseas persons are assessed by the Overseas Investment Office (OIO). The Minister of Finance has published a new Ministerial Directive Letter which sets out a range of benefit factors that are of high relative importance to the assessment of investments by overseas persons in non urban land over five hectares in area. The benefit factors in the Act and Regulations which must be given high relative importance by the OIO when assessing these applications are now as follows:
- Job creation
- Increased export receipts
- Introduction of new technology or business skills
- Increased processing of primary products
- Oversight and participation by New Zealanders in the investment
Previously these factors were only of high relative importance to investments in large farmland (e.g. a dairy farm of 1,987.5 hectares or sheep and beef farm of 7,146 hectares) but they now apply to all types of non urban land down to five hectares.
The stated rationale behind the new directive is to ensure that benefits realised for New Zealanders from the sale of farmland are genuinely substantial and identifiable. It is clear the Government now considers that the benefit to New Zealand can only be genuinely substantial and identifiable where the economic criteria in the Act are met. Farmland applications which focus solely on environmental and conservation gains, increased public access and other consequential benefits will now not meet the standard for consent under the new directive.
The implications of this directive are far reaching and significant, particularly for overseas persons wishing to purchase non urban land that is:
- relatively small in size (like a lifestyle block);
- of low or marginal productive value;
- already at full or near full economic capacity; or
- more suited to environmental and conservation benefits rather than the economic benefits listed above.
Non urban properties over five hectares that fall into these categories, which have previously been purchased by overseas persons through satisfying the non economic benefit criteria in Act, are now in our view effectively excluded from being purchased by overseas persons unless those persons move to New Zealand within 12 months of the investment, and will be living in New Zealand as a tax resident within two years of the investment.
Because a large productive farm or orchard in most cases allows far more scope for an overseas buyer to structure an OIO application which will satisfy the economic criteria of high relative importance required under the directive, we consider it will be possible to obtain OIO consent for overseas persons to purchase those types of property. There is a certain irony in this outcome given that most of the rhetoric from New Zealand First, Labour and the Greens pre and post election has been around restricting or banning sales of large productive farmland to overseas persons, rather than preventing the sale of smaller or less economic blocks of non urban land.
The goalposts have now moved in respect of farmland applications and in our view the directive is an effective attempt to significantly limit the sale of non urban land to overseas buyers. The messaging is direct, loud and clear. There will be very few applicants that are able to both achieve the high economic thresholds required under the new directive and satisfy the complex counter factual test (if a hypothetical New Zealand buyer would provide the same benefits, the benefits claimed must be discounted). This is particularly so for smaller land acquisitions.
This view is supported by media comments from Minister David Parker which have accompanied the publication of the directive. Mr Parker has confirmed that he expects the majority of approvals that have previously been given by the OIO for non urban purchases would be declined under the new rules.
Applicants who still decide to embark on the OIO process to purchase non urban land must now expect that the assessment process will be more demanding, take longer and be more costly.
This directive, together with the soon to be published Bill classifying existing residential homes as sensitive land under the Act, effectively restricts a large amount of New Zealand property that can be purchased by overseas persons who are not able to live here within two years. This is likely to have a negative impact on Immigration New Zealand’s investor visa program, particularly investor plus applicants, who often do not wish to become permanently resident in New Zealand in the early to mid term, but who have a desire to purchase residential or non urban land for their New Zealand base to support their other significant and often highly beneficial investments in New Zealand. Ironically, these cases are actually creating the economic benefits expected under this new directive, although are not understood or easily identifiable as they are outside the farmland scope of the OIO.
Further changes are anticipated to the immigration investment based policies following the inevitable review of that area next year. The risk of course is that fundamental changes to those policies in combination with these OIO changes could result in a significant reduction of highly beneficial capital to New Zealand that is supporting positive economic activity. However, we remain optimistic on this front. NZ$7 billion has come into New Zealand under these polices and that is substantial, especially so where the investments under these categories are transitioning into more growth orientated investments (away from bonds). As the review of these policies will not be rushed through under a 100 day plan, we expect a carefully considered review and well informed decision making process to make sure that balance is achieved, as that is in the public interest.