The Select Committee has completed its deliberations on the Overseas Investment Act Amendment Bill (Bill) with the publishing of its report on 18 June. The report proposes a number of changes to the draft legislation in an attempt to address issues with the Bill that were raised in public submissions received during the Select Committee hearing process. To recap on the first draft of the Bill refer to our article by clicking the button below.
Significant new restrictions overseas buyers residential property
The issues with the Bill raised by submitters were diverse and significant. These ranged from the Bill having the consequence of reducing the number of new homes available for purchase by New Zealanders as a result of offshore capital disappearing from our development market, the inability for overseas persons holding a residence class visa through one the investment visa programs to purchase a residential property, through to our largest infrastructure corporates requiring consent each time they acquired residential land necessary for delivering their essential services.
As the Government has acknowledged the Bill was prepared in haste, and it showed. The question is now whether the changes recommended by the Select Committee have resolved these issues and updated the law to provide clarity and certainty to overseas investors.
Whilst we consider that the amendments address some of the significant issues contained in the first draft of the Bill, there are other important issues that were raised during the Select Committee process that have been ignored. These have implications for some industries and regions. Therefore, the approach taken to incorporating amendments to the Bill appears to be somewhat ad hoc. An example being a one off exclusion offered to the Te Arai development north of Auckland. Perhaps realising that retaining this exclusion in the Bill would not be appropriate, we understand the Government has now withdrawn it.
Below is a summary of the key proposed changes recommended by the Select Committee on the residential ban aspects :
- The class of persons who will be considered a ordinarily resident in New Zealand, and therefore not require consent to purchase residential land, has been expanded from permanent resident visa holders to resident visa holders. There have been no material changes to the Commitment to Reside in New Zealand test, meaning that persons who hold a residence class visa, but who are not ordinarily resident in New Zealand, will still be required to commit to living in New Zealand for at least 183 days per year and become a tax resident in order to obtain consent to purchase residential land.
- The Bill previously required an overseas person who obtained consent to purchase residential land under the increased housing test to sell the land within a certain period of completing the development. Recognising that this condition would be a strong deterrent to offshore capital investing in new housing developments (thus affecting the financial viability of such developments), the Select Committee proposes the following amendments:
a. Overseas persons building or investing in large residential developments of at least 20 dwellings are not required to on-sell once construction is complete, if the dwellings are maintained as rental properties or a shared equity development; or sold under a rent-to-buy model; and
b. Developers of large multi-storey apartment buildings of 20 or more units can apply for an exemption to sell a percentage of the units to overseas buyers “off the plans”, without the need for consent or the requirement to on-sell once the unit is complete. However, buyers would not be allowed to occupy the units themselves. The Select Committee understands that the percentage will initially be set at 60, but this can be adjusted through the regulations to be set anywhere between 0 and 100 percent to respond to market conditions.
- Recognising that New Zealand has a shortage of hotel accommodation, a recommendation has been made to allow overseas persons to purchase and continue to own any number of units in hotels with 20 or more units, provided they enter into a lease-back arrangement with the hotel’s developer or operator on the conditions that the room must be used for the general purpose of operating the hotel, and that the overseas person may not reside in or reserve the unit for more than 30 days in a year.
- Allowing residential land to be acquired without consent for business purposes by electricity and gas distributors, telecommunication companies, and transmission network operators for the purposes of the relevant utility services.
- Allowing overseas persons to take leases of up to five years over residential land, compared to the existing three-year limit for sensitive land, without requiring consent and clarifying that periodic leases of residential land are not covered by the Overseas Investment Act.
- A streamlined approval path for businesses to purchase residential land for non-residential purposes, or for residential purposes to support a business is recommended. Such purchases would not be subject to a counterfactual analysis, but would be subject to conditions imposed by the relevant Minister to ensure that the land was being used for the purposes for which it was purchased.
- Allowing overseas persons to obtain a standing consent (pre approval) prior to entering into a transaction to purchase residential land under one of the qualifying consent tests, which in summary are the commitment to reside in New Zealand test, increased housing test, non-residential use test or incidental residential use test. A standing consent will be issued subject to conditions, including specifying a use-by date.
The Government has confirmed that both Australian and Singaporean citizens and permanent residents will be exempt from requiring consent to acquire sensitive residential land. They have also confirmed that the legislation will only apply to transactions entered into on or after the commencement of the new legislation, which is expected to become law at some point during the third quarter of 2018. The Bill also incorporates new easier consent pathways for overseas persons who wish to invest in forestry in New Zealand. We will review those changes in a separate article.
We consider the proposed amendments contain positive changes, particularly the ability for overseas persons to purchase a unit and rent it to a New Zealander rather than being required to sell, and for a developer to be able to obtain an exemption certificate allowing it to sell up to 60 percent of the units in a new development to overseas persons. However, the exemptions are reasonably limited in that they only apply to new residential developments where the overseas person is buying “off the plans”, the development comprises 20 units or more, and in the case of the exemption to sell a percentage of the units to overseas buyers the development must comprise one or more multi-storey buildings. This change therefore is, in reality, Auckland centric.
The threshold levels and building types contained in these rules appear to be somewhat arbitrary, and the financial viability of new smaller residential developments will likely be affected. If the purpose of the Bill is to make housing in New Zealand more affordable and accessible for New Zealanders, it would be logical for the exemptions described above to also extend to smaller residential developments throughout the country.
There are also areas where the Select Committee has not responded to submissions received, which in our view, will have an impact on certain markets and industries. For example, submissions from Queenstown regarding the importance and value to the local economy of the luxury home building industry, which is significantly funded by overseas buyers, for an offshore market. The Bill will likely result in this sector contracting, and therefore depreciation of high end property values may follow as there will likely be a reduced market for these properties.
The Select Committee has also not proposed any changes to exempt overseas persons who have obtained an investment visa, but who are not ordinarily resident in New Zealand. We consider that removing the ability for this class of visa holder to acquire residential property will have an impact on the numbers applying, particularly in the Investor Plus visa category which requires an investment of $10,000,000 and a requirement to spend 88 days in New Zealand over the three year investment period. Many of our current clients in this category have been snapping up property to live in during their conditional residency period to beat this new legislation. As noted in our previous article, it is often not possible for these visa holders to become ordinarily resident in New Zealand due to their offshore business/investment interests, and the structure of their tax affairs. Therefore, an inability to own a personal property to reside in when onshore will make the migrant investor categories less attractive in an environment where many countries around the world are actively competing to attract the same investors.
In summary, there are some positives to the Bill which are a pragmatic attempt by the Government to address some of the issues in the first poorly drafted version. However, as a consequence of the Bill starting life as a prohibition on the purchase of residential and lifestyle properties by overseas persons (other than cases which fell within a narrow range of clearly defined exemptions), it has now morphed into legislation that contains a wider number of exemptions, in each case with different conditions, to address the concerns of some of the sector groups who submitted to the Select Committee. As a consequence, it is not an easy piece of legislation to interpret, and overseas buyers/investors will need to ensure they are properly advised when considering whether they are able to make an investment in residential property in New Zealand.
