With the Government tightening rules on sales of land to foreign investors, Phil Edmonds looks at ways those investors can buy into New Zealand’s primary industries.

Just over a year into the Government’s term of office and the promised tightening of rules around sales of rural land to foreign investors is one piece of legislation it has proudly chalked up.
The Overseas Investment Act was amended and enacted in August 2018, which among other things reduced the scope with which overseas interests could buy farm land without scrutiny.
So what price is being paid for a more robust challenge to the merits of passing farm ownership into foreign hands, and what do foreign investors now have to do to get a piece of the New Zealand primary sector’s grass roots?
Changing its use looks increasingly like the answer.
The government wasted no time in implementing its plan to address what some were arguing to be a free-for-all sale of sensitive farm land to offshore interests.
Minister for Land Information Eugenie Sage argued the previous National government had taken an inappropriately soft approach to rural land sales to overseas investors, making sure the Overseas Investment Act was only narrowly applied. Tests on overseas investors were only needed if it involved the purchase of large farms, 10 times the size of the average farm.
The response was a new directive, issued in November 2017 shortly after the coalition Government was formed, to ensure any sales of rural land of more than five hectares other than forestry had to go through a consenting regime, and overseas investors needed to prove there would be substantial and identifiable benefits to NZ.
The directive determined new criteria which meant successful applications had to reflect a contribution to jobs, new technology and business skills, increased exports, processing of primary products and oversight and participation of New Zealanders.
Furthermore, Minister for the Environment David Parker said the Government would welcome high quality overseas investment that is environmentally sustainable, minimises adverse impacts on the natural environment, and is likely to create positive and long-lasting environmental benefits. Parker said he expect the Overseas Investment Office would elevate environmental benefit factors for appropriate investments.

In mid-2018 concerns started mounting that large rural properties were struggling to find buyers, attributed to the impact of the new directive.
Rural real estate spokespeople argued that raising the bar on overseas applications meant there was now a limit to the number of buyers with the necessary capital to spend on large properties and to add value to the local economy. They argued that ultimately the new interpretation meant farm values would fall.
Has this actually been the case? Those in the business of selling farm land say yes even though official records don’t support this.
Federated Farmers policy manager Nick Clark says anecdotally people are saying overseas interest in farmland has dried up, especially for dairy land.
“Many people previously interested have been put off by the higher hoops that have to be jumped through and the fees that have to be paid regardless of the outcome.
“But this does not square with the official OIO records. For the period January to October 2018 there were 41 approvals of sale of sensitive land covering 9964 hectares. This compares to only slightly more approvals (47) covering 16,418ha for the same period in 2017.”
Clark says sales are still going through the processes and are still being approved.
“However, what is not clear is how much of this has been forestry acquisitions, or current farmland that is slated to be converted to forestry, which no longer have to meet the same benefit test as now applies to farmland.”
More analysis would need to be done to properly understand the impact of the new measures on farm sales, he says.
Legal firms representing prospective foreign buyers say applications have increasingly been withdrawn in advance of consideration when they have been made aware their cases would be unlikely to meet the updated criteria.
“The OIO don’t decline many applications, but the statistics probably don’t reflect what is happening to initial applications that don’t look very strong,” overseas investment specialist barrister Catherine Reid says. “It is common for the investor to withdraw their application. And that doesn’t result in an official ‘decline’. Essentially the number of declines don’t actually reflect how difficult it is to get approval”.
Reid suggests the impact across all rural land depends on what the land is currently used for, or intended to be used for.
“Lifestyle blocks have definitely suffered. For example, on a 20ha property, it is very difficult to create new jobs or increase export receipts or add new technology. Previously you could be creative with environmental benefits and that might be enough, but you can’t do much more with a smaller piece of land to meet the new criteria.”
Reid says with large farms it still depends on what the purchaser wants to do.
“The overseas investor who was successful in gaining approval to purchase the 40,000ha Mt White Station Crown Pastoral Lease in Canterbury indicated they were planning to live in NZ.
“If you have someone who is genuinely moving to New Zealand then they shouldn’t have any issues in purchasing land. However if it is a corporate entity and they want to buy it, the bar has definitely been lifted.”
For dairy, Bayley’s national country manager Duncan Ross says the new directive’s impact has probably not led to a fall in value across the whole market, but it has disrupted the large farm segment, with a buyer group having effectively been taken out.
“Previously this market had buyer competition from offshore groups but now there is no longer that pressure. As a result it is just harder to get a transaction done on farms that fall into that OIO space.
“This is especially the case if you have a high-performing farm. There may not be a lot more value you can add to a corporate farm with existing high productivity. It will be difficult for them to sell to foreign investors, because of the limited additional benefits they will be able to put on the table,” says Catherine Reid.
Ross agrees.

“With the new priority list in the directive that identifies how overseas investors need to show significant and identifiable benefit to New Zealand, it is no longer possible to buy a dairy farm and retain it as a dairy farm.
“This used to be possible by putting new infrastructure in and increase the number of cows and productivity and adding a couple of additional employees. The ‘significant benefit’ wording is largely the same now, but the priorities and the way they are weighted has changed.”
Reid adds that it is not only dairy farms that have a limited number of domestic buyers able to meet the expectations of sellers.
“Some vineyards have also struggled to attract interest. There are some vineyards that have been on the market for five years.”
She says it is important that the Government does consider this difficulty to sell rural land, and it could be considered an unintended consequence of the change in directive – something a further review of the Overseas Investment Act will look at this year.
Ross says the unintended consequences probably include the stifling of investment in sectors that currently require large amounts of capital where there is an already identified shortfall and the viticulture sector is one of those.
In dairy, the need for capital has also been accentuated by changes in succession planning and farm transition.
“There used to be a succession plan where the old boy left two-thirds of the value of the farm in the farm and they didn’t get too much return when they gave way to a son or daughter. There is less of that happening now which means there has to be new equity coming from somewhere if those transactions are still going to happen.”
The terms of reference for this deeper review of the OIA, announced in November 2018, brings the Green Party’s concerns into play. The Greens have pushed for protection of water and Maori cultural values to be taken into consideration and co-leader Marama Davidson says it should be mandatory for decision makers to consider water extraction as a negative factor in the ‘benefits to New Zealand’ test.
The treatment of land adjacent to sensitive land will also be considered in the review, which will involve public consultation in the first quarter of 2019.
At this stage it is not clear if addressing these issues will further compound the alleged negative impact the Government’s directive will have on selling rural land to overseas investors.

FUTURE OF FOREIGN INVESTMENT IN NZ FARM LAND

The Government has been at pains to insist it still welcomes foreign investment, and as Reid says, there are ways to make successful applications.
Perhaps what might emerge is a renewed focus on applications that include a change in land use.
Reid says changing land use is likely to be looked on more favourably, because it opens up the opportunity to create new value.
“If you have a good strategy and can present the benefits in the context of land conversion, for example from a sheep and beef farm to a vineyard and create new jobs and increase export receipts then those type of applications will go through smoothly. But you do have to have very clear benefits to New Zealand to get approval. So often land conversion is the easy way to demonstrate those benefits.”
Ross agrees there’s a better chance of getting an application through on the basis of a land use change.
“Simply for the fact that you would be undertaking the change to improve the yield and productive capacity of that land. We’ve seen it with greenfield going into grapes in the Wairarapa, and in the Bay of Plenty with dairy land going into kiwifruit and in the far north, dairy land going into avocados.”
But Ross says the exemption for forestry is making the biggest difference, which has implicated land values.
“We are now seeing offshore buyers looking to buy what would be reasonable pastoral, or sheep and beef land and putting it into forestry. This has really kicked off in the last six months.
“Previously there was a dollar value on land where it had to be economic from a forestry perspective – for example within 100kms of a port and you’d pay $2500–$3000/ha. Now we’re seeing dollar values of upwards of $6000–$8000/ha for greenfield going into forestry both on the back of the Government’s policy, enabling offshore parties to invest in New Zealand land, and also the stance on carbon emissions, which had created additional value in that market.”
Westpac economist Anne Boniface recently wrote the bank thinks the shift in NZ’s rural landscape toward dairying has probably run its course and that the expansion of horticulture and forestry could increase.
She indicated accessing capital for land use change does pose difficulties particularly when an alternative use does not provide immediate cash flow. The potential for foreign investors to play a role here would be attractive, particularly to avoid what might otherwise be an incremental increase in diversification away from dairy.
These emerging trends may well ensure that foreign investment does continue to have a role in the rural land market.