Rising house prices are a common headache for countries around the world, yet there is no clear way to curb them. Some countries have responded in recent years by targeting overseas buyers. This time, New Zealand is determined to crack down on overseas speculators.
Faced with the prospect that pursuing the issue through TPP negotiations could undermine existing trade agreements with other countries, New Zealand's new Prime Minister Jacinda Ardern, acting on advice from her advisers, decided to introduce an amendment to the Overseas Investment Act classifying residential property as “sensitive”. This would mean people who were neither citizens nor residents could not buy existing homes. Australians, however, would be exempt from the amendment.
In a statement released on 31 October, Jacinda Ardern said she hoped to complete the legislative process before Christmas, with the changes taking effect promptly in early 2018 once passed.
ISDS provisions: will other countries agree?
Starting with domestic legislation would both improve the chances of passage and avoid tensions in external economic and trade relations. Notably, the only agreement affected by this amendment to the Overseas Investment Act would be the Singapore Closer Economic Partnership between New Zealand and Singapore.
This indirect approach would not completely resolve the conflict between existing trade agreements and restrictions on overseas buyers. Jacinda Ardern said amending the Overseas Investment Act would allow the focus at the APEC negotiating table to shift from land to ISDS provisions.
ISDS stands for investor-state dispute settlement: a mechanism for resolving disputes between investors and host states.
YIJU New Zealand consulted the OECD Working Paper on International Investment No. 2012/3, entitled “Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community”. It noted that governments faced growing numbers of arbitration claims from foreign investors involving major public policy issues and substantial damages. Many governments were also increasingly concerned about how these cases were handled through investor-state dispute settlement, or ISDS.
Only a few years earlier, international arbitration would not have been considered as a way to resolve investment disputes. The arbitration industry gradually emerged as pioneering lawyers began recommending it to potential clients. These developments could subject government actions to greater scrutiny under the ISDS system in future.
Now, the new Prime Minister has said she will make every effort to amend the TPP's ISDS provisions.
If other countries reject New Zealand's demands and refuse to amend ISDS, would New Zealand sacrifice the prospects of its export industries for a new policy that “flies the flag of housing affordability but may not work”? Would New Zealand refuse to join the TPP if agreement could not be reached on ISDS? According to the New Zealand Herald, the new Prime Minister declined to say.
Cabinet has also instructed trade negotiators to oppose ISDS provisions in future free trade agreement negotiations.
In fact, countries' positions on ISDS have begun to diverge. The report cited above noted that Australia had decided it would no longer seek to include international arbitration provisions in future agreements. Countries such as Brazil, whose investment treaties had not provided for international arbitration as a way to resolve investment disputes, could contribute to international dialogue by explaining their reservations and sharing their experience with alternative dispute resolution methods.
Will the amendment to the Overseas Investment Act pass?
The Labour-led government is firmly committed to cracking down on overseas buyers, making this one of Jacinda Ardern's first major initiatives in office. The two milestones are clear: legislation “before Christmas”, with the proposal formally taking effect in “early 2018”.
There is a prerequisite: the amendment must pass. Could there be uncertainty here? And in practical terms, how much additional work would this create for the Overseas Investment Office?
“Under the Overseas Investment Act, this reclassifies one type of land into a different category. The minister will have to sit there with a rubber stamp and decide on 1500 transactions each quarter under the sensitive land criteria,” National finance spokesperson Steven Joyce told the New Zealand Herald. He said this could hardly be called a ban.
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Barrister Catherine Reid previously worked at the OIO and now advises New Zealand legal practitioners and private clients on applications for OIO consent. She said the OIO expected to receive more than 100 applications a year, but not all would be approved. In every month of the past year, 18%–25% of first-time applicants had their applications returned by the OIO for failing to meet requirements.
The OIO has taken steps to help applicants, including providing new templates and tools. Only high-quality applications can be approved. It is therefore important for applicants to seek advice from experienced advisers, particularly those who have handled applications recently, as the process is constantly changing.
Once existing homes are classified as “sensitive” assets, overseas buyers would be almost unable to buy—and even permanent residents might not succeed
If the amendment passes, ordinary homes would become “sensitive” assets for overseas buyers. Judging by the conditions published by the Overseas Investment Office, how difficult would it be for an overseas buyer to purchase a “sensitive” asset successfully?
Jack Rao, the lawyer heading Chapman Tripp's China practice, told YIJU New Zealand that approval rates depended on the quality of the materials submitted. The recent trend, however, was towards “increasingly stringent” scrutiny. Approval was taking longer, more information was required, and the Overseas Investment Office's questions were becoming more detailed.
Jack Rao has extensive experience handling sensitive land applications and approvals for overseas people over many years. He stressed that investors first needed to understand the definition of an overseas person.
Under the Overseas Investment Act, the following people and entities generally do not need consent to buy land in New Zealand:
- New Zealand citizens
- Holders of New Zealand resident visas who currently live in New Zealand, intend to remain indefinitely, and have lived in New Zealand for the past 12 months
- Companies, trusts and partnerships in which overseas ownership is below 25%.
All other individuals and entities must obtain consent to buy or lease certain types of “sensitive” land. Jack Rao emphasised that even permanent residents could be classified as overseas people by the Overseas Investment Office. He highlighted three situations:
- First: someone who holds permanent residence but has been away from New Zealand for many years and now wants to return and buy would still need to apply to the OIO, because they would not meet the requirement to have lived in New Zealand for the past 12 months.
- Second: New Zealand permanent residents and citizens who are associates of overseas people may also be treated as overseas people. For example, using nominee ownership or ownership structures to avoid Overseas Investment Office scrutiny could constitute fraud and a criminal offence.
- Third: understand what 25% means. For example, if an overseas person and a New Zealander buy land together, an OIO application is required if the overseas person's shareholding exceeds 25%. But a shareholding that does not exceed 25% does not necessarily remove the need to apply. If the shareholding is below 25% but the overseas person effectively controls the project, Overseas Investment Office approval is still required. The office focuses on effective control over sensitive assets.
Under the Overseas Investment Act 2005, overseas people investing in sensitive land need approval from the Overseas Investment Office (OIO). The rules require overseas people to obtain consent to buy or lease certain types of “sensitive” land, including:
- Rural land exceeding 5 hectares
- Land on certain islands, such as Waiheke Island
- Most coastal land
- Land exceeding 0.4 hectares that includes or adjoins a lake, a regional or public park, or a place of historical significance or a sacred site.
This is not a complete list. Jack Rao also cautioned that the definition of sensitive land was highly complex, and specialist lawyers should assess whether a property was sensitive land.
If the amendment passes and residential property is included in the sensitive land category, its application requirements may differ from those currently applying to sensitive land. Jack Rao said the policy details would need to be awaited.
However, the difficulty of securing sensitive land approval in the past offers some insight. The key to approval for an overseas investment in sensitive assets is what additional, substantive benefits it would bring New Zealand compared with an investment by a local New Zealander.
Jack Rao said investors needed to commit to their investment creating jobs, generating tax revenue, promoting exports or introducing new technology, among other benefits. These benefits were usually set out in a business plan. Once approval was granted, the Overseas Investment Office would make the business plan's commitments conditions of consent. Each year, it would check whether the commitments for that year had been fulfilled. If investors failed to deliver, the office could require them to sell within a set period. If they failed to sell within that period, a compulsory auction without a reserve could follow.
This requirement alone would make it almost impossible to obtain Overseas Investment Office approval to buy an existing home. In addition, OIO application fees and legal fees would total nearly NZ$100,000. Under the new policy, overseas people seeking to buy an existing home through this route would therefore face an additional NZ$100,000 in investment costs on top of the purchase price, without knowing whether approval would be granted.
The change would also lengthen the home-buying process. Jack Rao said six months was currently a common approval timeframe for sensitive land. Once all documents were ready, Overseas Investment Office approval took around six months. However, investors unfamiliar with the process often spent considerable time preparing the initial documents. The entire process therefore took much longer than six months.
It is fair to say that, once implemented, the new policy would all but shut the door on overseas buyers—without leaving even a crack open.