Overseas investment process not just ticking the box

12 January 2012

Overseas investment process not just ticking the box

While New Zealand is regarded as a regulation-friendly country for overseas buyers to invest in, the investment process is far more than tick-box. Property lawyers say the lack of clear guidelines in some areas means obtaining expert advice is essential.

New Zealand’s good legal system, transparent and relatively simple tax system, coupled with a stable Government makes our property market a safe investment for foreign buyers, but the process of buying up New Zealand’s property is not as easy as some might think.

Overseas investors may need to apply to the Overseas Investment Office (OIO) for consent if they wish to acquire sensitive land or an interest in sensitive land (for example, by buying shares in a company that owns sensitive land), or business assets worth more than $100 million.

Explaining what makes prospective land/property “sensitive” is not simple, says Christchurch property lawyer and New Zealand Law Society Property Law Section executive member Lindsay Lloyd.

“Investors struggle to get their heads around requirements such as what is sensitive land because there is no single rule.”

“While determining sensitive land is sometimes straightforward, often significant legal and land expertise is required, particularly if there are any nearby waterways,” he says.

Legal advice is essential to avoiding a lengthy and costly consent process. The OIO outlines that 70 days should be the maximum timeframe for assessing the most complex application for investment consent, providing the applications are “high quality, well prepared and analysed”.

Chris Moore, the chair of the Law Society’s Property Law Section, says an OIO application needs to be properly put together, otherwise the process can take up to nine months.

“The applications are very complex and detailed. Invariably they require a properly prepared business plan, proof of necessary funds, their source and often specialist reports specific to the project,” he says.

“It can be an expensive exercise for a purchaser and any delay will be costly.”

Overseas investors often look for low maintenance or passive properties (with a New Zealand-based manager). They also look for the same fundamentals as New Zealand investors: yield, development potential and tenancy security, says Queenstown-based Property Law Section executive member Russell Mawhinney.

“Queenstown has traditionally attracted buyers looking for capital growth investment opportunities. However, since the global financial crisis this has changed and more recently international buyers have either been looking for solid yielding investment properties or quality land for land banking,” he says.

There have also been a number of trusts coming into New Zealand. This recognises that we have a slightly different attitude to the domicile of a trust.

“It’s not a tax haven but there are some distinct advantages for trusts and their residents - the taxation of trusts is on the residence of the settlor. New Zealand trusts are only taxed on New Zealand-sourced income, so people can have a trust with overseas assets but will only be taxed on New Zealand-sourced income,” says Lindsay Lloyd.

When thinking about selling assets to overseas investors New Zealand developers need to consider any likely effects of the Overseas Investment Act on such things as lot sizes and locations adjacent to "sensitive land" such as reserves and waterways.

“There are instances where developers have made it very difficult for overseas investors to buy through not being careful enough here,” Russell Mawhinney says.

Vendors should make sure Code Compliance Certificates under the Building Act have been issued, and there are no other lingering issues on LIM reports as little things can easily cause overseas buyers to go "cold" when they arrive back in their home country and the initial enthusiasm has worn off.

“In the past, for example, where there have been unit title issues here which require a body corporate decision to resolve, it has been virtually impossible to resolve them in a short period of time when many owners in the body corporate are spread all over the world. This can easily scupper a sale,” says Mr Mawhinney.

ENDS