The government's directive to the Overseas Investment Office to raise the bar in overseas applications to buy sensitive New Zealand land has scared away tens of millions of dollars in investments in rural property and will hurt farm values, real estate firms say.
The ministerial directive in a letter from Finance Minister Grant Robertson last November to Land Information NZ chief Andrew Crisp said the government is concerned to ensure any benefits from overseas investment in rural land "are genuinely substantial and identifiable" and economic benefits must be considered alongside environmental, social and cultural goals.
Owning sensitive New Zealand assets was "a privilege, not a right." The directive came into effect on December 15 last year.
"A chilling effect is a fair way to put it," says Peter Newbold, general manager at PGG Wrightson Real Estate, which along with Bayley's had dominated the market for properties of more than $15 million.
"It has put a lot of pressure on who can buy these large properties. How many local buyers can spend that much and then have capital and the horsepower to add value to the property and/or the New Zealand economy," he said.
Agents and foreign investors already in New Zealand told BusinessDesk that a large number of applications to the OIO have been technically withdrawn since the directive.
The OIO officials had been giving some applicants "a very, very strong hint" they should withdraw when it became clear they wouldn't meet the new hurdles, one agent said, adding that vendors "have been collapsing like a deck of cards." He said anecdotally, withdrawn applications may exceed $200m.
Chapman Tripp, the busiest law firm in terms of M&A in 2017, said the directive raised the benefit test threshold for consent for rural land applications.
While the letter didn't elevate environmental factors above economic, social and cultural goals, "given one of the consenting Ministers is a Green MP, we anticipate that focusing on the environment in investment plans will be influential in securing consent," the firm said. Green MP Eugenie Sage is Minister of Land Information, which includes the OIO.
"No doubt offshore investors are more nervous about the regulator and the ministers that sit above it," said Tim Tubman, a Chapman Tripp partner. He said it was likely applications have been withdrawn since the directive. He did welcome the directive for the OIO to speed up its processing of applications.
Tubman pointed to "the political fervour" that erupted after Sage allowed a Chinese owned water bottling company to acquire land to increase its output from Otakiri Springs in the Bay of Plenty to 580 million litres of water per year.
The decision was out of line with Green Party policy and attracted criticism from party members. The public outcry was "an off-putting feature" for some overseas investors.
For a US business looking to invest overseas, "at some point New Zealand stops being on the list" of potential investment destinations, Tubman said.
"I have certainly seen applications in the office (the OIO) where officials appeared paranoid to second-guess what ministers might think. You have got a Green minister who sits there and asks about every application that crosses her desk. That's a frustration for some clients."
The most expensive rural property currently on sale in New Zealand is a 1,363 ha dairy farm at Mossburn, Southland, with an asking price of $38m. The milk platform carries about 1,600 cows that produced 645,000 kilograms of milk solids last season. The property was listed on Nov. 10 last year.
The government is currently overhauling the Overseas Investment Act and its amending bill was reported back to parliament from the finance and expenditure select committee this week although the most contentious details are around investment in residential property.
National's finance spokesperson Amy Adams said the bill would "hamper the ability of New Zealand businesses to access foreign capital in order to expand and impose significant costs and delays on the housing sector."
The representative of one foreign investor in New Zealand farms says he is urgently seeking meetings with relevant ministers to get a better understanding of what the government means by the 'value to New Zealand' test.
"Currently we can't bring capital into this market to grow because we can't get a clear view. There is too much risk because the process is expensive," that person said, asking not to be named. The OIO was guiding applicants to withdraw their applications if they wouldn't meet the new criteria, they said.
Wrightson's Newbold said his firm has "a good number of applications" currently lodged with the OIO worth tens of millions of dollars and he feels sorry for applicants who had spent a lot of money progressing their application only to be caught by the changes.
He said the rural property market was already challenging before the government tightened rules on foreign buyers, with unfavourable weather, increasing environmental concerns, tighter lending criteria by banks and the emergence of the cattle disease Mycoplasma bovis.
"Add to that the changes to the OIO and there's little appetite for offshore people to apply at the moment," he said.