Overseas investment: So what's in store?
Two significant changes to overseas investment in sensitive New Zealand assets are out of the starting blocks, with further reforms, likely more radical, signalled to follow.
Taking effect on 15 December is the Government's Directive Letter to the Overseas Investment Office (OIO). All current and future applications for OIO consent will need to satisfy the new Government's directive. Expected before Christmas are changes to the Overseas Investment Act (Act) itself, which will affect overseas ownership of residential housing from early 2018.
Residential housing to be "sensitive" under expected changes to the Act.
On 31 October 2017, at the first post-cabinet news conference of the new Labour-led Government, Prime Minister Jacinda Ardern and Trade Minister David Parker announced Cabinet's plan to amend the Act, describing it as "one of the first substantial decisions that have been made by Cabinet".
The amendments will classify residential housing as "sensitive", and introduce a residency test. The Prime Minister said that she expected the legislation, which would not be retrospective, to be in place and introduced before Christmas 2017 and to take effect, once passed, in early 2018. Parliament is sitting for the next three weeks. This foreshadowed reform is expected before Parliament rises on 21 December.
The proposed changes to the Act will mean that non-citizens and non-residents, other than Australian citizens, will be unable to purchase existing residential dwellings. Australian citizens would be exempt because a similar exemption applies to New Zealand citizens purchasing existing residential properties in Australia.
Non-citizens and non-residents would, however, be able to buy land and build a house on it provided it was on-sold or rented, as this would have the effect of increasing New Zealand's housing stock. This appears broadly similar to the restrictions the Australian government imposes on purchases of vacant land by most foreign investors. In Australia, conditions of approval are imposed, such as a requirement that the dwelling is completed within four years of the date of approval, and a requirement to provide a certificate of completion. Similar conditions will almost certainly be imposed under reforms to New Zealand's Act.
The Prime Minister stated that the amendments would make housing and homeownership more accessible for New Zealanders. While house prices may have plateaued, particularly in Auckland, there are still lack of supply issues. The proposed amendments are one of the tools that could be used to tackle that problem.
The accumulation, or land-banking, of residential land by foreign speculators was flagged as an issue that would be looked at by the Government in more detail at a later date.
Changes to Government overseas investment policy announced
When the Minister of Finance, Grant Robertson issued a new Directive Letter on 28 November 2017, it confirmed widespread speculation that "strengthening the Act" would most likely affect rural land purchases.
The Directive Letter sets out the Government's approach to overseas investment and directs the OIO about the matters that are regarded by the Government as being of high relative importance in assessing applications for consent under the Act. The Directive Letter replaces the previous 2010 Directive Letter that was issued under the National administration.
The new Directive Letter states that the Government's overall policy approach is to achieve a balance between the need for highly beneficial overseas investment and the need for New Zealand to maintain ownership and control of sensitive New Zealand assets. By contrast, the policy approach under the previous 2010 Directive Letter was to balance the adequate protection of sensitive New Zealand assets with facilitating overseas investment, by enabling those investments that met the criteria for consent under the Act, to go ahead.
The new Directive Letter comes into effect on 15 December 2017 and applies to applications received on or after that date, as well as existing applications that are still in the pipeline. All existing applicants affected by the policy change will undoubtedly be required to file amended applications to address the new policy.
All investments involving sensitive land must generally be of benefit to New Zealand. The "benefit to New Zealand" test is assessed by reference to 21 statutory criteria, and the decision-making Ministers can choose what relative importance to give to some or all of those criteria. Under the 2010 Directive Letter, there were three criteria that were listed as being of high relative importance to the then Government, but these high relative importance criteria applied only to "large farms" (defined in the 2010 Directive Letter as being at least 10 times the average farm of that type).
The test has now been considerably tightened.
Five high relative importance criteria have been identified in the new Directive Letter – the creation of jobs, new technology or business skills, increased export receipts, increased processing of primary products, and oversight or participation by New Zealanders. These high relative importance criteria apply to all "rural land", defined as non-urban land greater than 5 hectares that is not used for forestry, not just "large farms".
Confirming that the bar has indeed been raised, the new Directive Letter states that as New Zealand is already a world leader in the primary sector, the merits of overseas investment in that sector can be less compelling. The Government is therefore concerned to ensure that the benefits from overseas investments in rural land are genuinely substantial and identifiable.
The new Directive Letter now contains specific provisions dealing with forest land, defined as land over 5 hectares principally used for forestry. The Directive Letter expresses the Government's wish to encourage an increase in the value-added processing of raw products and the advancement of forest-related strategies, and two criteria have been identified as being generally of high relative importance for overseas investment in forest land – the increased processing of primary products and the advancement of significant Government policy or strategy.
The Government has stated that it sees a role for the new Forestry Service to work collaboratively with the private sector to ensure that the Government's goal of planting 1 billion trees over the next 10 years is achieved. Much of New Zealand's forestry estate is overseas-owned, and the Government anticipates that about half of the 1 billion trees will be planted by the private sector.
The importance of the environment and the regions
While the identified high relative importance factors are largely economic in nature, the new Directive Letter emphasises that the Government welcomes high-quality overseas investment that is environmentally sustainable, will minimise impacts on the natural environment, is likely to create positive and long-lasting environmental benefits, and provides economic, environmental, social and cultural benefits to regional communities. Given also that Green Party Land Information Minister Eugenie Sage is one of the decision-making Ministers, we think that environmental impacts will be top of mind.
Minor changes in shareholdings not affected
Under the Act, consent is required for any increase in an overseas person's 25% or more shareholding in sensitive assets. The Directive Letter states that it does not expect the rural or forest land directives to apply to minor changes in shareholdings.
Intention to reside in New Zealand indefinitely
If an overseas person can show that he or she intends (and has the ability to) reside in New Zealand indefinitely, then the "benefit to New Zealand" test may not apply. However, in order to qualify, the Government now expects an overseas person to move to New Zealand within 12 months from the date of consent and generally to become ordinarily resident within 2 years from the date of consent. This is a distinct policy shift from the 2010 Directive Letter, which stated that as a general rule an overseas person must be resident in New Zealand within five years of the date of application.
Possible changes to significant business asset thresholds under international agreements
Currently, approval is required for foreigners to purchase non-land assets, such as businesses that don't involve sensitive land (called "significant business assets" in the Act), that are worth more than $100 million. However, higher thresholds (currently $501 million) apply to Australian non-government investors, following the implementation in 2011 of the Closer Economic Relations Investment Protocol.
The Transpacific-Partnership Agreement Amendment Act 2016, which was passed on 21 November 2016, would have allowed the significant business asset threshold to be lifted to $200 million for non-government investors from countries who were parties to the (now scuttled) Trans-Pacific Partnership agreement (TTP 12). Also, under "most favoured nations" clauses, the threshold would be lifted to $200 million under five other free trade agreements, including the NZ-China and NZ-Korea Free Trade Agreements.
The 2016 Amendment Act will never come into force, as it was dependent on TTP 12 coming into force. However, it remains to be seen whether the (now newly named) Comprehensive and Progressive Transpacific Partnership agreement will allow for the significant business asset threshold in the Act to be lifted to $200 million, as was proposed under TPP12.
Having said that, Associate Minister of Finance David Parker has been recently quoted as saying "broadly, the position in relation to business assets is unlikely to change".
Further changes are coming
The Prime Minister indicated at her post-Cabinet press conference on 20 November 2017 that the government was actively considering both legislative and regulatory options to implement its commitment in the coalition agreement between Labour and New Zealand First to "strengthen the Overseas Investment Act".
Consistent with that statement, Associate Minister of Finance David Parker was quoted as saying that the new Directive Letter is only an interim solution and that over the next year, the Act itself would be redrafted and those changes would narrow the gate through which applicants could pass. Once they are through the gate, however, the processes would be faster.
This is definitely a 'watch this space' topic.