Under “tenure review,” the ongoing privatization of South Island Crown pastoral leases, a pastoral lessee surrenders part of his leasehold, and acquires a freehold interest in the remainder. In order to determine whether the Crown sold the right to freehold too cheaply, we model the proportional difference between the price (per hectare) at which the Crown sold its interest to the lessee, and the prices paid to former lessees who have onsold some part of their new freeholds.tenure review; pastoral leases; New Zealand; rent seeking

Ann Brower

Philip Meguire

English

Research Papers in Economics

DEPARTMENT OF ECONOMICS AND FINANCE 
 
COLLEGE OF BUSINESS AND ECONOMICS 
 
UNIVERSITY OF CANTERBURY 
 
CHRISTCHURCH, NEW ZEALAND 
 
 
 
Does tenure review in New Zealand’s South Island give rise to 
rents? 
 
Ann Brower and Philip Meguire 
 
 
 
 
 
 
 
WORKING PAPER 
 
 
No. 49/2010 
 
 
 
Department of Economics and Finance 
College of Business and Economics 
University of Canterbury 
Private Bag 4800, Christchurch 
  New Zealand 
 
 
 
 Does tenure review in New Zealand’s South Island give rise to rents? 
 
Ann Brower 
Senior lecturer of Public Policy 
Lincoln University 
Ann.brower@lincoln.ac.nz 
 
Philip Meguire 
Senior lecturer of Economics 
University of Canterbury 
Philip.meguire@canterbury.ac.nz 
 
Alba DeParte 
AgroParisTech 
 
 
Abstract. 
Under “tenure review,” the ongoing privatization of South Island Crown pastoral leases, a pastoral 
lessee surrenders part of his leasehold, and acquires a freehold interest in the remainder. In order to 
determine whether the Crown sold the right to freehold too cheaply, we model the proportional 
difference between the price (per hectare) at which the Crown sold its interest to the lessee, and the 
prices paid to former lessees who have onsold some part of their new freeholds. 
 
JEL codes: K11, Q28. 
Keywords: tenure review, pastoral leases, New Zealand, rent seeking. 
 
 
Supporting paper for poster presented at the 2010 meeting of the New Zealand Association of 
Economists.2 
 
Background. 
About 20% of the South Island of New Zealand 
consists of Crown land leased to pastoral farmers.1 
The leases have 33 year terms and are renewable in 
perpetuity. Since 1992, a pastoral lessee can apply to 
acquire a freehold interest in part of his leaseholds, if 
he agrees to cede part of his leasehold to the Crown. 
The resulting land reform transaction is called “tenure 
review.” Under tenure review, the Crown sells its 
residual ownership interest in the part of the leasehold 
‘capable of economic use,’2 and buys the lessee’s 
interest in the part deemed to have conservation value. 
Bargaining in each tenure review deal includes the 
following features: 
•  The Crown hires a contractor to bargain on its 
behalf with the lessee; 
•  The contractor’s compensation does not vary with 
the terms of the deal agreed to; 
•  The contractor is compensated for completing 
tasks on a checklist, with the final payment made 
when the deal is closed; 
•  The Crown sets no reserve price on what it sells; 
•  Only the lessee may bid for freehold ownership. 
Tenure review gives rise to two significant option 
values: 
1)  A lessee has the option to acquire a freehold 
interest in part of his leasehold by going through 
tenure review; 
2)  Like any freeholder, a new freeholder has the 
option to apply to subdivide or to vary the land 
use of his freehold.  
The Crown employs a professional valuer to estimate 
the value of the Crown’s residual interest in the land to 
be privatised. We used the Official Information Act 
1982 to obtain copies of the resulting valuation reports. 
For all but four of the 77 deals, these valuation reports 
                                                        
1. For more on the institutions and other aspects of 
tenure review, see Brower, A., Meguire, P., and 
Monks, A. (2010) “Closing the Deal: Principals, 
Agents, and Sub-agents in New Zealand Land Re-
form,” Land Economics 86(3): 267-92. 
2. Crown Pastoral Land Act 1998, section 24(a)(2). 
found no material value above and beyond that arising 
from pastoral farming. Hence the Crown bargained 
with farmers as if option value (2) were zero.  
We propose to examine the correctness of this 
omission by looking at the selling prices of land 
privatized under tenure review. 176 parcels, amounting 
to 47,678ha, have been carved out of 28 of the 77 
leaseholds that completed tenure review during 1992-
2008. According to Table 1, these 28 new owners paid 
the Crown $6.9M for the right to freehold 102,306ha, 
then realized $134.5M by selling 47% of their new 
freeholds. Many hundreds of additional parcels carved 
out of former leaseholds are awaiting buyers. 
We evaluate this situation by comparing the price (per 
ha):   
•  At which the Crown sold its interest to the lessee; 
•  Received by a new freeholder who on-sells part of 
the freehold. 
 
Hypothesis. 
Controlling for location and the time value of money, 
the option to change land use post tenure review gives 
rise to rents enjoyed by former high country pastoral 
lessees. 
     
Dependent variable. 
os P  = Price/ha obtained when new freeholder sells 
some part of his freehold. 
f P  = Price/ha the new freeholder paid under tenure 
review to purchase the Crown’s interest in the 
land to be privatized. 
The dependent variable isln( / ) os f PP . The larger its 
value, the greater the potential rent. 
 
Explanatory Variables. 
ln(size) = log of on-sold parcel size in hectares. A 
small to medium size parcel is indicative of 
a major departure from extensive pastoral 
land use; thus parcel size is our operational 
measure of land use change. Higher value 
uses (e.g., lifestyle blocks, viticulture, lake-3 
 
front sections) are correlated with smaller 
parcels. Hence a small parcel will com-
mand a higher price per hectare than a large 
one, and we predict a negative coefficient. 
Location = 1 if the leasehold lies within 10km of 
Queenstown or Wanaka, and/or within 
sight of Lakes Hawea, Pukaki, Tekapo, 
Wakatipu, or Wanaka; = 0 otherwise. 
These characteristics give rise to amenity 
values and hence higher market prices. 
We predict a positive coefficient. 
Time elapsed  =  Years elapsed between completion of 
tenure review and subsequent on-
sale. As this controls for the time 
value of money, we predict a positive 
coefficient with a value similar to 
New Zealand dollar long-term 
interest rates. 
 
Results. 
The estimated regressions are reported in Table 2. The 
estimated coefficient on ln(size) ranged from -0.71 to -
0.81. 
2 R = 0.794 with just ln(size) alone. The coeffici-
ents on Location and Time elapsed were also signific-
ant, and their values were as hypothesized. However, 
their incremental contribution to
2 R did not exceed 
0.024.  
 
Discussion. 
/ os f PP  ranges from 1.9 to 26,968, with a median 
value of 995, so that the discrepancy between  os P  
and f P  is usually quite large. We submit that a large 
discrepancy is consistent with a former lessee enjoying 
a large rent as a result of having gone through tenure 
review. But first we consider other explanations that 
have been advanced for why ln( / ) os f PP  is as large 
as it is. 
1.  An advocacy group for pastoral lessees, the High 
Country Accord, proposes to explain the discrep-
ancy between  os P  and f P  by: 
a)  Tenure review does not grant the right to sub-
divide, but only the option to apply to sub-
divide; 
b)  The time, cost, and uncertain outcome of 
applying for consent to subdivide; 
c)  The boom in rural land prices, 2000-08; 
d)  Pastoral leasing being nearly equivalent to 
ownership, so that lessees owned over 90% of 
the value of the land from the outset.3 
(a)-(c) are all positively correlated with Time 
elapsed. The estimated regressions reveal that 
Time elapsed has an estimated coefficient is 0.08, 
similar to NZ$ long term interest rates over the 
period 1992-2008. A value of 0.08 is inconsistent 
with (c).   
If (d) were true, then the lessees’ ownership inter-
est, expressed as a percent of the capital value of 
the land, should be consistent across leases, 
because the same statutes govern all leases. One 
would thus expect the  / os f PP in Fig. 1 to cluster 
around a value indicative of the lessees’ property 
interest the land. In fact, the  / os f PP range over 5 
orders of magnitude, ruling out any possible 
clustering.  
2.  The government agency in charge, LINZ, propos-
es to explain the price discrepancy as follows: 
a)  An independent report (Armstrong et al. 
2006) concluded that tenure-review prices 
were "fair" because both Crown and lessee 
agreed to all aspects of the deals.4  
b)  The option value of subdivision was minimal 
when most tenure reviews were completed; 
c)  LINZ relied on expert valuation advice to 
obtain  f P ; 
d)  The problem is confined to deals concluded 
before 1998, when tenure review appraisals 
                                                        
3. Geoffrey Thomson, ‘High Country Report Flawed,’ 
The Press, March 8, 2006. Ben Heather. “Farmers 
deny rip-off over tenure review land deals.” The 
Press, 22 Feb 2010. 
4. Ben Heather. “Farmers deny rip-off over tenure re-
view land deals,” The Press, 22 Feb 2010. 4 
 
admittedly failed to take development 
potential into account. 
(a) wrongly assumes that the only parties with an 
interest in tenure review outcomes are the Crown neg-
otiating agent and the lessee. It assumes that the parties 
can reach an efficient agreement, regardless of parties 
external to the deal. But when one party is the Crown, 
the agreement affects parties not present at the negotia-
tions. Thus the efficiency, Pareto optimality, and fair-
ness of an agreement reached by insiders alone cannot 
be assumed.5  
(b), (c) and (d) assume that after 1998, valuers retained 
by the Crown took into account the option value of 
subdivision. In fact, valuers did so in only the four 
deals shown in Table 3, and only one transaction in our 
data involved land carved out from one of those four 
deals. In the case of Alphaburn, the option to change 
land use was valued at $3M for the entire 3365ha 
privatized. Yet less than one year after privatization, 
Table 1 reveals that the new owner sold a mere 193ha 
for $10.1M. Furthermore, Table 3 shows that even 
when a valuer foresaw the subdivision potential, the 
price at which the Crown agreed to grant freehold was 
well below the valuer’s estimate. 
 
Conclusion. 
The large discrepancies between  os P and f P  are 
consistent with former lessees’ enjoying large rents 
after tenure review. This suggests tenure review is 
inefficient for at least three reasons: 
a)  The option to acquire large rents via tenure review 
could artificially inflate the sale price of lease-
holds in course, making explanation 1(d) a self-
fulfilling prophecy (albeit one not supported by 
the data).   
b)  The price inflation of (a) makes tenure review an 
increasingly expensive policy. Therefore the price 
                                                        
5. Brower, Ann (2008) Who Owns the High Country? 
Nelson, NZ: Craig Potton Publishing: 141. Ellick-
son, R. C. (1991) Order without Law: How neigh-
bours settle disputes. Harvard University Press.  
to purchase freehold should not be based on mar-
ket prices for leaseholds in course, because the 
latter includes the value of the option to freehold, 
apply to subdivide, and sell. 
c)  Rents could also encourage or reward inefficient 
rent seeking by existing lessees. Rent seeking 
could take the form of lessees’ clearing native 
bush or otherwise destroying conservation values 
on leasehold land,6 in order to strip it of conserva-
tion value and make it suitable for privatization. 
 
                                                        
6. Donald Aubrey, High Country Chair of Federated 
Farmers, quoted in: Staff, “Rents Could Rise, High 
Country,” Otago Daily Times. October 14, 2006. 5 
 
       Fig. 1. 
Effect of on‐sold parcel size on price appreciation
1
10
100
1000
10000
100000
0.0 0.1 1.0 10.0 100.0 1000.0 10000.0 100000.0
log(On‐sold parcel size)
l
o
g
(
P
o
s
/
P
f
)
Within sight
of a Southern
Lake
10k to
Queenstown
or Wanaka
neither
 
Note. Logs are base 10 for easier reading. 
 
 
 
 
Table 2. Estimated Regressions. 
Constant  ln (Size)  Location Time   
elapsed 
2 R   SER BIC 
     7.95 
(0.07)
      -0.74 
(0.03) 
--- ---  0.794 0.950  242 
     7.54 
(0.17)
      -0.71 
(0.03) 
         0.53 
    (0.18) 
--- 0.806 0.923  239 
      7.11 
(0.18)
      -0.72 
(0.04) 
         0.47 
    (0.18) 
     0.08   
   (0.03)
0.817 0.894 236 
        7.42 
       (0.16) 
      -0.81 
     (0.05) 
         0.14† 
        (0.06) 
     0.09 
   (0.03) 
0.818 0.892 235 
† Variable is ln(Size)×Location. 
Note. N=174; sample omits two large negative residual outliers. Regressions estimat-
ed via OLS using TSP 4.5. Standard errors in parentheses are robust to heteroskedasti-
city. SER = standard error of the regression. BIC = Schwarz criterion. 
 6 
 
Table 1.  Summary Data Aggregated by Lease 
Name of lease  Hectares 
 privatised
Gross price
for freehold 
Hectares 
on-sold 
Gross price  
of on-sold land 
POS/Pf 
Alphaburn 3365 $267,500 193 $10,100,000  658
Closeburn 930 $199,889 14 $17,696,000  6,089
Hillend 2659 $336,000 2443 $26,200,000  85
Pukaki Downs  3722 $120,000 583 $4,665,000  248
Rhoboro Downs  4648 $55,000 127 $1,900,000  1,262
Woodbine 338 $110,000 0.1 $100,000  3,033
Bendigo 8727 $172,500 624 $4,685,000  380
Cone Peak  2181 $350,000 40 $1,650,000  257
Eastburn-Waitiri 5910 $535,000 1810 $9,700,000  59
Glenroy 1973 $400,000 13 $425,400  159
Midrun-Lake McKay  5372 $179,375 1 $492,000  11,630
Mt Pisa I & II  4633 $413,000 12 $1,204,845  1,097
Mt Rosa  1388 $155,556 53 $7,521,000  1,265
Queensberry Hills  2905 $191,000 1792 $7,347,500  62
Spotts Creek  3344 $282,600 3304 $2,030,000  7
Wentworth 3840 $351,111 3432 $5,547,000  18
Ardgour 3719 $640,000 229 $1,466,000  37
Avalon 1352 $134,000 1341 $2,264,000  17
Ben Ohau  4375 $169,500 3707 $6,047,000  42
Blackstone Hill  2684 $175,000 1055 $129,000  2
Cairnmuir 4437 $141,000 4065 $4,914,000  38
Earnscleugh 16410 $608,889 15344 $1,624,000  3
Glencreag-Camberleigh 922 $310,000 922 $1,751,000  6
Halwyn 3713 $124,444 624 $1,397,500  67
Mataura Valley  4322 $164,858 4357 $9,000,000  54
Omahau Downs  165 $31,000 6 $1,819,000  1,697
Raglan Run  1583 $84,500 1584 $2,000,000  24
Waiorau 2691 $191,000 4 $785,000  2,749
  
Sum 102306 $6,892,722 47678 $134,460,245 
Note:  Blue = new freehold includes some of the shoreline of Lakes Hawea, Pukaki, Tekapo, Wakatipu, or Wanaka; 
Red = some or all of the former leasehold lies within 10km of Queenstown or Wanaka; Black = all else. This colour 
coding is identical to that in Fig. 1 
 
 
Table 3. The Value of the Option to Vary Land Use. 
Lease name  Valuer’s estimation of  
the value of option to 
change land use  
Price at which 
 Crown sold freehold 
Alphaburn     $3M $267,500 
Glendhu $4.5M $579,000 
Glen Nevis  $1.2M $570,000 
Wyuna $5.25M $1,300,000 

Does tenure review in New Zealand’s South Island give rise to rents?

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Does tenure review in New Zealand’s South Island give rise to rents?

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