March 28, 2016

Farm buying hurdles deter foreigners

Originally published in the National Business Review.

Foreign investors looking to swoop in and take advantage of the distressed or mortgagee sale of farms over the next year may find they are not easy pickings.

The oft-criticised Overseas Investment Act can make it remarkably difficult for a foreign person to buy a farm, where it is being sold at the behest of lenders or where a lack of finance has prevented it from being developed.

Whether this was what Parliament intended – and indeed, whether it is actually desirable from the farmer’s perspective at all – is another matter entirely.

The act essentially requires a foreigner buying more than a 25% stake in farm land to demonstrate that they are of good character; that they have business skills and acumen relevant to the investment (or, in most cases, have bought that skill and acumen by partnering with local consultants); and, most importantly, that the investment will produce a substantial and identifiable benefit to New Zealand or an identifiable group of New Zealanders.

It is the requirement to show a substantial and identifiable benefit to New Zealand that is likely to pose difficulties for an overseas purchaser wanting to buy a distressed dairy farm.

This is in part because of the increasingly convoluted process for assessing whether a particular investment in farm land will in fact deliver a substantial and identifiable benefit to New Zealand.

Convoluted process

The Overseas Investment Office (OIO) has had to adopt this criteria following the Crafar farms court cases and the Cabinet ministers’ decision to decline the Lochinver application last year.

It is not enough to point out that the vendor (or mortgagee) of the land will benefit from being paid for his or her asset – even if that price is demonstrably higher than the owner could have obtained if he or she had sold to a New Zealander.

Nor is it enough simply to promise to undertake deferred maintenance or even to promise further development and productivity gains, no matter how substantial.

Applicants must actually demonstrate the benefits they claim to deliver are benefits that would be unlikely to otherwise arise.

In the context of a forced or distressed farm sale to an overseas person, the OIO will be likely to conclude the farm would be sold even if the applicant was not granted consent; and if there is deferred maintenance required, that a hypothetical New Zealand buyer would undertake that maintenance as well (and could afford to do so).

Proof of improvement

So the applicant will need to demonstrate they propose to do something with the farm – in terms of development or increased productivity – that a New Zealand buyer buying the same farm and running it on a commercially rational basis would probably not do.

This does not mean it will be impossible for a foreign investor to get consent to purchase a dairy farm in a forced sale situation. But it does mean that such an investor will need to do more – create more jobs, invest more and produce more – than a New Zealander would necessarily do on a commercial basis.

In addition, the investor will probably have to demonstrate other benefits to New Zealand as well, such as ecological planting or donations to community or conservation groups.

And they will almost certainly face a delay of many months while the OIO considers the application.

Some commentators will no doubt argue this is the system working as it should, and that it should be easier to sell New Zealand land to New Zealanders than to foreigners.

On the other hand, it creates a dilemma for the actual owners of such land – sell it to a New Zealander for less than the land is really worth, or sell to an overseas investor and take their chances waiting for the OIO to consider the counterfactuals around the transaction.

It is easy to sympathise with a heavily indebted farmer who is left facing two unattractive options. By way of comparison, few would find it an attractive prospect that they could not sell their house for its full value without government approval.

The OIA regime appears to be here to stay. There appears to be a broad consensus that foreign investment in land ought to be difficult and expensive. But it is important to bear in mind that such a regime cuts both ways, and that by screening investment in sensitive land we are also imposing costs on a vulnerable rural sector.