The proposed changes to the Overseas Investment Act 2005 (OIA) to restrict foreign purchases of residential land will be in force on 22 October 2018. There has been plenty of discussions on the effects these new rules will have on housing prices.
In this article, I hope to clear up many misconceptions regarding the Overseas Investment Act changes that are floating around. I will also provide a brief overview of the existing law and the changes to the OIA to restrict foreign buyers of residential property. The effects of these changes on the property market (with my ‘real estate agent’ hat on) will also be discussed.
If you are a New Zealand citizen and looking to buy or sell residential property in New Zealand, most of the below will not be directly applicable. However, you may want to understand the proposed restrictions and therefore consider the potential impact when dealing with buyers who do not hold New Zealand citizenship.
If you are not a New Zealand citizen (i.e. no New Zealand passport), read on as this will be extremely relevant.
Click here for a helpful flowchart below to explain the legislative changes and the steps you need to fulfil before you can purchase residential land.
The Land Information New Zealand website also has a very helpful section on these new rules (including application forms). Visit them here.
(As always, you should seek specific legal advice applicable to your situation. This is updated as of October 2018.)
Understanding the existing law under the Overseas Investment Act
Under the current legislation in force, you may need to apply to the Overseas Investment Office (OIO) for consent if you are:
- (1) an overseas person, or an associate of an overseas person, and
- (2) you wish to acquire sensitive land or an interest in sensitive land (e.g. by buying shares in a company that owns sensitive land)
What/who is an “overseas person”?
You are an overseas person if you are:
- NOT a New Zealand citizen, or
- NOT ordinarily resident in New Zealand, or
- holding a temporary work visa (i.e. cannot be ordinarily resident in New Zealand).
A company, a partnership, a joint venture or a trust can also be an overseas person. You will also require consent if you are an associate of an overseas person.
You should seek expert legal advice to know whether, under the OIA, you or the entity that is going to acquire the sensitive assets is an overseas person or an associate of an overseas person.
What is “sensitive land” which already requires consent under the OIA?
Land will be sensitive if it comes within the types of land and area thresholds detailed in Part 1 of Schedule 1 of the Overseas Investment Act 2005. Sensitive land is dependent on individual transaction details and whether the land/property is used as a personal residence or holiday home does not matter.
The following land types and area thresholds describe some examples of sensitive land:
- rural land that exceeds five hectares
- land that exceeds 0.4 hectares and adjoins certain types of reserve or conservation areas (that also exceeds 0.4 hectares)
- land that exceeds 0.2 hectares and adjoins foreshore.
Generally, residential property in the Eastern Bays will not be considered as “sensitive land” under the OIA so buyers of such properties are not affected.
If consent under the OIA is required, applicants for consent must satisfy a number of criteria, including the core “investor test” criteria. In addition, consent to acquire sensitive land will only be granted if:
- the transaction will, or is likely to, benefit New Zealand, or
- the relevant overseas person intends to reside in New Zealand indefinitely.
Overseas Investment Act Changes
Unless you have been living under a rock, you would have learned via the extensive media coverage that the Labour government has introduced changes to the OIA to restrict foreign buyers of residential property. The changes will officially become law on 22 October 2018, along with the regulations (which sets out certain details under the amended OIA).
You can read the final Overseas Investment Amendment Bill here.
The Overseas Investment Amendment Act
The Overseas Investment Amendment Bill (“Amendment Act”) aims to achieve this restriction by classifying all residential land (determined accordingly to the relevant district valuation roll) as “sensitive land” in the OIA. (One way to check is to use a property website and look for the ‘Building Type’. Properties with the Building Type ‘residential’ or ‘lifestyle’ are both captured by the new regime. Otherwise, talk to an agent or a lawyer if you are unsure.)
This would mean that all overseas persons will require consent to buy residential property.
If you are an overseas person, how can you obtain consent under the Amendment Act?
Overseas investors could only obtain consent to buy residential land (that is not otherwise sensitive (as described above)) in certain situations. They are, broadly:
- increasing housing on residential land test – if they would be developing the land and adding to New Zealand’s housing supply;
- if they would use the land for non-residential purposes or a residential purpose relating to a core business purpose; or
- commitment to reside in New Zealand test – if they held an appropriate visa (i.e. New Zealand resident visa or PR / Australian or Singaporean citizens and permanent residents) and could show they had committed to reside in New Zealand. (Read more below).
Buyers who are “ordinarily resident in New Zealand” do NOT require consent
To recap, “overseas persons” cannot buy sensitive land. You are an overseas person if you are:
- NOT a New Zealand citizen OR
- NOT ordinarily resident in New Zealand.
Therefore, New Zealand citizens and a person who is “ordinarily resident in New Zealand” can purchase residential land in New Zealand to live in without requiring to seek OIO consent.
Who is “ordinarily resident in New Zealand” under the OIA?
To be considered as “ordinarily resident” in New Zealand, you must:
- hold a residence class visa under the Immigration Act 2009. This means either a permanent resident visa or a resident visa; AND
- reside in New Zealand for at least the past 12 months; AND
- be present in New Zealand for at least 183 days in the past 12 months; AND
- be a tax resident in New Zealand
Otherwise, you will NOT be treated as “ordinarily resident” and therefore require consent. You can obtain such consent if you satisfy the tests I described above under the section “How can overseas investors obtain consent?”.
This is certainly good news to resident visa holders who may be looking to buy a house in the near future. If they have satisfied the above requirements at the time of the purchase, then no consent from the OIO will be required.
Unfortunately, everyone else (including all temporary visa holders such as work visa holders) will still be subject to screening / require consent.
Good news for Australians and Singaporeans under the Amendment Act!
Consistent with New Zealand’s international obligations:
- Singaporean and Australian “investors” are exempt from the new consent requirements for residential land. The term “investors” refers to:
- (1) Australian/Singaporean citizens OR
- (2) permanent residents of Australia/Singapore under Australian/Singaporean law AND who is ordinarily resident in New Zealand (click here for discussion). Hurray!
- Australian citizens and permanent residents and Singaporean nationals and permanent residents are “qualifying individuals” (i.e. similar to NZ residents/permanent residents) for the purposes of the commitment to reside in New Zealand consent pathway. That means consents can be granted to such people (who would otherwise not be eligible)!
Flowchart setting out the changes to the Overseas Investment Act
"Commitment to New Zealand" test to obtain consent
One way to obtain consent if you are neither a New Zealand/Singapore/Australian citizen nor satisfy the “ordinarily resident” test (which is pretty stringent) is that of the “Commitment to New Zealand” test.
Some factors (non-exhaustive) to show such commitment are the following:
- showing that the reason for absence from New Zealand is due to a qualifying (i.e. good) reason. Such reasons include overseas employment (for e.g. government or a business in New Zealand transferred/posted you overseas), compassionate reasons (for e.g. you/your family is receiving medical treatment overseas or attending a significant event like weddings/funerals) or you are accompanying your spouse for the foregoing reasons.
- whether the amount of time that you was or will be absent from New Zealand on application days is reasonable given the reasons for you being absent from New Zealand on those days; and
- your ongoing connection to New Zealand; and
- the nature of your connection to the other country or countries where you was or will be on application days.
- Occupation requirement: All key individuals must occupy the dwelling as their main home or residence (the occupation requirement)
- Disposal requirement: The consent holder must dispose of all relevant interests that the consent holder has in the residential land within 12 months of the date that a trigger event (for e.g. losing your residency visa status or absence from New Zealand for more than 183 days without a waiver) occurs (unless the trigger event is resolved within those 12 months)
Buyers' compliance with the OIA
Under the Amendment Act (i.e. after 22 October 2018), a purchaser of residential land will be required to provide (to a lawyer) a Residential Land Statement related to whether the transaction requires consent under the Act. If the lawyer has not received such a statement, or has reasonable grounds to doubt the accuracy of a statement, he/she would not be allowed to effect the transfer of the property. There are significant penalties for both conveyancers who do not comply, and for purchasers who make false statements. The statement is not required for transactions entered into BEFORE 22 October, even if settlement is AFTER that day.
I expect that, in addition to the anti-money laundering regulations that has applied to lawyers since 1 July 2018, any purchaser of residential property will expect to face more scrutiny and should be prepared to provide more supporting documents (for e.g. passports, proof of address and source of funds for certain persons) to their lawyers in order for their lawyers to adequately discharge their legal obligations. The lawyers are not allowed to start work before they have adequately discharged their legal obligations in relation to customer due diligence. Therefore the obvious effect is that conveyancing fees and time-frames to complete transactions will likely increase due to more work being required.
If you are buying a property with a short settlement time-frame, I would suggest engaging with your lawyer early to get ‘pre-cleared’ so that any such issues can be dealt with and delays to settlement can be avoided.
Requirement to on-sell
Under the “increasing housing on residential land” test, overseas persons could purchase residential land if it was used to increase the supply of housing. Properties built on land purchased under this pathway must not be lived in by the owner, and generally must be on-sold once they are completed.
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. There will be an amendable threshold (initial threshold of 60 percent) of percentage of units per development that could be sold in this manner to overseas buyers.
The impact of such a recommendation (if adopted) remains to be seen. There are many factors that go into play when considering a development project, including the general availability of financing and the market conditions.
At least the on-selling requirement of the originally proposed bill has now been slightly relaxed and this would likely re-attract some interest from offshore investors who would otherwise be deterred by the original on-selling requirements (which were tougher than in Australia). Given that units purchased by overseas buyers will be investment properties, it should also increase the supply of rental housing. Deterring these overseas investors would have prevented the growth of housing supply, and therefore likely put pressure on rental prices.
So when is the new law taking effect?
The Amendment Act will come into force on 22 October 2018. In terms of the actual consent process, cost and timings, these are set out in Schedule 2 of the Regulations. The starting cost for an application (for individuals) to apply for consent to buy residential land (under the commitment to reside in New Zealand test) is NZ$2040. This is excluding any legal fees that may be necessarily in such an application. Not cheap indeed!
What if my partner has a different visa?
If you are buying a property together with your partner and at least one of you is eligible to buy, you can purchase the property.
What effects will the Amendment Act (i.e. changes to the Overseas Investment Act) have on housing prices, sellers and buyers?
If you are a seller:
Other than as already discussed above, the pool of potential buyers will likely shrink a little if all goes according to Labour’s plan. At the very least, there will be more hurdles for non-New Zealand citizens to overcome when buying. This would necessarily mean that all sellers will face a higher risk of deals falling over and cannot take for granted that OIO consent for the buyer is not required (as is the case now for most residential properties in the Eastern Suburbs).
Overseas buyers (under the Amendment Act) may also include conditions relating to OIO consent in their offers, and therefore expect to offer more when competing with other buyers who do not require such consent. Banks will also attach conditions to their pre-approvals which the borrowers (i.e. buyers) have to satisfy in relation to their status under the new rules.
There may also be flow-on effects on auction clearance rates as the pool of buyers who can buy unconditionally at auctions will likely shrink. This may have effects on the auction clearance rates (read more here about Auctions vs Set Date of Sale in this market)
However, given that the indication of presence of foreign buyers in New Zealand is 3% (according to Statistics New Zealand), the exact effect on prices remains to be seen, given ongoing high demand and restricted supply, especially for desirable suburbs in the Eastern Bays.
If there are any plans to sell in the near future (i.e. within the year or so), sellers should consider whether selling now or in the next few months will adequately meet their other objectives. In the greater scheme of things, however, the OIA changes should not factor too high on considering whether or not to list and sell. The personal motivations for selling remain key and choosing a competent real estate agent to advise on marketing make a difference.
If you are a existing owner:
Owners of existing homes (which would be classed as “sensitive” under the Amendment Act) will not be affected as the Amendment Act is not retrospective. Therefore existing ‘foreign owners’ of residential property will not be forced to sell their property once the legislative changes are in force. However, they would face the new restrictions should they choose to buy again. This would likely suggest that these owners will not readily sell (unless they are required to under their own circumstances) and the houses available for sale on the market will likely decrease. This should provide a countervailing support for housing prices if the possible pool of buyers shrink.
Unless interest rates in New Zealand head upwards (and there does not seem to be any sign of that at this point in time) or there is some external adverse economic event, the holding power of owners remains strong.
If you are a buyer:
The first thing to consider is whether the legislative changes will directly affect you. If you are a New Zealand citizen, then this does not matter.
This is especially so if you are a returning Permanent Resident and cannot fulfil the minimum residency requirement of 12 months and present in New Zealand for 183 days prior. We find many such buyers in the popular suburbs such as Glendowie and St Heliers in the Eastern Bays, given the good school zones and beach lifestyles. If so, then you should consider:
- whether you can obtain consent
- if you do NOT have consent, include the appropriate clauses/conditions in your offer in relation to obtaining such consent. Do note that this is likely to make your offer less attractive.
If you need consent, you can find out more information about the application process and apply for consent here. According to the Overseas Investment Office, simple consents could take up to 10 working days to be granted. The fee for individuals is $2040.
For buyers who are not affected by the new rules:
You may think that holding out for cheaper prices in the future will be a better move. Historically, housing prices have increased over a long horizon and nominal prices have increased faster than consumer prices. Although past performance is certainly no guarantee of future gains, if the right property comes along and you are financially equipped to hold it over a long period, then it may be a good idea to start making those offers. Even if you have not purchased at the absolute bottom of the market, you would still have gained utility from purchasing and building your own home, and equity at the same time. There remains strong demand for housing in New Zealand (see for example the strong demand for the recently announced Kiwibuild, which has high income caps – an indication that the prices of such builds need to cater to Kiwis earning such incomes to prevent a possible oversupply) and buyers remain out in force, albeit more picky, with little market supply.
Found this post useful and have more questions or just want some advice?
Please get in touch and I am happy to have a chat over coffee!
(Contact details below)