Christina Lefever, Special Counsel at Duncan Cotterill, discusses the foreshadowed changes to Overseas Investment laws and the Finance and Expenditure Select Committee’s report on the Amendment Bill released on 18 June 2018.
OIO Update
Currently, in New Zealand’s overseas investment regime, the only constant is change. This article contains a short summary of the recent and proposed changes with reference to different investment types.
Overview
An overseas person wanting to invest in “sensitive” New Zealand land must satisfy the Overseas Investment Office (OIO) that the investment is likely to be of benefit to New Zealand. For rural land, that benefit must meet a higher threshold of being “substantial and identifiable”. “Benefit” is assessed against specific factors listed in the Overseas Investment Act 2005 (Act) and Regulations.
An overseas person does not currently need OIO consent to buy residential property in New Zealand (unless it has “sensitive” features, such as historic heritage status, or adjoining a reserve).
New Ministerial Directive
The Act allows the relevant Ministers (the Minister of Finance and the Minister for Land Information) to issue guidance to the OIO on how certain aspects of the Act are to be applied, and how certain “benefit to New Zealand” factors are to be weighted by the OIO. Following the change in Government, a new Ministerial Directive Letter took effect on 15 December 2017.
Overseas Investment Amendment Bill
In December 2017 the Government introduced the Overseas Investment Amendment Bill (Amendment Bill). The main focus of the Amendment Bill is to bring “residential land” within the Act, with the purpose of create a housing market with prices shaped by, and making homes more affordable for, New Zealand buyers.
Over 300 public submissions were received on the Amendment Bill, many expressing concern that the Amendment Bill would have negative impacts on the housing market, including from reduced investment in new housing developments, which would far outweigh any benefits from removing “foreign speculators” from the residential property market. The Select Committee released its report on the Amendment Bill on 18 June 2018.
As expected, while the underlying ban on overseas persons buying residential properties remains, the Select Committee has proposed a number of amendments to address issues raised by the public submissions. However, in doing so the Select committee has created a very complex piece of legislation, introducing rules that could result in two similar transactions receiving different treatment from the OIO.
Also, where an overseas person wishes to acquire residential land, an application to the OIO will still be required in all cases. Applicants might benefit from the revised rules, but an application will still be necessary. Ultimately, it seems that developers are bearing the cost of the ban on foreign speculators. It also creates hurdles for overseas persons with a genuine connection to New Zealand, where the time and cost involved in obtaining OIO consent could be significant relative to the value of the residential investment.
Rural Land
The previous Ministerial Directive Letter, which gave greater weighting to certain economic factors, only applied to acquisitions of “large farms” (generally 10-times the average farm size).
The new Directive Letter replaces this with a “rural land” directive that applies to all acquisitions of non-urban land over 5 hectares. It requires the OIO to give high relative importance to five factors, being:
While few decisions relating to rural land have been issued by the OIO since the December 2017, there is no doubt that the Rural Land Directive has increased the thresholds for demonstrating “substantial and identifiable benefit” to New Zealand. As more decisions are made and released, both the OIO and overseas investors (and their advisors) will gain clarity as to where those thresholds now sit.
The issue of timing remains a concern – what was until recently generally a 3-4 month process has extended as a result of internal OIO changes and the new Ministerial Directive. It is now not unusual for OIO processing times to exceed 6 months, leading to significant delays in confirming and settling commercial transactions. Particularly when compared against the average processing times of the Australian equivalent Foreign Investment Review Board, which aims to assess all applications within 30 days, this is an area that requires attention.
The OIO is taking steps to streamline its processes and improve its processing times. However, things are likely to get worse before they get better if the new Amendment Bill is passed into law, creating a strain on existing resources through new applications for residential land and forestry investments.
Residential and Lifestyle Land
The Amendment Bill is aimed at ensuring that overseas persons (persons who are neither a New Zealand citizen nor ordinarily resident in New Zealand) will generally not be able to buy existing houses or other pieces of residential land. To give effect to this “residential land” will be added as a new category of sensitive land requiring OIO approval. The “residential land” definition will capture residential and lifestyle land (determined by rating status) and will include including bare land, apartments, and some mixed use properties.
To get OIO consent, the overseas person will generally need to show that:
If an overseas person purchases residential land for development, they will be required to on-sell all of the new houses that they build within a specified period, unless the development includes at least 20 new houses. Below that threshold there is no allowance for the overseas person to retain and/or rent any of the new houses.
Applicants for OIO consent can apply for consent using a combination of the available tests, depending on their intentions for various parts of the land (for example an overseas person could now apply for consent to purchase land, develop, say, 6 new houses, and retain one for their own use while selling the rest – they would still not be permitted to hold any to lease).
Property Development
The new Rural Land Directive will apply to an overseas person looking to acquire rural land for the purposes of property development, including residential developments.
The Amendment Bill also has potentially significant implications for commercial property developers. The amendments introduced by the Select Committee only go some way to addressing these issues. The new provisions include:
However, the Amendment Bill still imposes restrictions on the ability of property developers to undertake new housing developments, particularly where they have a degree of overseas ownership (which is not uncommon). All developers with a degree of overseas ownership (generally 25%+) will still need to apply for consent to buy residential land for the purposes of new development.
If the residential development incudes less than 20 new houses, the developer must sell of all of its interests within a specific period (to be set by the OIO). It also reduces the potential purchaser pool for new property developments by imposing restrictions on overseas persons buying into these developments. As a consequence new developments may be less likely to proceed, or may need to be scaled down.
Forestry
The new Ministerial Directive Letter also contains a separate directive for forestry land, and requires the OIO to give high relative importance to:
While this may seem like a narrow application of the tests in the Act and Regulations, the intention behind the Directive was to make overseas investment in forestry more straightforward, essentially by focussing the test down to the above two factors. The reality is that the Directive Letter cannot change the legislation, and a positive benefit must still be demonstrated.
Forestry investment will be further promoted by changes proposed in the Amendment Bill, including the introduction of new “benefit” tests and streamlined approval paths for forestry investments. This is balanced out by proposals to bringing forestry rights (and some other rights to take resources) within the overseas investment regime.
Progress of the Amendment Bill
The Finance and Expenditure Select Committee’s report on the Amendment Bill, including all proposed amendments, was released on 18 June 2018. The Bill will now progress through its second and third readings with Parliament. The Report includes a statement that the New Zealand National Party and ACT New Zealand oppose the Bill, so it is likely that there will be some further debate as the Bill progresses through the final stages.
The current proposal is that the new provisions will come into force no later than 2 months after theAmendment Act receives royal assent (which is when the Governor General signs off on the Bill – usually within a week of the third and final reading in Parliament). The new rules will not apply to any contracts that are entered before the Amendment Act comes into force.
Christina Lefever specialises in corporate and commercial law and acts for clients in a broad range of industries, with a particular focus on overseas investment, structuring, acquisitions and corporate finance. Christina’s experience in advising on the Overseas Investment Act consent process, means that along with a comprehensive knowledge of the Overseas Investment Act and Regulations, she understands the practicalities associated with the application process (including applications for variations and exemptions) and the key issues that clients face.
Christina’s expertise includes business start-ups, acquisitions and disposals, corporate structuring, employee share schemes, joint venture arrangements, service arrangements, and franchising and licensing. She has significant experience in negotiating and drafting an extensive range of commercial contracts. Christina has an interest in governance, is a member of the Institute of Directors and has completed the Institute of Directors’ Governance Development Programme.
Contact Christina at christina.lefever@duncancotterill.com