Andrew Gawith: Restricting ownership comes at a cost

Agriculture, horticulture and forestry account for more than half of New Zealand's exports. Photo / Mark Mitchell

The government has voiced some concern about foreigners buying up our land and is now re-reviewing the foreign investment rules. It won't lack support in Parliament for a tightening of the rules surrounding foreign ownership of land.

Given the emotional and economic suffering that Maori have endured over the past 150 years as a result of being dispossessed of much of their land, it seems odd that as a nation we have taken such a laissez faire attitude towards foreign ownership of our land, which is so important to this economy.

Unlike most other developed economies where agriculture is a relatively insignificant contributor to economic wealth, New Zealand remains acutely dependent on land-based industries such as meat, wool and dairy farming.

But it goes far wider than that to forestry, wine, and even tourism.

Agriculture, horticulture and forestry exports still account for more than half of all New Zealand's exports by value.

The ratio of primary exports to total exports has hardly changed in three decades despite strenuous efforts to reduce our dependence on them. Food remains the bedrock of how we make our living in the world, and although for a while it was regarded as an old economy product, growing Asian wealth has given it a new lease of life - New Zealand's commodity prices are at historic highs.

So land, particularly for farming and forestry, remains vital to our economic fortunes and therefore deserves a bit more consideration than we have been giving it.

John Key's point that "it is not in New Zealanders' best interests to become tenants in their own country" suggests he recognises some of the dangers of leaving this very strategic economic asset open for all to buy.

But any tightening of the rules governing land sales to foreigners will tend to cramp land prices. Barring, or severely restricting, deep-pocketed and often talented foreigners from purchasing farmland will certainly shrink the pool of potential buyers for large properties.

The sale of the Crafar dairy farming empire highlights the impact of foreign buyers on the price of land.

Landcorp's bid clearly didn't come close to the price the receivers will get if the Chinese-related Natural Dairies' bid gets the nod from the Overseas Investment Commission.

Leaving aside the xenophobia the Chinese bid has unleashed, it has some other important ramifications for New Zealand's farming industry.

Is the land really that valuable? Certainly Landcorp didn't think so. Is it only that valuable if you can vertically integrate to a well-established or captive market; and if so, does that suggest the farmer-owned Fonterra co-op model is flawed, or underperforming, or both?

It's not just foreigners pushing up the price of land to the point that yields are simply not bankable for budding farmers. An increasing proportion of land is owned by wealthy city folk (either individually or in syndicates) often with a sentimental attachment to the land and the means to own it.

It's strange though that people are so keen on buying land, which has a notorious track record for delivering low ongoing returns. In many cases returns from farming do not cover the cost of capital - that is, they do not return sufficient income to cover the interest costs that would be incurred if the farm was purchased using a 100 per cent mortgage.

It's hard to see the business proposition if that is the case; and it is the case for a significant chunk of the farming sector in New Zealand.

So why do so many farmers persevere in the face of what looks like financial lunacy? Is it the lifestyle?

No, they expect to collect substantial, tax-free capital gains when they sell their property and thus the total return from their business over 30-40 years can be reasonable - there are quite a few wealthy retired farmers.

For this business case to work, though, farm values have to rise, and for that to occur you have to have buyers who can lift productivity substantially via economies of scale, better husbandry, vertical integration, etc. Or you attract wealthy lifestylers prepared to pay big money for the scenery, isolation, prestige, etc of a trophy farm. Foreigners make up a big proportion of these buyers.

Alternatively we restrict the ability of foreigners to buy land, and farm values rise more slowly or even fall. Foreigners don't need to own the land to get access to what comes off the land. They can lease the land: become our tenants.

Foreign ownership of land is a sensitive issue but it may simply be highlighting a trend that disturbs us and will continue whether or not John Key tightens regulations governing foreign land ownership.

More and more land is being purchased by faceless, commercial enterprises (companies, syndicates, tribal entities, etc) rather than honest, rugged, individual farmers. Bugger!

* Andrew Gawith is a director of Gareth Morgan Investments.