Forestry is New Zealand’s third largest industry, following the dairy and meat sectors. Forestry generates a gross annual income of NZ$5 billion, and accounts for ~3 per cent of GDP. New Zealand’s main forestry export markets are: Australia, China, Japan, Korea, the United States of America, Indonesia and India. Together, these markets comprise over 80 per cent of the value of New Zealand’s forestry exports.
The forestry industry has existed in New Zealand for over 100 years, and has well-developed infrastructure. It generates crucial employment and investment in New Zealand’s regions, and is critical to the New Zealand Government’s One Billion Trees and climate change policy programmes.
Offshore Timber Investment Management Organisations are the most common owners in the forestry asset class. The industry relies on overseas investment, which accounts for up to 70 per cent of investment in the sector.
The three main types of forestry interests are freehold, leasehold and forestry rights. Unlike freehold and leasehold interests, forestry rights are not interests in land; they are a profit à prendre to establish, maintain and harvest crops of trees.
FORESTRY IN THE OVERSEAS INVESTMENT REGIME
Overseas persons and entities wishing to invest in any “sensitive land” in New Zealand must first obtain consent from the Overseas Investment Office (OIO). The OIO is responsible for determining whether overseas investors meet the criteria to invest in sensitive land under the Overseas Investment Act 2005 (Act). Recent amendments to the Act now mean that nearly all investments in forestry in New Zealand require OIO consent.
Freehold and leasehold forestry interests in land have been, and continue to be, subject to the OIO consent regime. Previously, forestry rights were exempted, provided they did not meet the $100 million threshold to be an “investment in significant business assets”. As of 22 October 2018, the Act deems forestry rights with a term of three or more years exceeding 1000 ha in a calendar year to be acquisitions of interests in sensitive land, requiring OIO consent. These thresholds are an aggregate of all investments acquired in a calendar year, including those made by “associated persons”.
There are several pathways to obtain OIO consent for forestry investments under the Act. All pathways first require the intending investor to meet the “investor test”, which looks to criteria regarding the applicant’s good character, business practices and financial commitment, as well as certain Immigration Act requirements.
Special Forestry Test
This test provides the simplest means of obtaining OIO consent. It is intended to provide a “lighter touch” approach to screening potential overseas forestry investments. This test will take the form of a checklist of requirements, which will be provided in regulations. Draft regulations include requirements that the investor:
- acquire the land exclusively for forestry purposes;
- maintain existing commitments regarding historic, biodiversity, environmental or public access features of the land;
- replant felled areas, where the investor’s interest in the land allows this;
- maintain existing contractual commitments to provide logs to domestic processors; and
- if the relevant land includes foreshore, seabed, or a bed of a river or lake, offer that land to the Crown under the procedure set out in the Overseas Investment Regulations 2005.
Modified Benefits Test
This test is intended for use where investors wish to purchase freehold or leasehold interests in sensitive land and convert them to forestry. Intending investors must demonstrate that a “substantial and identifiable benefit” to New Zealand will result from the acquisition of the land, taking into account criteria in the Act and in regulations. This benefit must outweigh that of a counterfactual, which will usually be the current owner continuing in their ownership of the land.
The OIO may now grant an investor a “standing consent”, which provides the applicant with OIO pre-approval for future investments in sensitive land. The investor can only rely on the standing consent for investments which they believe satisfy the Special Forestry or Modified Benefits tests above. The OIO will grant standing consents to applicants who they believe will make good judgements about when these tests will be met. Applicants must demonstrate a history of obtaining and complying with OIO consents (or overseas equivalents).
When an investment is made in reliance on a standing consent, the investor must report it to the OIO. The OIO may impose conditions specific to the land acquired, or seek a court order for the disposition of land if conditions under the consent have been breached/if that land should not have been purchased.
Existing Benefits Test
This is a more rigorous test than the Special Forestry or Modified Benefits tests. It is the only option for investors intending to acquire sensitive land for both forestry and other purposes, e.g., farming, or if the investor does not intend to replant after harvest. The test requires intending investors to show a “substantial and identifiable incremental benefit” to New Zealand counterfactual. This compares the expected result of the overseas investment against what is expected to occur without that investment, such as if a hypothetical New Zealand investor purchased the land.
THE FUTURE OF THE NEW ZEALAND FORESTRY INDUSTRY
The above reforms to the overseas investment regime are intended to stimulate investment in New Zealand forestry. The new pathways for overseas investors to obtain OIO consent for forestry investments are easier and more streamlined than before, and the standing consent regime should further assist with this.
The New Zealand Government has stated that an increase in overseas forestry investment would be welcomed in New Zealand’s regions. The OIO has also recently approved the purchase of over 60,000 ha of forest land by an Australian forestry company. This indicates that New Zealand’s forestry industry is well and truly “open for business”!
RECENT FORESTRY TRANSACTIONS IN NEW ZEALAND
- September 2018: Stafford Capital Partners indirectly acquired a 23 per cent shareholding in Matariki Forests, the owner of six New Zealand forestry estates, through its takeover of Phaunos Timber Fund Ltd in the United Kingdom.
- August 2018: Australian-based OneFortyOne Plantations Holdings received OIO approval to make its first investment in New Zealand – the acquisition of 100 per cent of the shares of Nelson Forests Limited, which owns or controls freehold and beneficial interests in over 60,000 ha of forestry land. This transaction was based on an enterprise value of USD 850 million.
- July 2018: The OIO provided consent for The New Zealand Redwood Company to purchase ~1,150 ha of farmland in Manawatu-Wanganui, which the company intends to convert into a redwoods forest.
- July 2018: Summit Forests New Zealand Limited, a subsidiary of Sumitomo Corporation Japan, obtained consent from the OIO to expand its forestry portfolio from Northland to the Manawatu-Wanganui region, establishing a 1,241 ha portfolio there.
- June 2018: Subsidiaries of New Forests Australia Forest Fund 2, an investment fund managed by New Forests Asset Management Pty Limited, received OIO consent to invest in sensitive land and significant business assets, including: 38 per cent of the shares in Wenita Forest Products Limited, which has a freehold interest in ~5,830 ha of sensitive land and forestry rights in Otago.
- May 2018: OIO approval given to Huimei Investment (NZ) Pty Limited, a Chinese-controlled company formed for the purpose of undertaking forestry activities in New Zealand, to acquire 206 ha of sensitive land in Marlborough on which it intends to continue forestry operations.
- May 2018: Wairarapa Estate Limited, as trustee for New Forests Australia Forest Fund 2, received OIO consent to acquire ~200 ha of land in the Hawkes Bay to harvest the current crop of pine trees between 2020 and 2022 and then replant the land with a new commercial crop of pine trees.
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