Foreign Asset Sales: Are they worth it?
Foreign Asset Sales: Are they worth it?
1 September 2014
With the pending election, the current sale of Lochinver Station before the OIO, and the wider debate around foreign investment in land assets (both rural and residential), the issue of direct foreign investment in land has jumped to the top of the queue of hot issues.
Much of the discussion has been emotive, and that is entirely legitimate, but it’s the economic debate that seems to have been lost.
We pose the question, “What is the economic return to NZ Inc. by allowing foreign direct investment in land?”
Many of the public offerings in the NZ market place that are targeting an investment in farming, offer returns of around 3-4% cash return, and an 8-9% capital return. Importantly, the capital return (if treated appropriately) is tax free. Given that much of the NZ Inc. Agribusiness value is tied up in the value of our rural land, it seems the first major test appears to fail.
Profits from a gain in the value of land are not taxed, (if managed appropriately) so there is no return for NZ Inc., particularly if those funds are repatriated and not invested into better (i.e. greater than 3-4%) cash-returning assets.
Of course, there is the counter argument that if the capital is released and applied to a better returning asset, then there is some value. Using the Lochinver Station example, it can be argued that NZ Inc. is releasing capital from one lower performing asset to invest in a higher performing asset, which has a better outcome for NZ Inc. But in the Crafar farms example, that capital simply repaid debt. What is done with the Lochinver purchase from an economic perspective in the future, will be the final determinant as to whether NZ Inc. benefits. As yet, we don’t have that information.
The Crafar example also showed another factor to consider when it comes to Foreign Investment. The offer was significantly larger than the next closest offer, which raises the question of how a foreign entity with no experience in NZ farming systems could justify a value well in excess of the largest and most experienced operators in NZ, relative to the cash returns from the asset. We actually don’t know the answer to that as we are not privy to the wider strategy being employed, but it needs clarity because it appears to be putting a value on land that is outside what can be economically justified. There are lots of other examples of this.
Our iconic high country stations are often sold for values well in excess of any production values. (Although that’s not just to foreign investors). The economic value to NZ Inc. is once again negative, because the outcome will create greater barriers to entry for operators focused on productive returns, from which NZ Inc. benefits through increased exports and profitable taxable earnings.
But there is the alternative view that the land is being put into a higher value use. Tourism in Otago is valued at 2.17B, so the creation of 53,000Ha of covenants on land covering Motatapu, Mount Soho, Glencoe and Coronet Peak stations, has to be seen as a big endorsement for foreign investment, as the land was placed into the covenants by the owners of Soho Property Limited and its overseas owner Robert “Mutt” Lange.
Underlying all of this of course is our free market. It has served us well. No one should be told who they can and cannot sell their private assets to. We also need to acknowledge that we need foreign investment. NZ Inc. is relatively poor when it comes to the amount of capital we hold. As a country we do tend to hold the value of our Agribusiness Industry in the value of our land, but this has been a hard fought process. Successive governments and economic polices have created an environment that makes us very attractive.
So NZ Inc. needs to ensure it gets a return for its investment, without interfering in the mechanism that has created it.
The economic debate needs to move toward what measures can be put in place to ensure NZ Inc. gets its share of its investment, while those in the market can still trade and make the best decisions for their businesses.
We think the answer starts by measuring the overall outcomes from recent OIO approved decisions, and whether they have achieved what was expected economically. Each OIO in itself is a detailed application, and the applicant has to achieve the agreed outcomes. But we think an overall review of OIO approvals and outcomes over the last few years would provide a more informed debate, on not only the benefits, but allow an informed debate on mechanisms and process that may need to be implemented to ensue that if there is any miss alignments, then NZ Inc. is still getting its return.
Hayden Dillon is the Managing Principal for Waikato and leads the Corporate Agribusiness and Capital Advisory team.
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