Foreign investment in agricultural land was a hot issue in 2016 with a lot of attention being generated by the sale of the large S Kidman and Co holdings.
After a number of false starts, a revised sale of the holding was approved by the Treasurer to a joint venture between Gina Rinehart and a Chinese investment company. The political pressure caused by the Kidman sale resulted in significant reform to the Foreign Investment Review Board (FIRB) rules, including:
- Compulsory Registration – All foreign controlled rural properties and agricultural land must now be registered on the Register of Foreign Ownership of Agricultural Land, regardless of the value of the land.
- New Thresholds – The new threshold for purchases of rural land, subject to “approval” by the FIRB, has been lowered from $252 million to $15 million.
- Objections rather than Approvals – “Approvals” are no longer provided, instead, the Treasurer will provide a notice of objection, or non-objection with conditions. The timeframes for this process have also shifted slightly to 20 business days to determine whether an objection will be issued, or conditions imposed, plus an additional 10 business days to notify of the decision.
Who owns what?
The Australian Taxation Office’s Register for Foreign Ownership of Land reports that 53 million hectares of Australian agricultural land is owned by foreign investors. This is approximately 13% of all agricultural land in Australia. UK investors own the majority share with 27.5 million hectares, followed by the US and the Netherlands with 7.7 million and 2.9 million hectares respectively. Chinese investors own 1.4 million hectares, however, with the Kidman holdings and two recent acquisitions by a Chinese investor, this will almost double to 3 million hectares.
These figures illustrate that mature agriculture sectors are investing in Australia and many of these investors are superannuation/pension funds. Investments by large superannuation funds bring added complexity to sales. Not only do these investors have a responsibility to their shareholders, many also have experience investing in agriculture in the US where land contamination issues are a much more important concern. Foreign investors are therefore often not as nimble as the “traditional” Australian buyer.
Pros and Cons
Foreign investment supports Australia’s economy by providing new capital sources to help achieve even better productivity. Many foreign investors will also pay at the top-end of the market for their investments in Australian agriculture. However, agents should be aware of the trade-offs for sellers as a result of the FIRB reform, and foreign investor requirements:
- No Auctions – Foreign investors are often not able to compete at auctions. Therefore, if your client is hoping for foreign buyers (or at least competition from foreign buyers) for sale of their property, perhaps an auction is excluding some of their best prospects.
- FIRB Clauses – The change in the Treasury process from “approval” to “non-objection” means that your old FIRB clause may be out of date and need revising. Timeframes and terminology have also changed slightly. We can help with drafting a revised clause.
- Negotiation Process – Investment buyers will more than likely provide an offer with a lot more conditions than the industry norm. These conditions need to be considered and negotiated carefully. If the buyer is a portfolio investor, such as a superannuation fund, they may not have the flexibility to negotiate some of the conditions. However, there are conditions and processes that can be undertaken to protect your client’s position.
- Warranties – As part of the negotiation process it is important to carefully review any warranties the buyer requires from the seller. As an example, the buyer may want a warranty about prior chemical use on the land. This can be difficult to give with certainty as acceptable chemical use has changed significantly over the past 100 years. Limiting warranties to information that is within your client’s own reasonable knowledge is usually an acceptable outcome. Anything outside of this should be undertaken through the buyer’s due diligence process.
Take home message
If your client wants to attract foreign buyers for their property, it will require a change in mindset. You and your client will need to be open to longer negotiations, longer due diligence periods and a careful approach to contractual conditions. However, in return, a foreign investor will often pay at the top-end of the market and, once contracted, is generally very committed to the purchase.
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.