Overseas investor fee hike could cool foreign property investment

Fletcher Building is caught by the Overseas Investment Office rules. Photo / File

A proposed fee hike for foreign investors will likely cool the desire to buy land here but will also push up costs for major residential property developer Fletcher Building who is caught under the rules.

Land Information New Zealand (Linz) has recently closed consultation for a new two-tiered fee structure for the Overseas Investment Office (OIO) which proposes a nearly $100,000 jump in the fee for complex sensitive land applications.

The OIO is responsible for approving all foreign investment of businesses where the investor is acquiring more than 25 per cent of a business or its assets or increasing ownership to or beyond 50, 75 or 100 per cent.

It also handles approvals of applications for sensitive land purchases which captures most land in New Zealand including residential, lifestyle and large land purchases.

Linz is reviewing the fees in light of an operating deficit at the OIO of $3.5 million in the 2019/2020 financial year. As of June 30, 2020 the OIO was in deficit by $8.48m.

Those who apply to buy one home to live in will see no increase in fees while applicants wanting to purchase land, business, forestry and fisheries assets will pay different amounts depending on whether the application is standard or complex.

Linz estimates 75 per cent of applications it receives are standard and will see fees for significant business asset applications rise by just over 20 per cent but total fees for sensitive land applications would increase by 75 per cent.

For the 25 per cent of applications that are complex, total fees for significant business applications would nearly triple from $32,000 to $86,700 and total fees for sensitive land applications would more than triple from $41,500 to $141,200.

Tessa Baker, a partner at law firm Chapman Tripp who specialises in property and real estate, said it would likely slow investment, although there could be a short-term rush to get in before the price hikes come in.

"I think it will potentially have a bit of a cooling impact on transactions that might be a bit finely balanced in terms of feasibility.

"If you are adding potentially up to $170k into your upfront feasibility it puts a lot of pressure on making sure the transaction can definitely proceed. You have to pay the transaction fees before you know you will get consent."

Baker said investors were already quite careful in terms of only applying if they think they will be successful.

"But if it is finely balanced in terms of feasibility, cost or the likelihood in terms of getting consent I think we will probably see more people pulling back."

Major NZX-listed companies Fletcher Building and Ryman Healthcare are also caught as foreign investors because a large number of their shareholders are overseas-based.

That means when Fletcher Building buys a large piece of land for residential development it has to get approval from the OIO.

Steve Evans, chief executive, Fletcher Residential. Photo / Michael Craig

Steve Evans, chief executive of Fletcher Residential, said it was aware of the significant fee rises proposed by Linz.

"While such increased fees when introduced will represent an increased cost for projects, we don't foresee this being passed on to customers or having any material impact on prices for residential developments, however, we await the outcome of Linz's consultation process and the final position.

"In principle, we accept that there should be higher fees applied to more complex applications, but we are unclear on definitions of such transactions as that level of detail has not yet been shared by Linz."

A Ryman Healthcare spokesman said it did not have a view on the price increase. He did not answer questions on whether it would push up the cost of licences to occupy for units in its villages.

However, the fee increase would be small compared with a typical land acquisition for Ryman, which was around $120m.

Baker said she expected foreign investors would go ahead with a complex application only if it was a sizeable transaction.

"I think what we are going to see is people ... are only going to go ahead with a complex application if it is a big enough deal.

"I can think of situations where we have had a complex application not of big value and those types of deals just might not proceed."

She said part of the challenge was that the OIO had yet to define exactly what complex meant.

"The difficulty is we are stabbing in the dark in terms of what complexity means ... they have not yet made it clear to everyone how they specifically determine what is complex and what is not.

"That is the big question everyone has got right now about these fees and what types of applications might be caught - they haven't made it clear. They have given some examples of what could make something a bit more complex - but I could also see a situation where you submit an application and are reasonably certain it is not complex and the OIO looks at it and says we think it is."

She said the OIO had indicated it would publish guidance on complex transactions closer to when the fees come in, likely to be later this year.

Foreign investment rules have been tightened in recent years, pushing up the number of applications significantly. Emergency measures were brought in last year to ensure companies under pressure from Covid-19 were protected from predatory raids and a separate national interest assessment was brought in.

Last week an additional character test for investors was added which means people will be assessed against factors including convictions resulting in imprisonment, corporate fines, prohibitions from acting as an officer of an entity or penalties for tax avoidance or evasion.

Baker said the new test should cut down the amount of work the OIO had to do to assess applicants, thereby reducing costs.

"Previously they had to comb the internet for every piece of negative allegations about a person and now it is much more clear-cut. That part was incredibly time-consuming."