Tracking overseas investment in rural land

With changes to overseas investment legislation on the horizon again, Bell Gully special counsel Glenn Shewan and partner Andrew Petersen examine what has happened to investment in rural land under the current rules and what may change with the latest proposals.

Overseas investment in rural land has jumped to centre stage in recent weeks. A vocal group of farmers and their supporters marched on Parliament, with the sale of farmland to overseas buyers for forestry among their concerns. Rural lobby groups are at odds, with different interest groups advocating for farm or forest.

With the government aiming to entrench rural land protections as part of its Overseas Investment Act reform, this is a critical time to assess how this legislation shapes investment in the rural sector. We take a look at how rural land investment is currently treated under the legislation and the likely impact of the proposed legislative amendments.

Farm land: the “counterfactual test” and the Rural Land directive

There is no doubt that foreign investment in New Zealand farm land has become progressively more difficult since 2015. Changes in Ministers’ approach to rural land applications and changes in government policy are both responsible for this.

Overseas buyers looking to acquire five hectares or more of non-urban land (other than forestry land) must demonstrate that their investment will bring “substantial and identifiable” benefits to New Zealand, beyond those that would arise in the absence of overseas investment.

In 2015, ministers in the National-led Government made the importance of the counterfactual test clear in their decision in the sale of the sought-after Lochinver Station in the central North Island. The applicant trying to buy the station had committed to substantial new investment into the property, but this was set against adoption of a hypothetical “well-funded New Zealand purchaser” as the counterfactual. Ministers determined that this hypothetical New Zealander would be expected to undertake almost all of the expected developments that the overseas investor had claimed, and declined consent. The Lochinver case highlighted the high threshold that investors faced then, and continue to face, in demonstrating substantial and identifiable benefits above a well-funded New Zealand purchaser.

Shortly after the Labour-led coalition came into power, a new factor emerged when Finance Minister Grant Robertson issued the Rural Land directive in November 2017. The directive requires the Overseas Investment Office to increase significantly its emphasis on specific benefits, like the creation of jobs, increased exports and increased processing of primary products when considering foreign investment in rural land. The effect of the directive has been to make obtaining consent for overseas investments in rural land much more onerous.

In a recent announcement, the government has signalled its intention to embed the provisions of the directive in the Overseas Investment Act as part of broader reform of this legislation. The government’s stated intention is to avoid future governments being able to change the approach to farm land acquisitions without Parliament’s consent.

However, it has also signalled its intention to change the counterfactual test to focus on changes from the status quo (rather than a hypothetical alternative purchaser) and to take a proportionate approach to assessing benefits depending on the level of “sensitivity” of the land in question. It remains to be seen how these changes will affect decision-making in relation to rural land, although it is clear that the government’s intention is not to make the acquisition of large tracts of farm land any easier for overseas investors.

Impact on farm land consent decisions

A review of recent decisions indicates that, taken together, these changes have indeed had a material impact on the numbers of consents obtained for investments in New Zealand farm land. Overall, we have seen a reduction in consents granted for acquisitions of farm land and an increased number of rejected applications. For example in the four months from July to October 2017, 80 percent of all OIO consents granted were for non-urban land (over five hectares), compared to only 25 percent in the same period for 2019.

Refusals to allow transactions such as the proposed Tegel chicken farm in Northland and the Waihī mine expansion sought by Oceana Gold have been highly publicised. Oceana Gold has now achieved consent from different ministers after making new applications, but there have also been other, less well-publicised declines. These include the case of a Chinese national seeking to acquire a “hobby farm and stables”, who was declined consent late last year, and that of Global Ag Properties which was declined consent to acquire more than 500 hectares of vineyard land in September this year. Most recently, in October, Canadian-owned Mercury Agriculture LP was declined consent to acquire an interest in Rangitata Dairies, which holds a large portfolio of rural land in the South Island.

However, some applications to acquire rural land succeed. The Overseas Investment Office has allowed several winery transactions to proceed, including the $52 million sale of Mt Difficulty to US investor Bill Foley and Australian-owned Negociants’ Marlborough vineyard acquisition. In granting consent, the OIO gave heavy weight to the increased export value the investments would bring, with the strong investment track records each acquirer had in New Zealand. Commercial developments on rural land have also gained consent, such as Summerset Holdings’ recent acquisition of rural land in order to build a retirement village.

Different approach to forestry transactions

While farm land acquisitions have certainly become harder, the government’s recent legislative changes have made certain forestry transactions much easier. Nine forestry consents were granted by the OIO in September alone and over 20 applications have been approved to date under the “special test”.

The modified and special forestry tests enacted in October 2018 have been introduced to support of the Government’s aim to plant one billion trees by 2028. The modified test allows the ‘benefits to New Zealand’ from the investment to be assessed against the status quo – rather than against a hypothetical, well-funded New Zealand purchaser as is the case in many farm land acquisitions. The special test allows consent to be granted simply where the purchaser of forestry land agrees to maintain or comply with existing log supply agreements, existing consent conditions on the land and other matters.

Where forest investors expect to make a series of forestry investments, they can now seek a “standing consent” under the special forestry test pathway. This avoids the need to seek a new consent for each acquisition. In October 2019, Pan Pac Forest Products became the first investor to obtain such a consent, allowing it to acquire up to 20,000 hectares of forests (or up to 25 transactions, whichever happens first) by October 2022. All of these consent pathways require that the land remain in use as forestry (or is converted from farm land to forestry).

In our experience with a number of forestry transactions that have, or are about to achieve consent via these pathways, overseas forestry investors have seen these changes as a major improvement.

Where to from here?

The government’s impending round of reforms will bring some wins and some losses to overseas investors in New Zealand generally. While the amendments are expected to introduce a more streamlined application process and a more tightly focused definition of sensitive land, the adoption of a national interest test, even where no land is involved, will bring an element of uncertainty to transactions in the affected sectors.

However, few of these changes will benefit overseas acquirers of farm land, who look set to face the current high hurdles into the future. Forest investments, meanwhile, have indeed become easier. The new pathways applying to forestry investments are now a year old. As the OIO is already more experienced in applying them, forestry applications should become more streamlined. The new legislation appears unlikely to make major changes to the forestry regime.

For ordinary corporate applications that happen to involve farm land, we do not see any major effects from the new legislation. In general, where a good application has been submitted, most have been able to proceed.

The overseas investment community will be watching with interest when the government unveils the draft legislation early in 2020. It will signal the most fundamental shift to the regime since the passing of the Act in 2005. However, investors in rural land may be more concerned about what will not change in this sector with the current high thresholds for farm land investments set to continue.

* Bell Gully is a foundation supporter of Newsroom

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