Significant new restrictions overseas buyers residential property
The Coalition Government has introduced into Parliament under urgency the Overseas Investment Amendment Bill (Bill), which is its long foreshadowed ban on overseas buyers of residential land.
The general policy intent behind the Bill is to create a housing market with prices shaped by New Zealand-based buyers that will lead to more affordable homes at some times in the property market cycle, and to help redirect offshore capital to more productive uses.
Broadly, the Bill defines residential land as land that has a property category of residential or lifestyle in the relevant district valuation roll. Attached at Appendix 1 are the definitions of the residential and lifestyle categories from the Rating Valuations Rules 2008.
The Bill seeks to achieve the Governments policy outcome by preventing the purchase of residential land except by persons who:
- are New Zealand citizens (Treasury have advised that Australian citizens and permanent residents will be treated the same way as New Zealand citizens and permanent residents respectively); or
- are New Zealand permanent residents that are ordinarily resident in New Zealand (at the time the persons enters an unconditional contract for sale and purchase, they have a permanent resident visa and have resided in New Zealand for the last 12 months and are present in New Zealand for at least 183 days in that period); or
- can demonstrate to the Overseas Investment Office (OIO):
- a commitment to reside in New Zealand; or
- that they will increase the housing supply through their investment and commit to sell the properties; or
- that they will build or expand retirement villages, aged care facilities, student accommodation or similar long-term accommodation, where the developer can retain, lease or operate those facilities (but not reside in them); or
- that they wish to purchase residential land for development to a non-residential use and can show the development will be beneficial.
Commitment to Reside in New Zealand
The Bill provides a means to home ownership for permanent resident visa and other resident visa holders that are not ordinarily resident (such as those who have not resided in New Zealand for at least 12 months) but are committed to reside in New Zealand. People making use of this pathway to consent will be able to purchase one home for use as their main home in New Zealand, which they will be required to sell if they cease to live in New Zealand.
Yet to be published Regulations will set out the types of resident class visas or nationality status that the commitment to reside in New Zealand test will apply to. At this stage we expect Australian permanent residents will be able to take advantage of this rule and this will potentially extend to Singaporean permanent residents as a result of New Zealand’s free trade agreement with Singapore.
The Regulations will also specify the requirements for showing commitment to reside in New Zealand for each type of visa class or type or specific nationality status. Understanding this detail is critical for any potential buyer holding a residence class visa who has not become ordinarily resident in New Zealand at the time of entering into an unconditional contract to purchase residential land. We expect that the Regulations will provide for specific timeframes stating when an applicant must be residing in New Zealand and when they must become a tax resident of New Zealand. We expect additional factors such as providing factual evidence of steps taken to move to New Zealand will also be relevant.
Increased Housing Supply
An overseas person can also apply to the OIO for consent to purchase residential land where they increase the residential use by doing one or more of the following:
- the number of residential dwellings constructed on the land is increased;
- construct or expand a long term accommodation facility such as a retirement village, aged care facility or student accommodation facility; or
- undertake development works on the land to support either of the above, such as site works and construction, demolition, alteration of a building or infrastructure.
The overseas person must not hold an interest in the residential land after a specified period, nor can they occupy the land for their own residential purposes. The latter requirement mirrors the residential property development investment condition under the current migrant investor categories, so the Bill also provides a clear signal that this type of investment activity for migrant investors is welcome and will continue into the long term. This is despite some earlier views that infrastructure (only) investments were being contemplated for the migrant investor categories under the new Government.
In the case of construction or expansion of a long term accommodation facility, the overseas person may retain, lease or operate those facilities (but not reside in them).
Benefit to New Zealand Test
The final option available to an overseas person wanting to purchase residential land is to satisfy the existing benefit to New Zealand test. This option would likely be used where a developer wants to purchase residential land to convert to a non residential use which will produce benefits for New Zealand, e.g. the residential land is developed into commercial land, a process which creates new jobs.
The Bill introduces conditions which are mandatory where an overseas person wants to use this avenue to purchase residential land. The residential land must be used for a non-residential purpose or use for new residential builds and then on-sold, or sold where it is surplus land not needed for the development.
The urgent timeframe for getting the Bill passed into law is driven by New Zealand’s commitments under the Trans-Pacific Partnership Agreement (TPP). The Bill needs to become law before the TPP is concluded, which could happen in the first half of next year. The Bill will go through a Select Committee process where the public will have the opportunity to submit. We expect that process to be completed and the Bill to become law at some point in the first quarter of 2018.
Unconditional contracts entered into before the Bill becomes law will not be affected by the changes so any overseas buyer considering purchasing residential land now should move quickly to unconditionally conclude their purchase.
Impact of Changes
The Bill captures a wide range of land, both urban and rural, that is, or could be, used for residential purposes. Under the Bill an overseas person that does not have a commitment to reside in New Zealand or add to New Zealand’s housing supply or provide benefit to New Zealand by converting residential land to another use, will no longer be able to purchase residential land in New Zealand.
The Bill will add a significant layer of complexity and cost to residential land transactions for buyers, lawyers and real estate agents. It currently proposes that the lawyer acting in relation to the purchase of residential land will be required to give a certificate that, to the best of that person’s knowledge, the purchaser will not breach the Act by giving effect to the transaction. A failure to give the certificate is an offence with a potential fine of $20,000. This requirement will require property lawyers to make additional citizen, residency and land type investigations on all property transactions that could potentially involve residential land as defined in the Bill, which will add transaction time and cost.
Treasury has also raised concern with the rushed nature of the Bill, and the OIO’s ability to scale up to operationalise the policy to meet up to 4700 additional applications. Unless the OIO is given the resources to process these additional applications, overseas buyers applying to the OIO can expect lengthy timeframes for receiving decisions.
We consider that the Bill will most significantly impact New Zealand’s investment visa programme. Overseas buyers that have an investment class visa, but are not ordinarily resident in New Zealand or who are not in a position to make a commitment to reside in New Zealand, but who wish to purchase a residential dwelling where they can base themselves while they satisfy the residency requirements of their visa and oversee the investments they have made into the New Zealand economy, will not be able to purchase residential land. For that type of overseas buyer, the options for owning land on which they can reside without going through an OIO application will be limited to economic rural land under 5 hectares, such as a kiwifruit orchard. There are a very limited number of that type of property in New Zealand.
The challenge the Government faces is managing the perception that this Bill will create in the international investment/migration market that New Zealand competes in. Although the Government maintains that it continues to welcome quality overseas capital and investment, the Bill potentially sends a negative message in a market where most developed countries in the world are creating visa products to actively attract valuable foreign investment, not discourage it. We are already receiving feedback from the US that it is understood New Zealand no longer welcomes foreign investors who cannot live in New Zealand permanently. This incorrect perception could create a significant reduction in offshore investment capital flowing into New Zealand’s economy.