Our German Desk
Earlier this year, the coalition Government announced that it would be introducing a new streamlined consent pathway for build-to-rent developments by way of amendments to the Overseas Investment Act 2005 (OI Act).
Momentum on this issue continued to build earlier this month, when Associate Ministers of Finance Bishop and Seymour issued a new directive dated 4 April 2024 (Directive Letter) to the Overseas Investment Office (OIO), foreshadowing the upcoming legislative change and directing the OIO on immediate and interim updates to the approach when assessing investment applications for build-to-rent developments.
Our Corporate and Commercial team recaps on the key updates.
Existing OI Act Criteria for Build-to-Rent (BTR) Developments
‘Build-to-rent’ refers to medium to large-scale residential housing developments which are built to provide long-term rental accommodation to tenants. This generally encompasses the development and professional management of a property by institutional investors and developers.
Under the existing OI Act framework, overseas investors can participate in new build-to-rent developments via certain pathways depending on the land sensitivity. Typically, the pathways utilised are:
- The increased housing pathway (for developments on residential land that are not sensitive for any other reason). This pathway requires an investor (who is in the business of providing residential dwellings) to develop at least twenty dwellings in a build-to-rent development.
- The benefit to New Zealand pathway (for developments on residential land that is sensitive for another reason). This pathway requires an investor to demonstrate that their investment will deliver benefits to New Zealand against seven broad ‘benefit factors’.
- Where investments exceed NZ$100m, the Significant Business Assets pathway will also be applicable.
Overseas investments in existing build-to-rent developments on sensitive land will be assessed under the ‘benefit to New Zealand’ pathway. Traditionally, the benefit test has imposed a high threshold on investors to demonstrate that real and tangible benefits to New Zealand will flow from the investment.
While initial investment in build-to-rent schemes by overseas investors can be achieved via the mentioned OIO pathways, any subsequent disposal of such interests is a challenge for developers given the small market size of this sector and the limited pool of potential buyers for build-to-rent developments within New Zealand.
New directive from the Ministers
Ministerial Directive letters are made pursuant to section 34 of the OI Act and are a means for the Government to direct the regulator on matters of policy.
The Directive Letter has a stated aim to reduce barriers to overseas investment in build-to-rent schemes. In addition to alluding to the upcoming changes to the OI Act, the Directive Letter provides clarity on the current interpretation and approach to two tests under the OI Act; the benefit to New Zealand test and the increased housing test.
Benefit to New Zealand Test
The last Ministerial Directive letter was issued on 24 November 2021 and clarified (among other things) that an overseas person acquiring an asset would benefit New Zealand by ensuring there is a purchaser for assets that might otherwise be stranded. That directive went so far as to specifically give an example of a stranded ‘build-to-rent’ asset.
The Directive Letter issued earlier this month builds on this guidance. In addition to reconfirming the benefit to New Zealand in ensuring liquidity of otherwise stranded assets, the Directive Letter provides that:
- “Investments in BTR, including existing BTR developments are a clear example of a benefit to New Zealand”; and
- “unless there is compelling evidence to the contrary, the OIO should consider investment that supports housing supply and the continued operation of existing large-scale housing developments as a benefit when undertaking assessments under the Benefit to New Zealand Test.”
The OIO is therefore encouraged to approve an overseas investment in a build-to-rent development, based simply on the fact of the investment itself in the build-to-rent sector and in light of the resulting reduction in liquidity risk, without further evidence of other benefits to New Zealand.
Increased Housing Test
Whereas the OI Act provides (at Schedule 2, section 20) that a developer under an increased housing test must be ‘in the business of providing new residential dwellings’, the Directive Letter allows for flexibility in this interpretation to widen the pool of potential investors. Specifically, the OIO is directed to:
- consider the nature of any existing business (including related entities),
- consider what overt steps have been taken to commence providing residential dwellings by one or more of the required arrangements (and especially overt steps taken to enter the built-to rent market), and
- not require investors to have previously completed or operated a build-to-rent development.
Final thoughts
The Directive Letter will be welcome news to overseas investors looking to participate in New Zealand’s build-to-rent sector as it clarifies the reduced ‘benefit’ threshold that would have otherwise applied. Clarity on exactly what legislative changes are coming from the Government in respect of the streamlined build-to-rent pathway are not outlined in any detail yet. We will be watching this space closely.
Hesketh Henry regularly assists offshore clients (including large corporates and individual investors) with investment applications to the OIO. If you have any questions about investing in residential or sensitive land within New Zealand or any other matter, please get in touch with our Corporate and Commercial Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
