Blunder Down Under

Infrastructure is not the only asset class bearing the brunt of Australia’s latest tightening of foreign investment rules. We ask Matthieu Favas, editor of sister publication Agri Investor, to explain how farmland is being affected.

At the start of February, Scott Morrison, Australia’s Treasurer, unveiled new regulations that aim to give Australians the first right to bid for domestic farmland.

The new rules state that Australian agricultural properties worth more than A$15 million ($12 million; €9.5 million) will have to be “marketed widely” for at least 30 days – advertised in a major newspaper or real estate listing site, for example – before being offered to potential overseas suitors. There are a couple of exemptions: if foreigners only buy a minority share, for example, or if the property has been advertised before without success. But most transactions won’t escape those rules.

The government’s hardening stance is the latest instalment in its efforts to increase scrutiny of foreign investment in agriculture. It comes a few years after Canberra reduced the threshold for farm sales to be screened by the Foreign Investment Review Board from A$252 million to A$15 million (if bidders are non-government entities. For state-backed buyers, the threshold is zero).

To be sure, foreign investment in Australia is no small phenomenon. As at June 2017, overseas entities owned 13.6 percent of all agriculture land Down Under, largely through leasehold interests. The UK is the largest investor, accounting for 27 percent of foreign-held land. But China – the implicit target of Morrison’s actions, in the eyes of many observers – comes right behind, with a quarter of the foreign-owned stock.

The Treasury says it understands that foreign investment “creates jobs for Australians, and always will,” but that it is determined to ensure such investment is not “contrary to the national interest.” That sounds like a reasonable premise. But the problem comes when trying to figure out what the government means by “national interest,” a pliable concept.

It’s not clear it always has to do with food security. There is a long history of foreign investment in Australian agriculture, and few would argue it is reaching a stage where it could put the country’s food supplies at risk. On the latest count, Chinese investors owned about 2.5 percent of Australia’s total farmland. That’s about the same proportion of Bordeaux vineyards owned by Chinese entities. Despite some controversy in France, few people believe the country is about to run out of fine wine.

The national interest, in this instance, has more to do with allowing Australian buyers to compete on a more equal footing with deep-pocketed foreigners. Such gripes are becoming more common. But it’s unlikely the new rules will do much to re-establish a level-playing field. Any determined foreign buyer will just sit out its 30 days before offering as much money as before; sellers looking to achieve the best price – and those who don’t are hard to find – will probably be keen to wait as well. What’s more, it’s not obvious the restrictions will impact pooled funds acting on behalf of foreign limited partners.

They will, however, cause inconvenience for a number of sellers (many of whom are Australian farmers). Those can have a variety of legitimate reasons for wanting to keep a transaction private, ranging from privacy and reputational issues to political and timing considerations. Sellers wanting to stick to a private process may have to exclude foreign bidders, and perhaps achieve a lower price for their asset. Foreign buyers, meanwhile, won’t see much point in making unsolicited bids, some of which have rewarded sellers handsomely in the past.

Meanwhile, the changes send mixed signals to foreign investors – something local market players themselves are worried about. “We have got something they certainly want,” CBRE’s Danny Thomas told television channel ABC. “But we may be coming to the point where we may be becoming a bit arrogant about that, and thinking they will keep coming.” By casting too wide and coarse a net, Canberra risks turning foreign-funded productivity gains into a lost opportunity.

Australia is not the only country where foreign land ownership triggers passions. If the country’s investment rules are to be more than a vote winner, however, its government has to learn to be more tactful.