Converting sheep and beef country to forestry is a controversial subject in many rural communities.

However, for those seeking to optimise a farm’s value and therefore quit it in the best possible financial circumstances, in recent years the market has trended steadily in this direction.

In many instances hill country properties historically used to breed sheep and cattle have sold to overseas investors motivated to plant trees, netting their previous owners considerable premiums over what these farms would otherwise have been worth. Although reduced returns for export logs and amendment of the regulations by the previous government paused that trend, a recent decision of the current government to speed up and simplify the decision process for OIO applications is likely to re-boot this market. Potential changes to the Emissions Trading Scheme may also have an influence.

A handful of such marginal sheep and beef farms are sitting with the Overseas Investment Office (OIO) awaiting decisions on their sale, which would result in land use change to forestry. For those who may be situated for a similar opportunity in the future, understanding the relevant regulations will assist.

Enacted to safeguard New Zealand’s agricultural assets while promoting sustainable and beneficial foreign investment, the Overseas Investment Act 2005 acknowledges that it is a privilege for overseas interests to own or control sensitive New Zealand assets. Administered by the OIO, which is part of Toitū Te Whenua Land Information New Zealand (LINZ), the Act sets out that such investment needs to meet certain criteria before being consented, and provides the capacity to impose conditions on the investor.

Most importantly, the Act mandates that farmland must be offered on the open market to New Zealanders before an overseas transaction can occur. This ensures a fair chance to gauge local interest.

Two types of advertising are required, online and print, with the prominence of advertising subject to OIO scrutiny. Farmland for sale must be advertised on a website that is generally used to advertise real estate for at least 30 working days; and in print in at least one edition of the property section of a local newspaper or real estate publication. This advertising must be published no longer than 12 months before the application for consent is made.

To gain consent, the overseas purchaser must also demonstrate that their investment will generate economic benefit greater than the status quo.

When the purpose of the purchase is conversion of farmland to forestry, the investor’s application for consent should present the business case, including evaluating the additional employment associated with the investment; additional revenue generated, particularly from export; and where relevant the potential carbon sequestration.

Other overseas investment might typically be in dairy property or to construct arrays for solar power generation.

Whatever the land use change, the OIO will assess the application based on the point of difference between the status quo and the investor’s plans; assurance that the land will have higher and better future utilisation; and the potential for added value. Particular land sensitivities will also come under consideration.

In practice, land where conversion to forestry is a viable economic option is generally steep and stony, with shallow soils that are prone to erosion, climatic limitations, low moisture holding capacity and poor levels of fertility that are difficult and expensive to correct. As such, it may not be best suited to grazing, in which case its potential to generate sustainable returns from breeding sheep and cattle will be limited.

The Overseas Investment Act ensures that international investors can navigate the investment process, providing them with a framework and certainty that they can work with to benefit from the opportunities available. In a changing environment, depending on decisions by the government and the OIO, the level of activity from overseas investors motivated to participate in the New Zealand primary production sector may pick up, possibly to where it was pre-2017. Those who stand to benefit from this by selling land would do well to educate themselves accordingly, taking expert advice, including on how best to market a farm in a way that ensures any resulting transaction will gain OIO consent.

If you have further questions please contact David Henderson at dhenderson@pggwrightson.co.nz.

Regional Real Estate Reports - June 2024

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