As foreshadowed, the coalition Government yesterday issued a new Ministerial Directive Letter on Build to Rent Housing Developments. The new Directive Letter is intended to provide immediate encouragement to Build to Rent developers ahead of formal changes to the Overseas Investment Act that are in train for later in the year and which will introduce a new streamlined OIO consent pathway for investments in existing large-scale housing developments.
This new Directive supplements the existing Directive Letter issued by the prior Government in November 2021, and directs the OIO, with immediate effect, to consider investment that supports housing supply and the continued operation of existing large-scale housing development as a benefit when assessing any investment in such a development under the Benefit to New Zealand test. Additionally, the new Directive states explicitly that the "reduced risk of illiquid assets" economic benefit factor in section 17(1)(a) of the Act may be sufficient, in and of itself (i.e., without any other benefits resulting from the investment), to satisfy the Benefit to New Zealand test and therefore allow the investment to be granted consent under the Act.
The comments in the new Directive Letter relating to the 'illiquid assets' benefit factor may indicate a direction of travel for the new Government that could have broader implications for investments in mature businesses in other sectors with a domestic market that does not support exits at fair value. Although amendments to the Overseas Investment Act in July 2021 explicitly introduced this new benefit factor, and the November 2021 Ministerial Directive Letter provided further support to encourage the OIO to rely on it in appropriate cases, we are not aware of OIO consent decisions that have been granted to date in reliance on this benefit factor without evidence of material other benefits.
The clear intention of this 'stranded assets' benefit factor is that it should be able to be used in cases where there are limited to no other benefits that are able to be claimed by the applicant, to allow the investment to proceed without them (i.e. to avoid the assets being 'stranded' due to the impossibility of establishing other benefits to New Zealand). In our view, the illiquid assets benefit factor could be considered by the OIO as sufficient, in and of itself, to obtain consent under the Act for investments where the existing owners have already maximised the productive capacity and efficiency of the land (as they should be encouraged to do) and are seeking to exit and recoup an appropriate return on their invested capital, but where the pool of potential domestic buyers does not support an exit at fair value. These cases may involve relatively large tracts of "farmland", which is subject to the higher "substantial" benefit threshold under the Act, in circumstances where it will likely not be possible for an overseas investor to claim material benefits under the Act, due to there being no room to invest new capital to boost productivity and/or employ additional workers. Sectors where these considerations may apply include fully developed poultry farms, vineyard businesses and orchards, and operational PPPs.
We hope that the coalition Government does not limit its focus on the 'illiquid assets' benefit factor to Build to Rent development only, and encourages the OIO, perhaps in its new Ministerial Directive Letter to replace the one issued by the previous Government, to apply it more broadly in appropriate cases of investments in mature assets with limited domestic buyer pools, to achieve the stated intent of encouraging overseas investment by securing a path to exit.
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