China: Potential reforms in the granting of industrial land in China

Last Updated: 15 May 2014

By Yingying Wang

In order to increase land utilization efficiency and enco urage economical and intensive use of industrial land, the Chinese governments on the central and local levels are exploring some new practices in respect of industrial land supply, which is expected to have an impact on land acquisition by industrial land investors, developers and manufacturing companies in the near future.

Rise of Industrial Land Price

The industrial land price is expected to rise. This is explicitly mentioned as one of the points to implement paid utilization of resources by the Communist Party of China (CPC) in the Decisions of the Central Committee of the CPC on Several Major Issues Concerning Comprehensively Deepening Reforms ( 中共中央关于全面深化改革若干重大问题 的决定 ), which was passed by the 3 rd Plenary Session of the 18 th Central Committee of the CPC on November 12, 2013.

The current minimum industrial land price guidelines were issued by the Ministry of Land and Resources in 2006. With the rapid growth of economy in China during the past eight years, these benchmark land prices are out of date and no longer reflect the actual industrial land grant price le vels in different areas in China, nor do they match the existing economic development conditions. The industrial land prices are anticipated to go up in the near future.

Shortened Land Use Term for Industrial Land in Certain Areas in China

In some small cities and industrial zones in China, for example Yizhuang Economic and Technological Development Zone in Beijing ( 北京亦庄经济技术开发区 ) and City of Linyi in Shandong province ( 山东临沂 ), the local authorities are implementing a more flexible land grant term system, namely, to shorten the grant term from a maximum of 50 years to 20 years.

The rationale behind such new practice is to increase land utilization efficiency and at the same time, increase government's tax revenues.

Under PRC law, the land authority is entitled to grant a plot of industrial land with a term no more than 50 years; and in practice, such 50-year term is usually fully granted. With such a long-term land use right at hand, many land users are not motivated to commence its construction immediately and develop the project within an efficient time frame, causing many idle land issues. Now with shortened land grant term, it is hoped that a plot of industrial land can be utilized at a higher efficiency during a specified period of time . On the other hand, shortened land use right term leads to less land premium, which is more cost-efficient for land users. And from the perspective of a local government, the increased land utilization efficiency is more likely to bring about increased tax revenue during a given period of time.

Exploration of A New Grant Approach of "Lease before Grant"

The Ministry of Land and Resources published the Regulations on Economical and Intensive Utilization of Land (Draft ) ( 节约集约利用土地规定 ( 草案 ), the " Draft Regulation ") on October 29, 2013 for public consultation and comments .

In accordance with the Draft Regulation, the local land authority, when supplying industrial land, may lease the state-owned construction land use rights to a land user first through public tendering, auction or listing, and specify in the lease contract the conditions for grant (e.g. completion of the construction on the land and/or achievement of the investment commitment). After the land granting conditions are fully satisfi ed, the authority will then grant the land use rights to the land user and sign a separate land grant contract. Such approach is called "lease before grant ( ?? ?? )", which is different from the existing practice whereby land use rights are granted to a land user for a term of 50 years from day one without any land lease arrangement or any preconditions to be satisfied before land grant.

The rationale behind such new approach is the same as that for shortened land use right term. This approach aims to encourage the land user to develop the industrial land in a timely manner pursuant to the time limit specified in the land lease contract or required by the local land authority; if it fails to complete the development within the requested time frame or fails to satisfy any other land granting conditions, the local authority is entitled to take back the land after the expiration of the lease term or even early terminate the land lease according to the lease contract. The Draft Regulation is not clear as to the guidelines and schemes on detailed aspects of the leases before grant, such as the permitted term, price threshold, which are likely to be formulated after public consultation.

Other Potential Changes to Promote the Land Use Efficiency

Moreover, in accordance with the Draft Regulation, the local land authority may also require in the land grant contract that, if the land user's development intensity or investment standard fails to reach the required level, the local land authority has the right to purchase back the land. In the current land grant contract templates, failure to comply with the development intensity or investment standard will usually entitle the land authority to charge a penalty equivalent to the shortfall, which in reality may not be strictly implemented. The Draft Regulation intends to introduce a more powerful remedy for choice by the local government in such cases, in order to promote the efficient use of industrial land.

The Draft Regulation further proposed to encourage the land users to enhance the land use efficiency by adding stories on or redeveloping the existing factory buildings or workshops. In certain cases wher e the plot ratio is increased because of land use efficiency enhancement on the existing industrial land with the same usage and in compliance with the planning requirement, the land price for the increased construction area may be waived. This seems a tempting incentive for the existing land users to remodeling the current facilities and expand the output by using the same piece of land.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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