OIO changes send mixed messages to investors

In November 2017, the incoming Labour-led Government issued a new ministerial directive letter to the Overseas Investment Office (OIO).

The directive acknowledged the importance of foreign investment for New Zealand’s economic growth. For rural land, it required the OIO to place particular importance on factors generating economic benefits (such as increased production and jobs).

For forestry assets, it required the OIO to place particular importance on investments resulting in increased domestic processing of wood. The parties comprising the Labour-led coalition Government campaigned on changes to the OIO regime, including further restrictions on foreign investment.

This was proposed against a back drop of anxiety about New Zealand losing control over land assets. There was little consideration of the economic benefits of foreign investment.

The new directive took effect from December 15, 2017 and applied to all future applications including those already being considered by the OIO.

In summary, the letter makes the purchase of lifestyle rural properties of any size difficult — these had often previously relied on non-economic benefits to secure OIO consent.

Professional investors buying farms may not have been similarly affected: their consents are usually obtained on the grounds of significant economic benefits to New Zealand.

But the letter may have changed the tone or emphasis of assessment. The OIO is now most likely applying a higher standard to the assessment of economic benefits. I understand the OIO has indicated a number of applications being considered under the directive letter are likely to be declined, though there has not been any public notice of a decline.

This change of emphasis will create uncertainty for investors. It is hard to reconcile it with the directive letter. The Government introduced the Overseas Investment Amendment Bill, which proposes to make all residential land “sensitive” for the purpose of the Overseas Investment Act. It will effectively ban anyone who is not a citizen or resident from purchasing residential land. The goal is to make homes more affordable for New Zealand buyers, particularly first home buyers, and ensure housing prices will be shaped by New Zealand-based buyers alone.

Concerns have been raised about unintended consequences of this legislation, such as capturing commercial transactions where residential land is bought for non-residential purposes or facilities such as retirement villages. It may discourage large-scale residential developments, where developers retain ownership to rent them out. The jury is out on what will happen. The Government has just introduced legislation to bring forestry rights within the OIO regime. Concurrently, it has eliminated the counterfactual test and proposed a “light-handed checklist” screening regime for consents involving forestry assets.

This light-handed checklist will apply to freehold forestry land and cutting rights, which will make it easier for overseas investors to gain consent to buy forestry assets.

These changes demonstrate a pragmatic approach by the Government, recognising the importance of foreign capital to the industry and the difficulty investors were having obtaining consent. They will be a major step in the right direction to support the industry, particularly to realise the Government’s ambition of significant further planting of trees.

It contrasts with the approach of the OIO in relation to farmland, despite the terms of the directive letter. This is likely to reduce levels of foreign investment into the agriculture sector, when there is a need for significant capital to reduce existing debt levels, address material environmental issues, facilitate the consolida- tion of non-economic farms, and increase overall productivity.

It is difficult to see where the required capital will come from for farming, particularly given the level of investment made here by New Zealand-based fund managers, which allocate only a limited proportion of total assets to New Zealand; many do not hold any direct investments in assets such as farmland.

All this should be read in light of the OECD’s recent survey of the country’s economy which indicated the Government should be removing barriers to foreign investment.

A final influence in the mix is the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) — the resurrected TPP. This will raise — from $100 million to $200 million — the values at which investors from countries party to the agreement must get approval from the OIO for purchasing significant business assets. This is for non-sensitive land deals only. It is quite possible the upgrade of the New Zealand-China FTA may include a proposal to make the same change.

Again, this opens the door for more foreign capital on big deals. In summary, it’s a mixed picture. Will the OIO restrict foreign capital more readily? Will investors be scared off? What will be the effect on the housing market? Time and politics will tell.

Martin Thomson is a partner in DLA Piper and chair of the NZ China Trade Association.