Active investor plus visa: Plimmerton Farm deal raises questions over property rules

What’s inside, however, is prompting a rising number of observers to ask, just how much growth are visa investors adding?

University of Auckland professor of economics Robert MacCulloch said the projects were unlikely to fuel growth that wouldn’t otherwise have happened.

“We don’t lack funds secured by property title in New Zealand and, in these cases, the visa money is just going to displace local lending … that tells you that the benefit to New Zealand is essentially zero. This kind of asset-backed lending is a very long way from venture capital.”

The Plimmerton deal has caused the most controversy.

A range of parties, including those involved across the active investor plus (AIP) visa scheme and several economists outside the scheme, variously told the Herald that the loan on Plimmerton, a Gillies Group development, appears to be “outside the rules”, that it “skirts the rules”, and that it “goes against the spirit of the rules”.

Private Capital Group, the managed investment fund behind the loan, refutes these characterisations.

The terms of the loan are not public. However, the rules for growth visas exclude investment in pure property developments, including residential real estate developments. This is because the growth visa scheme is aimed at funding high-growth economic activity and boosting productivity.

Property development doesn’t fit that bill.

While it increases spending, it doesn’t meaningfully generate more value from the country’s people and resources: greater productivity.

Neither does it represent an area of the economy that lacks existing investor interest; it’s clear that multiple parties, including banks, competed to provide the Plimmerton debt.

If the Plimmerton investment stands, the critics claim, it is likely to be followed by others of its kind, and these will soak up a growing proportion of the foreign direct investment flowing into the country in exchange for visas.

The growth category visas have proven very popular since the AIP scheme (which includes the more conservative “balanced” category investment visas) was revamped by the Government early last year.

Growth visas require a $5m investment over three years, while balanced visas require a $10m investment over five years. Both categories pay out permanent residency visas to the investors and their families.

The balanced category clearly allows pure property investments, but this option has been little used. In this category, property investments compete with other conservative investment options like bonds and listed equities.

Additionally, far more money is flowing into growth visas. They account for roughly two-thirds of the $1.5 billion in investment the AIP scheme drew into the country in the year to April, and several managed funds, approved for growth visa investment, have grown very rapidly as a result.

Private Capital Group

The fund manager behind the Plimmerton lending, Private Capital Group (PCG), is one of just two fund managers with AIP approval which have swallowed the overwhelming majority of growth visa investment funds.

PCG’s two managed funds have secured over $500m in growth visa investment in the 16 months since the visa scheme was relaunched.

PCG co-founder Paul Carman maintains there’s been no foul.

He said details of the Plimmerton loan are private and he declined to disclose specifics, including whether the lending is secured against the property.

Elsewhere, PCG and its lawyers, Simpson Grierson, have suggested that the loan will build the Plimmerton development’s infrastructure, such as earthworks and roads; infrastructure is an allowable growth visa investment.

The lending appears to blend both senior secured and subordinated debt: “unitranche financing” as a Simpson Grierson write-up described it.

Josh Cairns, the banking and finance partner at Simpson Grierson who worked on the PCG deal, did not respond to the Herald’s request for an interview.

But Land Information New Zealand (LINZ) documents list the mortgagee for the first and second-ranking mortgages on the Plimmerton Farm property title as Public Trust, a Crown entity that offers corporate trustee services through one of its business units.

This is an ordinary course service and typically used by parties, including fund managers, to hold clients’ assets at arm’s length.

The LINZ details show that Josh Cairns signed off in mid-June as the mortgagee representative for the lodgement of the first-ranking mortgage on the property: $87.5m plus interest.

Cairns also signed off the second-ranking mortgage, also in mid-June, for which a value is not given.

A third-ranking mortgage is held by a subsidiary of the Crown’s social housing agency, Kāinga Ora; its value isn’t given.

Several sources told the Herald that back-of-the-envelope figures suggest the PCG loan on the 380ha Plimmerton development covers the bulk of the project cost, well beyond that of the infrastructure – its 2200 homes at an estimated average $800,000 to $900,000 each, suggests a project valued, very roughly, around $200m.

In an emailed statement, Carman said that PCG had obtained legal advice on the transaction and that this, and “other expert advice”, had “confirmed PCG’s view that the transaction we have signed falls within the AIP framework”.

“There is not now, nor has there ever been, any dispute between PCG and INZ [Invest NZ]. Both PCG’s funds remain on INZ’s list of acceptable managed funds for AIP purposes and are open for investment,” the statement said.

It remains to be seen whether that puts an end to the matter.

The Herald spoke to a dozen sources, some of whom said they have also raised their concerns with Invest NZ. However, the parties preferred not to be named, for reasons including that they work within the AIP system or that they are not authorised to speak on behalf of their employer. A couple of these are competitors to PCG.

Invest NZ

Invest NZ spokeswoman Fiona Acheson confirmed that the agency is “aware that the Plimmerton transaction has generated questions from AIP participants”.

In light of these questions, the agency published further guidance on its AIP rules last week.

This reads, in part: “For the avoidance of doubt, Invest NZ will generally not regard infrastructure that is developed solely or primarily to enable a residential property development as a standalone infrastructure investment … This includes, for example, roads, water, wastewater, stormwater, utility networks, earthworks and other enabling infrastructure that forms an integral part of a residential subdivision or housing development.”

It goes on to say that where infrastructure and residential development are economically or operationally interdependent, Invest NZ will assess the proposal based on the substance of the underlying activity rather than the characterisation of individual project components.

It notes that the involvement of social housing providers does not, of itself, alter the underlying nature of an investment in residential property development.

The Herald asked Kāinga Ora what its intentions are for the Plimmerton development and if it is connected to PCG.

Nick Howcroft, general manager urban development and delivery, said the agency’s financing agreements were commercially sensitive and he declined to disclose its current plans.

He noted it has a 2023 agreement to buy build-ready land within the Plimmerton development from the title owner, KM & MG Holdings, owned by Malcolm Gillies and Kevin Melville.

The deal was made as part of the former Labour Government’s 2021 Kāinga Ora Land Programme, aimed at hastening the construction of more private, market-rate and so-called affordable housing.

Whether Invest NZ, which is an autonomous Crown entity at arm’s length from ministerial control, has taken a view on the Plimmerton deal, and what that view is, remains unclear.

Asked if Invest NZ is investigating or otherwise contesting the Plimmerton deal, Acheson said the agency did not approve the individual transactions of AIP-approved managed funds, although it was responsible for ensuring that investments were made within the rules.

“Where questions arise regarding transactions undertaken by an acceptable managed fund, Invest NZ may consider whether any compliance concerns arise and, if so, what response is appropriate in the circumstances,” she said.

Another investment that raised eyebrows

The greenfield Wolfe Heritage Hotel has also raised questions among AIP participants, although it differs from the Plimmerton project in important ways, including that it was expressly approved by Invest NZ as a permissible project for direct growth visa investment.

The planned $200m new build would rise above Auckland’s Fosters’ Chandlery building close to the waterfront, and developer Conrad Properties aims to raise nearly three-quarters of that money directly from growth visa holders.

Jamie Hutchens, an owner and director of Conrad Properties Holdings, said the company was currently in “early state engagement” with AIP investors but he declined to disclose how many.

The investment is structured so that investors will hold shares in a hotel management business, Wolfe Heritage Hotel Management, and these will be stapled to a strata title hotel unit or units as a single investment.

Other AIP participants have queried whether the investment is, in essence, an apartment purchase, pointing out that the project’s resource consent allows the use to be either for tourism or residential.

And they’ve also noted that any AIP funds raised for the development will sit in term deposits until 2029, and will be returned to investors, who will still receive credit under the visa scheme for the investment, if the project doesn’t go ahead.

Hutchens confirmed that funds would not be deployed until 2029, but he refuted any characterisation of the investment and the project as residential.

He said that, before the Covid pandemic, the company obtained a resource consent for high-end apartments on the site and that this was never launched to market.

The earliest possible date at which investors could potentially use their units for personal use was after 15 years, Hutchens said. “There is no residential crossover or mixed use.”

He said an agreement with a hotel operator locked in the period of hotel use for 15 years. After that, by mutual agreement, the hotel operator and the hotel management company (in which investors will have an interest) could mutually agree to exercise two extension options of five years each.

Invest NZ documents also show that Conrad Properties has promised a land covenant on each hotel unit, to the effect that the owner/investor will not occupy it for any residential purpose for 15 years.

“By purchasing both the hotel rooms and shares together, the investors have an interest in the ongoing success of the hotel operation. This is not simply a real estate purchase,” Hutchens said.

He declined to provide the project information memorandum, citing statutory rules for wholesale investments.

Invest NZ’s assessment matrix for the Wolfe Hotel, released to the Herald under the Official Information Act, noted that the project “has a range of ministerial and council support” and indicated that letters to this effect were provided.

Asked which Government ministers supported the hotel, Acheson said that the agency now thought it was unlikely that there were ministerial letters of support, and that “source records retrieved to date do not include ministerial support correspondence”.

Invest NZ’s updated guidance for companies seeking direct AIP investment notes: “For the avoidance of doubt, investments into pure property assets or projects other than infrastructure (for example: commercial, residential and industrial real estate) will not be considered acceptable investments under the Growth Category (managed funds or direct investments). Where a direct investment involves property assets, Invest NZ will need to be satisfied that the business or project comes within the above sectors [including tourism], or another sector that will deliver economic and other positive impacts for New Zealand (excluding pure residential, commercial or industrial real estate).”

Immigration Minister Erica Stanford is responsible for the AIP visa scheme, while Trade Minister Todd McClay has purview over Invest NZ.

In response to the Herald’s questions, the pair issued a joint statement.

“It is up to Invest NZ to determine whether applications from fund managers and direct investments [meet] eligibility requirements [sic] to be an acceptable investment, but Invest NZ does not assess or approve individual investment transactions undertaken by an approved fund,” the statement said.

“Where we have seen behaviours in the system that have caused concern, we have moved quickly to address those.”

Why exclude property

Auckland University professor of entrepreneurship Rod McNaughton noted that there are good reasons for stripping property investments out of the visa scheme. He said that he was speaking generally and not about the particulars of any investment.

Conventional property development generated economic activity but that economic activity was not the same thing as productivity. It was therefore reasonable that it had a weaker claim to preferential treatment under a growth visa scheme, McNaughton said.

“If we are offering a more attractive immigration pathway for growth investment, we should expect something more than capital in return. We should be looking for investments that bring knowledge, innovation, international connections, export capability or help build firms and capabilities that would otherwise be less likely to develop in New Zealand … conventional property lending is less likely to generate those kinds of spillovers.”