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.
Residential land
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.
Forestry
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 consolidation 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
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.
TIGHTENING UP ON OVERSEAS INVESTMENT
Overseas Investment approvals were arguably already tightening before the change of Government, says Martin Thomson.
● OIO approvals totalled 98 in 2017 — 136 in 2016 and 129 in 2015.
● Just three forestry consents were made in 2017; 13 in 2016.
● Last year's approvals all had a strong focus on domestic processing of logs. Thomson says the changes demonstrate the historic difficulties in obtaining consents for established forests.
● While total freehold land consents decreased from 87 to 61 between 2016 and 2017, the number of consents in relation to rural farm land actually look to have increased. The total net area of freehold land proposed to be transferred into foreign ownership under these consents was approximately 17,000 hectares, a reduction from 25,000 hectares in 2016.
● There was a 30 per cent increase in the number of active applications being considered by the OIO — from 68 to 89 — between December 2017 and February 2018. This is likely to reflect an increase in the time being taken by the OIO to consider applications, particularly those affected by the labour-led Government's new ministerial directive letter, rather than an increase in applications.
● In the last 12 months, the average number of applications being assessed at any one time was approximately 65.
● In both 2016 and 2017, the number of applications declined was two. But Thomson says this is likely to be an understatement: "A number of applicants withdraw their applications rather than have them declined."
Martin Thomson is a partner in DLA Piper and chair of the NZ China Trade Association.
