The Overseas Investment Act 2005 was amended in August 2022, making it harder for overseas investors to purchase New Zealand farm land for conversion to production forestry by requiring that applications be considered under the "Benefit to New Zealand test" (Benefit Test) rather than under the streamlined "Special test relating to forestry activities" (Special Forestry Test).
The first farm-to-forest decisions under the Benefit Test were released by the Overseas Investment Office (OIO) in August last year with only one of the first four initial applications granted consent. In the intervening months, the OIO faced criticism for its failure to make recommendations to the relevant Ministers (being the Associate Minister of Finance and Minister for Land Information) as to whether the Benefit Test had been satisfied and for the perceived inconsistency in the manner in which benefit claims have been assessed.
Applications for forestry conversions made under the Benefit Test have inarguably taken longer, cost more and given rise to greater transactional uncertainty than applications made under the Special Forestry Test, but there have been recent indications that there may be a clearer path forward for forest conversions. Based on the OIO's published decisions, as at 1 April 2024 a total of 17 forest conversion applications for productive plantation forestry have been decided with 11 applications granted consent and six applications declined.
In contrast there have been no decisions made under the Benefit Test where sensitive farm land is being acquired for conversion to permanent forest, since the OIA was amended in August 2022. This is reflective of the difficulty for applicants to demonstrate the required "substantial" benefit to New Zealand as is required under the stricter farm land Benefit Test (which places greater weight on economic benefit and New Zealand participation) applicable to permanent carbon forestry.
As noted in our Overseas Investment Update (available here), there have been clear signals from Hon David Seymour (as the Associate Minister of Finance responsible for overseas investment decisions) and Hon Chris Penk (Minister of Land Information) that the coalition Government is taking practical actions to make New Zealand's overseas investment regime more accessible.
Based on operational guidance from the OIO and recent Ministerial decisions there is also now greater clarity about the type of benefits it will be necessary for production forestry conversion applicants to be able to demonstrate. We discuss the trends in the decisions we have observed below:
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The Land-Use Capability has been highly determinative: Land-Use Capability (LUC) is used to measure the long-term capability of land to sustain a productive use. The LUC class system categorises land into eight classes depending on physical qualities of the land, soil and environment. Class 1 land is the most arable with LUC class 8 land having limitations on the production use of the land. Successful forestry conversion applications have, to date, involved little to no LUC class 3 and class 4 land. However, consent has been granted on the basis that investors commit to complete the subdivision of land to separate the more highly arable LUC class 3 and class 4 land from land which is more suitable to forestry, consistent with a "right tree right place" approach.
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Land size: Whilst land size is an important consideration, and early decisions seemed to indicate a high bar for the conversion of large parcels of farm land, recent decisions have included consent being granted for the acquisition of farm land exceeding 1500 hectares. These decisions demonstrate that the determination of the appropriateness of land for conversion to production forestry requires a more nuanced consideration of land sensitivity, including how the land is currently being used, the revenue generated, and employment offered.
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Early third-party consultation: Early, comprehensive, and detailed engagement with local Iwi, council and organisations such as the Department of Conservation, Herenga ā Nuku Aotearoa (the Outdoor Access Commission) and Heritage New Zealand Pouhere Taonga allows overseas investors to make commitments that are aligned with the expectations and principles of the various stakeholders the OIO will consult with during the application process and therefore to demonstrate more compelling benefits.
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Carbon emission reduction: Carbon emission reduction has been a core theme in forestry conversion applications, with the argument being made that afforestation has the dual benefit of increasing carbon sequestration and reducing agricultural emissions. Whilst early decisions demonstrated that the OIO's assessment of this benefit has not been consistent, more recent decisions indicate that the current Ministers are placing weight on this benefit and it would be helpful for the OIO to provide further guidance on how it assesses this benefit in due course.
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Domestic Processing: The difficultly for domestic processors to get access to logs (as approximately 60% of harvested logs are exported offshore) and the long-term value to forest owners of having a strong domestic processing industry has meant that domestic processing has remained a key focus for the OIO. The OIO has advised that the benefits claimed by an applicant undertaking afforestation is obviously different (and has an added benefit) where the applicant is committing to supply domestic processing. It is therefore unsurprising that the majority of the consents that have been granted have included commitments to offer to supply an agreed percentage of timber from the land to domestic processors. Suitable proximity to both domestic processing and ports is likely to be an important factor for investors evaluating investments in sites for conversion to forestry.
In light of the above we believe there is reason to be optimistic that conversion applications that are well made out will be assessed in a consistent manner and granted in a timely fashion.