The Year 2017 has proven to be a turbulent year for Sino-Australian relationship, which witnessed not only the downfall of some pro-Chinese politicians amid scandals of taking illicit funding from Chinese businessmen in Australia, but also the tabling of the highly controversial counter-espionage and foreign interference laws which evidently aim at forestalling China’s perceived infiltration into Australia’s politics. This trend is poised to continue into 2018. Unsurprisingly, once back from the long X’mas and New Year holidays, Australia’s Treasurer announced the introduction of tighter measures for the sale of agricultural lands to foreign investors. While the new measures are generally applicable to all foreign investors, they are believed to be targeting mostly Chinese investors.
Chinese investors’ Growing Interests in Agricultural Land
The year of 2016 has seen China’s unprecedented buying spree of the Australian farmland. In 2016 alone, according to the latest Register of Foreign Ownership of Agricultural Land, Chinese ownership of Australian farmland has increased tenfold to 14.4 million hectares. This brought China to No. 2 in the ranking of foreign ownership of Australian farmland, after the UK, but it is expected that China will overtake it in this year. The Chinese’s insatiable hunger for Australian farmland is unabated even after its State Council’s new restriction on overseas investment by Chinese companies, announced in August last year. In August 2017, China’s State Council set out new rules for overseas investment by Chinese companies, dividing them into three categories: “prohibited”, “restricted” and “encouraged”. The prohibited category covers casinos and military technology, while “restricted” includes hotel and property development. But agriculture and infrastructure investments are encouraged.
The aggressiveness of Chinese investors in snatching Australia’s farmland has naturally aroused concerns and suspicion among local Australians and there has been tremendous public outcry to tighten the restrictions on foreign ownership of agricultural land, although only about 80% of foreign investment is in leasehold land instead of freehold. This xenophobic sentiment was most evident in the landmark acquisition of Kidman & Co., Australia’s largest farmland owner.
Kidman & Co. Acquisition
Kidman is Australia’s largest private land owner and holds approximately 1.3 per cent of Australia’s total land area, and 2.5 per cent of Australia’s agricultural land. It has 10 cattle stations, including properties across regional South Australia, Western Australia, the Northern Territory and Queensland covering 101,411 square kilometres and managing a long-term average herd of 185,000 cattle. This is significantly larger than the next biggest rural landholding in the country. One of Kidman’s stations, Anna Creek, is also the largest single property holding in Australia. Importantly, around 50 per cent of the Anna Creek pastoral lease is located in the Woomera Prohibited Area (WPA) in South Australia. The WPA weapons testing range makes a unique and sensitive contribution to Australia’s national defence and it is not unusual for governments to restrict access to sensitive areas on national security grounds.
The uniqueness and vastness of Kidman’s assets were of course coveted by aggressive and well-funded Chinese investors. The first round of the bidding has seen a battle among Chinese investors themselves, notably, Chinese investment company Genius Link Asset Management and its rival Shanghai Pengxin. This iconic asset of Australia however had aroused as much political debate and attention as it attracted Chinese buyers. This finally resulted in the Treasurer’s first block of the deal, citing national interest as the reason. This did not curtail the interest of Chinese investors. The renewed bid came from a consortium led by China’s Dakang group with 80% in the stake, and a local investor held the remaining 20%. The renewed bid again was knocked back by the Treasurer on national interest ground.
The third attempt to take over Kidman was again made with the participation of a Chinese investor, namely, Shanghai CRED. But this time its stake had shrunk to 33%, with the remaining majority held by Gina Rinehart, the richest woman in Australia. More importantly, the defence-sensitive Anna Creek Station was carved out of the deal, and sold to a local investor. Evidently, the deal was carefully restructured by reducing Chinese stake to a minority and further by stripping off the militarily sensitive tenements to alleviate the political concerns of the Australians. Had it not been so, it is doubtful if the transaction could have been approved finally. The Kidman deal is only a tragic win for Chinese investors.
It is against this background that the Australian government introduced tighter measures in February this year to “mandate vendors to advertise and market agricultural land to Australians first”.
Under the current regime, proposed investments in agricultural land by foreign persons (excluding foreign government investors) generally require approval where the cumulative value of a foreign person’s agricultural land holdings exceeds $15 million, with exceptions applying to investors from Australia’s trade agreement partners (as specified below). All acquisitions of agricultural land by foreign government investors require approval. All acquisitions of interests in agricultural land by foreign persons regardless of whether they require approval and regardless of value must be notified to the Australian Taxation Office Register of Foreign Ownership.
The applicable threshold value depends on the nationality of the foreign person and whether or not the foreign person is a foreign government investor. For foreign government investors, a $0 (nil) threshold applies. For non-foreign government investors (except those from Chile, New Zealand, Thailand and the United States), a cumulative $15 million threshold applies. To meet the cumulative threshold, the total value of all interests in agricultural land in Australia held by the foreign person (and their associates) and the consideration for the acquisition of the interest in the agricultural land together must exceed $15 million.
If this threshold is exceeded, the Treasurer has a discretion to approve unconditionally, approve subject to conditions which are to ensure that the transaction would not be contrary to national interest or simply prohibit the transaction on the ground of national interest.
As part of the national interest test, the decision maker will consider whether there was an opportunity for Australians to acquire a given parcel of agricultural land. The decision maker will have regard to the openness and transparency of the sale process. Generally, approval will not be granted for any acquisition of agricultural land that was not offered for sale publicly and “marketed widely” for a minimum of 30 days. The purpose of this requirement is to ensure Australians have had sufficient opportunity to bid in any sale process of agricultural land.
An open and transparent sale process means:
- public marketing/advertising was undertaken for the sale of the property, using channels that Australian bidders could reasonably access (e.g. advertised on a widely used real estate listing site or large regional/national newspaper);
- the property was marketed/advertised for at least 30 days; and
- there was equal opportunity for bids or offers to be made for the property while still available for sale.
The responsibility is on the applicant to demonstrate how they became aware that the property was advertised for sale and whether the acquisition was subject to an open and transparent sale process. Applicants may be requested to provide evidence of the sale process.
The worsening Sino-Australian relationship is likely to continue into this year. Any significant acquisition by Chinese investors of Australian assets, which are not limited to agricultural land, will certainly attract closer scrutiny by FIRB to address political concerns from Australians. The preferred strategy is to follow the Kidman model, where the Chinese investor holds a minority interest, plays a passive role in the management and any sensitive or strategic assets are stripped off the deal. And of course hire a good public relation manager and keep a low profile!