Unlocking the door for build-to-rent? New guidance on overseas investment regime

The Overseas Investment Office (OIO) has issued new formal guidance on how the Overseas Investment Act 2005 applies to investments in build-to-rent (BTR) developments by overseas persons (OPs). The guidance comes in response to feedback from the housing sector that the Act is a disincentive to foreign investment in BTR developments, at a time when foreign capital and experience are seen as necessary to kickstart the growth of BTR in New Zealand.

The OIO’s clarification of its approach to BTR investment is welcome and to be encouraged. However, some may be disappointed by the government’s approach to issuing guidance, rather than initiating bespoke legislative change. Having already rejected a BTR-specific exemption to the interest deductibility rules, the government appears to be taking a “light touch” approach to its role in facilitating BTR development. The sector should watch this space though: the Minister of Housing has signalled further announcements about Government support for BTR in New Zealand.

Whether these announcements will go further to level the playing field between BTR and build-to-sell developments, we will be sure to keep you updated.

We summarise the key features of the OIO’s guidance below, and you can access the link to the OIO’s release above.

Current legislative position Area of uncertainty New OIO guidance Our comment
One of the most likely consenting pathways for an overseas person to acquire an interest in sensitive land for a BTR development is under the (streamlined) “increased housing” test.

Consent granted under this test will include a condition that the OP must dispose of the land (e.g., by market sale of the completed residential dwellings). The OP will be exempt from this condition where they lease the residential dwelling to an occupier, but this exemption only applies if the OP is “in the business of providing new residential dwellings” in the ways set out in the Act.

If the OP is a new entrant to the New Zealand market, or even a new entrant to the international market, how can they prove they are “in the business of providing new residential dwellings”? To establish whether someone is “in the business of”, the OP does not need to have already completed a BTR development. The OIO will consider the nature of any existing business (including related entities) and what overt steps have been taken to commence providing residential dwellings (and especially overt steps taken to enter the BTR market).

The guidance sets out examples of steps where an investor is “probably” “in the business of”, including clear supporting decisions at the OP’s senior executive level.

This approach, which we have seen in other uses of the “in the business of” concept, provides much-needed clarification which should give comfort to new players in BTR.
The “increased housing” test is usually only available where there will be a net increase in the number of dwellings on the land as a result of the development. It typically cannot be used by an OP wanting to acquire an existing BTR development and maintain the status quo. In these circumstances, an OP will need to seek consent through the standard “benefits to New Zealand” pathway. This is more onerous and lengthy than the “increased housing” pathway. How can an OP demonstrate that its investment will create a benefit to New Zealand if they are seeking to acquire a well-run existing BTR development? One benefit that can be considered under the benefit to New Zealand test is the “reduced risk of illiquid assets”. This means that an overseas person acquiring an asset would benefit New Zealand by ensuring there is a purchaser for assets that might otherwise be stranded. The application of this benefit to BTR developments was signalled in the Minister’s directive letter of 8 December 2021, although the guidance is useful reinforcement.

Note that the OIO has not (either in its guidance note or the directive letter) commented on whether providing this benefit, and this benefit alone, will be sufficient for a successful OIO application.

Applicants would be well-advised to discuss this benefit, and what supporting evidence will be needed to stack up the benefit, with their advisers and the OIO before making an application.

If you would like to learn more on the laws affecting overseas investment and BTR developments in New Zealand, please contact one of our experts.

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