The governments of both Australia and New Zealand are keen extol the virtues of FDI, yet both countries are surprisingly restrictive about who can and  cannot invest within their borders.

Land purchase by foreign investors is a hot topic in both countries. Soaring residential property prices in cities such as Sydney, Melbourne and Auckland are blamed, at least in part, on an influx of foreign investors, from China in particular. The purchase of farmland by foreign investors has also led to concerns about food security.

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Renewed scrutiny

Recent budget changes in both countries reflect these concerns. On 2 May, 2015, the Australian government announced reforms to strengthen the country's foreign investment framework. As part of the reform package, the Australian Taxation Office will be responsible for the residential real estate functions of the foreign investment framework, including audit, compliance and enforcement activities.

There will also be new measures to make it easier to pursue foreign investors who purchase existing residential properties in Australia. Criminal penalties will be increased to A$127,500 ($92,000) or three years' imprisonment for individuals, and to A$637,500 for companies. Fees will also be levied on all foreign investment applications, thereby reducing the costs to Australians.

The Australian Treasury will introduce a comprehensive land register and hence increase the level of scrutiny surrounding foreign investment in agriculture and the level of transparency around foreign ownership in the country. From March 1, the screening threshold for agricultural land was lowered from A$252m to A$15m (cumulative) and from December 1, 2015, a $55m screening threshold for investments in agribusiness will be introduced.

The Australian government also said it would undertake further consultation on options to simplify the Foreign Acquisitions and Takeovers Act 1975, the legislative framework for the country’s screening regime. Australia’s Business Council has responded and recommended that, among other things, the foreign investment notification requirements for a single foreign person should be changed from 15% to 20% of total ownership, to be consistent with the Corporations Act.

Residential rules

In New Zealand, concern that foreign buyers are behind the hike in property values in Auckland has led the country's government to impose a capital gains tax on buyers who sell a residential property within two years of buying it (according to the The Reserve Bank of New Zealand, the country's central bank, the median house price is 60% above its 2008 level). Foreign buyers also have to register with the tax authorities.

The central bank has introduced changes to its loan-to-value (LVR) policy to take effect from October 1, including the requirement that residential property investors in the Auckland Council area must have a deposit of at least 30% for a bank loan. 

Arguably, New Zealand is more restrictive than Australia, according to the OECD FDI Regulatory Restrictiveness Index, which, in 2014, ranked Australia among the top places in which to invest. New Zealand is ranked as “middling”. Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research, believes that the concerns about New Zealand as an investment destination mainly concern “screening and equity restrictions”.

“The rules are generally not onerous, but there are complexities,” he says. “For example, large and sensitive assets need approval from the Overseas Investment Office [OIO], but the decisions are subject to ministerial discretion and thus they are not always consistent.”

Stable destination

The recent changes to Australian investment laws, namely the change in threshold limits, has made the country less attractive for FDI, according to Khyaati Acharya, research assistant at think tank The New Zealand Initiative and co-author of several FDI reports.

When it comes to the investment environment across the Tasman Sea, however, Bryce Wilkinson, senior research fellow at The New Zealand Initiative, says: “New Zealand is still a good place for foreign investors. It’s all relative and New Zealand ranks very highly in important respects such as absence of corruption and political stability.”

During 2013, Chinese investment in Australia declined by 10% against a backdrop of an overall increase in Chinese outbound investment, according to the report 'Demystifying Chinese Investment' compiled by KPMG and the University of Sydney. In 2014, Australia was overtaken by the US as the most attractive destination for Chinese outbound investment. 

Cash buyers

If asked, the average New Zealander would probably guess that the country which dominates domestic foreign investment is China. But the reality is quite different. According to research undertaken by KPMG New Zealand, OIO approvals between July 2010 and December 2012 suggest Asia accounted for only 16% of gross FDI in the country. At 46%, Australia was the country’s main single source of capital. North America, Europe and Australia combined account for approximately 70% of investment into New Zealand.

When it comes to New Zealand real estate, however, Mr Eaqub says: “Although foreign purchases are difficult to quantify, we estimate that they comprise at most 8% of all houses sold in 2014. When we look at cash buyers who are new to the market, they are a very small number. The data simply does not support the anecdotal observations around foreign buyers.”

Residential investment by foreign investors in New Zealand is unknown, he adds, saying that FDI into the country is dominated by the banking system and insurance. He also believes that the impact of capital gains tax on Auckland house prices will be marginal, and likely to capture only about 5% of house sales.

But even if the figures categorically show that foreign buyers are not pushing up house prices, “politically and emotionally, that is not the way people are going to look at it”, says Mr Wilkinson. “Many houses are sold by auction. Attendees see Asian-looking people bidding at those auctions. They don’t know if they are New Zealanders, or foreigners, and perhaps they don’t care. What they do know is that they don’t like being outbid by them.”