2% cutting through complexity Foreign Direct Investment in New Zealand: Trends and Insights August 2015 Important notice The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 1 Contents Page Introduction 3 Report Highlights 4 Approach 5 Origin of investment 6 Investment from Asia 7 Top 10 investments in 2013 and 2014 8 Gross investment vs. net investment 9 Destination of investment 10 Agribusiness 11 Land acquisition by country 13 Land acquisition by land use 14 © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 2 Introduction Foreign direct investment is a lever to fuel prosperity in New Zealand In New Zealand (“NZ”) we pride ourselves on ‘punching above our weight’ whether it be sport, the arts or business. Winning on a global stage is difficult to achieve from an arm chair, and relies on individuals to move outside their comfort zone to try new ideas and build new relationships. Foreign Direct Investment (“FDI”) is an area which frequently tests the comfort zone of a country. Fears of a loss of sovereignty, dealing with different cultures, uncertainty as to the actual benefits of investment and the implications for future generations are frequent discussion points in the media and the wider public. FDI can be an important contributor to the nation’s prosperity. Particularly where it results in investment into new productive assets and the development of export focused business ventures. Stronger trade relationships and the creation of employment opportunities for the next generation underpin a healthy economy. Constructively debating the merits of FDI is also a characteristic of a healthy society. With this in mind, KPMG has prepared an analysis of FDI in New Zealand based on Overseas Investment Office decisions over the last two years (2013 – 2014). This is the second report prepared by KPMG on FDI, the first being published in 2013. The purpose of this publication is to aid discussion on FDI, and provide some observable data on the origin of investment and where it is being invested. We welcome your feedback on the report and any enquiries should you have any questions. Kind regards Justin Ensor Partner Greg Knowles Partner – Head of China Business © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 3 Report highlights Report Highlights ■ Foreign direct investment has a direct impact on the prosperity of New Zealand, whether this is through cementing trade relationships or creating employment through investment in businesses located in New Zealand. Our analysis highlights that: – Canada was New Zealand’s most significant source of FDI based on gross consideration data provided by the OIO; – Dairy and milk processing investment has increased. It now accounts for over half of all disclosed agribusiness investment. We expect that investment in processing will reduce in coming years with recent falls in the milk price. However, this may be offset by speculative buying of farms in the event forced sales occur in this sector; – The United States is the largest acquirer of land for the 2013-2014 period, followed by China and the Netherlands. – At first glance, Australia’s influence on New Zealand through foreign direct investment appears to have reduced since our last report. However, we suspect that this is primarily due to recent changes to the regulations which have relaxed the requirement for Australian companies to obtain OIO approval rather than a material shift in investment; – Our recent experience suggests that many Australian companies are considering investment in New Zealand given NZ’s strong economic growth over the last two years; – Approximately 59% of FDI continues to come from North America, Australia and Europe. Asia accounted for 33% of total investment; – Investment in New Zealand continues to be broad based across a range of sectors; – China’s share of investment has not increased substantially from our previous analysis. Where investments have occurred they have focused primarily on dairy and real estate development; – Net investment equates to approximately 35% of the gross investment figures; – The largest 10 transactions in each year account for approximately 64% of the total overseas investment; © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 4 Approach Methodology for analysis of Overseas Investment Office (OIO) data – Where a foreign entity purchases a controlling stake in a New Zealand company, the total land area now controlled by the ■ The analysis which follows is based on statistics provided by the overseas entity is recorded in the land area statistics. OIO, combined with an analysis of OIO approvals. Caveats to this report ■ Where we have reviewed specific approvals, we have adopted the ■ With the exception of the origin of investment and the land following procedures in analysing the OIO data: acquisition statistics, there are several caveats to the conclusions – The majority of the analyses performed in producing this report drawn in this report. Specifically: has been provided by way of summary data from Land – A number of transactions are deemed to be confidential. At the Information New Zealand (LINZ); country level over the 2013 to 2014 period, over 90% of – Where pertinent information could not be obtained via consideration values were able to be recovered, with the correspondence with LINZ, we have retrieved the relevant residual being withheld under confidentiality. There are a large information from the decision summary cases on the Overseas number of reasons why information may be confidential, a Investment Office Website; http://www.linz.govt.nz/overseasfrequent ground for withholding official information is that the investment/decisions and from the Overseas Investment Office; release will result in "prejudice to a person's commercial position“; – In situations where application consideration is “confidential”, yet they disclose the consideration as exceeding $100m, we have – A number of well known New Zealand listed companies are assumed a value of $100m as the gross consideration; captured in the data by virtue of their share register containing overseas investors, for example Sky City; – A standardised list of macro industry sectors and their constituent subsectors was used in conjunction with overseas investment – Takeovers occurring in overseas markets and IPOs can trigger decision summary descriptions to guide the categorisation of OIO application requirements in New Zealand markets by virtue each application; of the change in control, for example Metroglass; – Country specific contributions are calculated by taking a country’s – With the introduction of new regulations, certain Australian percentage stake in the applicant and multiplying it by the total investors are no longer required to make an OIO application consideration stated in the said application; where the consideration is less than $477 million, and the investment does not include any sensitive land or fishing quota. – Where “cost of development” has been cited in place of This is likely to have reduced the level of observed Australian consideration, we have treated the figure quoted as gross investment relative to our previous report (2013); and consideration; – Where the “asset valuation” of the vendor was stated in place of consideration, we have treated the figure quoted as gross consideration; and © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. – Not all OIO decisions necessarily proceed to settlement or result in an investment. Therefore the information cannot be interpreted as actual investment data. 5 Origin of investment Key findings   New Zealand continues to enjoy a wide range of investment interest from countries abroad. KPMG has researched the trends in foreign direct investment through a review of the OIO approvals over the period January 2013 to December 2014, together with statistics made available to us from the OIO. Canada accounted for 22% of foreign investment in New Zealand, driven in part by two transactions being, the sale of a property portfolio of 18 assets held in the AMP Capital Property Portfolio (APP) to the Public Sector Pension Investment Board (“PSP”), and an increase in PSP’s investment in Kaingaroa Timberlands Limited.  Despite the media attention, China has not been as dominant in New Zealand as it has been made out to be, contributing to only 14% of the total foreign direct investment (based on gross consideration);  The United States, Canada, Europe and Australia account for approximately 59% of foreign direct investment in New Zealand;  Recent changes in the requirements for OIO applications has meant that a number of transactions from certain Australian companies and individuals no longer require OIO approval where their value is less than $477 million, perhaps explaining the lower level of observed investment from Australia. The total overseas investment applications approved by the OIO over this period totalled approximately $14.2 billion. This compares to $18 billion for the two-and-a-half year period 1 July 2010 to 31 December 2012. Overseas Investment by Region (gross consideration) (Jan 2013 - Dec 2014) USA 13% Philippines 5% United Kingdom 3% Japan 7% Canada 22% Hong Kong 4% Malaysia 2% Switzerland 5% Asia (Other) 1% Brazil 1% Australia 11% China 14% Various/ Undisclosed/ Other 7% Europe (Other) 5% Source: OIO statistics for the period January 2013 to December 2014 Note: Gross consideration includes asset value and development costs, where gross consideration was not specified. …Canada was New Zealand’s most significant source of FDI based on gross consideration. © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 6 Investment from Asia China and Japan remain the key sources of investment from Asia Investment from Asia (Jan 2013 - Dec 2014) ■ China and Japan remain a consistent source of foreign investment in New Zealand, contributing 62% of Asian investments. If Hong Kong is included, this increases to three quarters. Other 3% ■ Asian investment highlights are: – Oji’s acquisition of Carter Holt Harvey’s pulp and paper operations for $1.036 billion (Japan); Japan 20% – CKI’s acquisition of Envirowaste for $490 million (Hong Kong); and, China 42% – URC’s acquisition of Griffins for $750 million (Philippines). Griffins was previously held by an Australian private equity firm. ■ Chinese investment exceeded $1.9 billion over this period. Significant investments include: – Beijing Capital’s acquisition of Waste Management from Transpacific Industries ($950 million); – Yashili’s investment into a milk processing plant in the Waikato town of Pokeno. The plant will manufacture paediatric milk powder products ($212 million – 52% China); – Yili Group’s investment into Oceania Dairy to construct a milk processing plant to produce infant milk formula ($214 million); – Lee Island Investments (NZ) acquisition of land with the intention of constructing a six star luxury resort, which will include suites, restaurants, entertainment and business facilities on Pararekau Island ($172 million); and, – SFL Holdings Limited’s acquisition of Synlait Farms ($85 million – 74% China). ■ Interestingly, a significant proportion of investment from China is into new assets, rather than the acquisition of existing assets. © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. Hong Kong 13% Malaysia 6% Philippines 16% Source: OIO statistics for the period January 2013 to December 2014 …Unlike a large proportion of FDI, China’s investment into New Zealand in recent years has included the development of new assets. …China’s investment reflects a focus on dairy. 7 Top 10 investments by year Top 10 Gross Considerations 2014 Alternate measures of foreign investment ■ The table opposite summarises the top 10 transactions in 2013 and 2014. These accounted for approximately 64% of OIO approved investment over the 2013 and 2014 year. ■ A number of transaction values are classified as “confidential’ and do not appear in the tables opposite. For example, Canada’s Public Sector Pension Investment Board investment into Kaingaroa Timberlands Limited is confidential and therefore does not appear in the top 10 list, despite being a substantial asset and a sizable increase in its investment. ■ The USA and China accounted for nine of these transactions, reflecting their focus on larger transactions. Date Nov-14 Nov-14 Jun-14 Oct-14 Jun-14 Feb-14 Mar-14 Jul-14 Oct-14 Dec-14 Total Gross Asset or business Consideration trade nam e of target ($m ) com pany 1,102 1,037 950 750 482 402 375 308 255 172 5,832 AMP property portfolio Carter Holt Harvey Waste Management Griffins Crombie Lockw ood Land - New investment Lumley Insurance Metroglass listing Opus Group Land - New investment Origin of dom inant investor Canada Japan China Phillipines USA Various Listed Australia Various Malaysia China Top 10 Gross Considerations 2013 Date May-13 Nov-13 Apr-13 Aug-13 Nov-13 Nov-13 Mar-13 Mar-13 Jan-13 May-13 Total Gross Asset or business Consideration trade nam e of target ($m ) com pany 688 525 490 350 234 218 214 212 153 136 3,220 Heinz Pow erco Envirow aste Ezibuy BOS International OfficeMax Oceania Dairy Dairy - New investment Endace Bank Link Origin of dom inant investor USA Australia Hong Kong Australia USA USA China China UK USA Source: KPMG analysis of OIO approvals. Note: We have presented the assets acquired based on their trade name for ease of reading, rather than their legal name. …The United States and China accounted for half of the top 10 transactions by number reflecting their focus on larger transactions. © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 8 Gross vs. net investment Gross investment vs. net investment ■ One of the distinctions made by the OIO in its summary statistics relates to the gross value of consideration versus net investment. ■ “Net investment dollars” represent the total dollar value invested in New Zealand. For example, if a New Zealander sells a $100 million business to an Australian then the whole $100 million is added to the net investment total. However, if for instance the New Zealand asset was 100% Japanese owned, then $0 would be added to the net investment total. Thus, the net change in ownership of New Zealand assets is captured in the "total" net investment figure. 7,000,000,000 6,000,000,000 NZD ($) ■ “Gross value of consideration” represents the total consideration including GST (if any) to be paid for the acquisition of the assets, or the value attributed to those assets, under consents granted during the relevant period. Gross vs Net Investments Jan 2013 - Dec 2014 5,000,000,000 4,000,000,000 3,000,000,000 2,000,000,000 1,000,000,000 Jan-Jun 2013 Jul-Dec 2013 Jan-Jun 2014 Jul-Dec 2014 ■ Net investment is arguably the better measure of incremental foreign direct investment in NZ. ■ The graph opposite shows the net investment as compared to the gross consideration for applications approved by the OIO. Gross Investment Net Investment Source: OIO decision summaries ■ Net investment over this period equates to less than 35% of the gross investment figures. ■ The last six months of 2014 saw a substantial increase in investments compared to the previous 18 months. Half of this investment relates to three transactions, being the sale of the AMP property portfolio, Carter Holt Harvey pulp and paper and Griffins transaction. …Net investment equates to approximately 35% of the gross investment figures, broadly consistent with previous years. © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 9 Destination of investment Destination of investment ■ Overseas investment in New Zealand continues to be broad based. Total Overseas Investments by Sector (gross consideration) (Jan 2013 - Dec 2014) ■ Agribusiness (primary sector) accounted for approximately 11% of total investment. This is consistent with the results of our previous report, which saw 12% of investment directed towards agribusiness. ■ Energy and Power, Consumer Staples, and Financial Services also continue to be an area of investment throughout the 2013 – 2014 period, consistent with the findings in our previous report. ■ Overseas interest in the New Zealand healthcare sector has grown since our last report. The most notable transactions in this sector is Switzerland based Zuellig Group’s acquisition of a 40% stake in EBOS Group Limited, with a total consideration of $658 million. Retail 5% Agribusiness 11% Real Estate 13% Consumer Staples 9% Media/Entertainment 5% Consumer Products and Services 7% Materials 11% Industrials 1% High Technology 3% Healthcare 9% Energy and Power 17% Financials 9% Source: KPMG analysis of OIO approvals …Overseas investment in New Zealand continues to be broad based. © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 10 Agribusiness (primary sector) - Destination of investment Primary sector / agribusiness investment ■ At first glance the dairy sector (including milk processing) remains the most dominant source of investment in the agribusiness segment. The level of investment in the dairy sector has increased from 37% to 51% of disclosed primary sector investment since our last report. ■ A large proportion of this investment has been in milk processing. We expect this to slow with the decline in milk prices globally. However, this may be offset by speculative buying of farms in the event forced sales occur in this sector. ■ Wine and forestry remain important sectors for foreign investment. Forestry investment is likely to be under-represented due to ‘confidential’ transaction values being excluded from this analysis. Given the inherent size of these transactions, the relative size of dairy investment may be overstated. Overseas Investment in Agribusiness (gross consideration) (Jan 2013 - Dec 2014) Wine 12% Sheep & Beef 2% Dairy 20% Other Agriculture 17% Mixed Operations 6% Horticulture 5% Forestry 7% Milk Processing 31% Source: KPMG analysis of OIO approvals …Dairy and milk processing have increased in significance, accounting for nearly half of disclosed primary sector investment. We expect this to slow with the decline in milk prices globally. © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 11 Agribusiness investment Primary sector / agribusiness investment Agribusiness investment by Origin (2013 - 2014) ■ China and Hong Kong represent 49% of the investment in agribusiness with the majority of this being the result of several investments into the dairy sector. Canada 1% ■ Canada and the United States have made significant investments Other European into forestry. The confidential status of these transactions has 7% Australia resulted in their exclusion from this analysis. This potentially 3% understates the level of investment out of North America. Cayman Islands 3% Malaysia 3% German 3% UK 4% NZ 5% Singapore 7% Japan 1% Various/ Other 7% China 30% Hong Kong 19% USA 7% Source: KPMG analysis of OIO statistics Note: Yashili New Zealand Dairy Co. (52% Chinese owned) was granted a consent to build a $212 million milk processing plant. A year later Yashili was taken over by China Mengniu Dairy Company (Hong Kong Listed). This transaction is reflected in the OIO data twice, due to two applications being required. This potentially causes an overstatement of Chinese and Hong Kong agribusiness investment into New Zealand. If the second transaction is excluded, the combined Chinese and Hong Kong share drops to 41%. …Asia has had a focus on dairy, North America has a focus on forestry. © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 12 Land acquisition by country Hectares acquired by country ■ The United States was the most significant acquirer of land in the 2013-2014 period, totalling approximately 115,000 hectares. This is largely due to one acquisition in 2013 where Rayonier Canterbury LLC (99.9% US owned) applied to acquire an additional 74% holding in Matariki Forests, and Waimarie Forests. China and the Netherlands follow the U.S. with roughly half the number of hectares combined. Land (Ha) Acquisition by Origin (Jan 2013 - Dec 2014) Land Area (freehold and leasehold) - Approved acquisition by country (for the period Jan 2013 - Dec 2014) Other/ Undisclosed 17% Country United Kingdom 3% Japan 2% Netherlands 9% USA 46% Hong Kong 2% Europe (Other) 6% Europe (Other) China Australia Canada USA Other/ Undisclosed United Kingdom Japan Netherlands Hong Kong Total Business Applications Land Applications Land Area No No (Ha 000's) 27 10 16 9 18 43 15 3 4 5 150 91 22 44 14 53 75 48 7 10 22 386 16 27 4 5 115 42 8 5 22 6 250 Source: OIO Summary Statistics, KPMG analysis of confidential transactions China Canada Australia 11% 2% 2% Source: KPMG analysis of OIO statistics … The United States was the largest land acquirer over 2013 and 2014, followed by China and the Netherlands. © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 13 Land acquisition by land use Hectares acquired by land use (Freehold and Leasehold) ■ The table below summarises the freehold and leasehold land acquired for the last five years. ■ Forestry accounts for the majority of land acquired in New Zealand, followed by sheep and beef. Dairy comprises 22% of land acquired between 2013 and 2014, up from 6% for the period 2010 to 2012. Over a five-year period dairy land accounts for 12% of land acquired. ■ To put land acquisition in context the land acquired over the last five years represents approximately 5% of New Zealand’s total agricultural and forestry land area. Some of these acquisition are likely to be the consequence of an exchange of land between two overseas entities, rather than net investment (Note 2). Land for Agricultural Use (Jan 2010 - Dec 2014) Other agriculture 1% Wine 1% Land Acquired (freehold and leasehold) for Agricultural Use (Jan 2010 - Dec 2014) Forestry Sheep & Beef Dairy Wine Other agriculture Horticulture Milk processing Total Milk processing <1% Dairy 12% Horticulture <1% 2010 2011 2012 2013 2014 (Ha) 109,744 19,177 5,482 1,060 2,463 36 64 138,026 (Ha) 83,601 82,181 3,526 2,257 1,144 49 172,758 (Ha) 29,929 6,880 11,593 306 760 696 50,164 (Ha) 100,580 63,606 32,983 1,184 432 232 38 199,055 (Ha) 6,479 5,966 18,418 2,630 460 1,057 1 35,011 Total 330,333 177,810 72,002 7,437 5,259 2,021 152 595,014 Source: OIO Summary Statistics Sheep & Beef 30% Forestry 56% Note 1: The land areas above includes freehold and leasehold land acquired over a five year period. The leasehold land acquired in the last two years equates to approximately 48,000. Note 2: This estimate assumes that agricultural land accounts for 43% of New Zealand’s land area, based on a 2011 World Bank estimate. Source: KPMG analysis of OIO statistics © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 14 Contact details Contact details ■ For further information on this report please contact the following KPMG Partners. KPMG contacts Contact Contact Greg Knowles Ian Proudfoot Partner – Head of China Business Partner – Head of Agribusiness T: (09) 367 5989 T: (09) 367 5882 E: iproudfoot@kpmg.co.nz E: gknowles@kpmg.co.nz Mark Crawford Dinesh Naik Partner – Head of Japan Business Partner – Head of India Business T: (09) 363 3450 T: (09) 367 5867 E: dnaik@kpmg.co.nz E: mwcrawford@kpmg.co.nz Justin Ensor Trevor Newland Partner – Deal Advisory Partner – Head of Maori Business T: (09) 367 5934 E: jmensor@kpmg.co.nz T: (07) 858 6560 E: tnewland@kpmg.co.nz © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in New Zealand. 15 © 2015 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 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