29 August 2011 Former pastoral lessees do 'very well' in land on-sales after tenure review

Former lessees of South Island Crown pastoral land have done "very well" financially under the tenure review process, according to public policy researcher Dr Ann Brower of Lincoln University and economist Dr Philip Meguire of the University of Canterbury.

As part of their study of tenure review, undertaken over the past five years, Brower and Meguire calculated the ratio of the price per hectare a lessee was paid when selling all or part of a new freehold, to the price per hectare the Crown charged the lessee to acquire the freehold under tenure review.

Brower and Meguire found that that this ratio ranges from 1.8 to 27,096, with an average value of 2696 and a median value of 992 . In other words, lessees on average on-sold land at 2696 times the price the Crown charged them for freehold rights. And half of the lessees on-sold land for more than 992 times what they paid for freehold.

The researchers say that "Everyone who has gone through tenure review and then sold newly privatised land, has done so for a price at the very least 80% higher than the price at which the Crown sold the freehold rights. At the other extreme, some land privatised under tenure review was sold for more than 27,000 times what was paid for it.

"The smaller the on-sold land parcel, the higher this ratio. We found that subdivision explains about 80% of the variation in the ratio across on-sold parcels. Hence it is evident that the option to subdivide land that has gone through tenure review is a very valuable one.

"Moreover, in every tenure review deal we examined but one, the proceeds from selling part of the new freehold exceeded what the Crown charged to privatise the entire freehold. The one exception involved a lessee who purchased freehold rights to 338 hectares for $110,000, then sold 0.1 hectare for $100,000."

"Land Information New Zealand (LINZ), the Government agency administering tenure review, defends the prices at which it sold the Crown's interest in former Crown pastoral leases, because those prices were grounded in valuations done by well-known farm valuation firms.

"When we examined the valuation reports of the 28 former leaseholds from which land was on-sold, only four of those reports mentioned that the option to subdivide and develop freehold land means that its market price is much higher than that of land under pastoral lease. Even in those four cases, however, the Crown sold the freehold for 9% to 48% of the estimated value of subdivision alone, even though the undivided land had significant farming and other values .

"Hence the valuations LINZ obtained seldom take into account the option to subdivide. And when they do, LINZ still agrees to sell the freehold for a price that ignores this option.

"LINZ also claims that tenure review prices have been fair, because both Crown and lessee agreed to all aspects of the deals. This assertion overlooks the fact that in tenure review, nobody argues the interest of the taxpayer," says Dr Brower. "The Crown does not negotiate tenure review, but instead hires contract negotiators who are merely told to complete a task list. What LINZ does in tenure review would be like selling a house without setting a reserve price, and paying the property agent a flat fee instead of a percentage of the selling price."

The High Country Accord, the association representing pastoral lessees, argues that the boom in rural land prices over 2000 - 2008 helps explain the large value of the ratio calculated by Brower and Meguire. The university researchers counter this claim by showing that the time elapsed between the conclusion of a tenure deal and the closing of the eventual onsale, explains only 1% of the variation in the ratio.

Some have argued that the profits from selling land formerly under pastoral lease, as reflected in the average ratio of 2696, serve to reimburse former lessees for costs they incur when subdividing, such as the costs of obtaining council consent to subdivide. With this claim in mind, the researchers examined the handful of cases where a former lessee sold an entire farm, so that subdivision was not relevant. In these cases the ratios ranged from 7 to 54, suggesting that even in the absence of subdivision, the Crown had significantly
undervalued its interest in leasehold land.

A summary of the work by Drs Brower and Meguire will be published soon in the internationally recognised scholarly journal New Zealand Economic Papers.