In a shift with major implications for Shanghai’s manufacturing sector and for the prospects of logistics developers, the government of China’s commercial capital is readying sweeping changes in industrial land use rights, that include cutting back land use terms to 20 years from the national standard of 50 years. The rules would also set new guidelines for industrial land pricing in the city.
Currently in draft form, the new rules are expected to be adopted by July 1st of this year, and if implemented in their current form will have a dramatic impact on the acquisition and financing of industrial and logistics properties in Shanghai. The restrictions on industrial land use can be seen as the latest signal from Shanghai’s government of the city’s determination to shift towards a service driven economy, and move away from manufacturing.
Shortened Land Use Terms
With few exceptions, the rules reduce land use rights to 20 years, and while this will not affect existing land use rights, when any existing land grants come up for renewal, they will be subject to the new 20 year term.
The shortened term is expected to have a dramatic impact on valuation and pricing. Analysts familiar with the new rules project that land granted under the new 20-year use term will be valued at a significant discount compared to land with a 50-year term.
These lower valuations will influence project financing, especially the ability for investors to fund property acquisitions. In addition, the valuation of the buildings and improvements located on industrial land will now be assessed according to residual value, rather than market value.
Introduction of Investment Targets
Beyond the changes in term of land use, investors using industrial land would now be required to achieve financial targets with regard to use of industrial land, including investment in fixed assets, reaching targets for investment per square metre of land used, reaching minimum sales revenue targets, paying a minimum amount of tax or minimum tax amount per square metre of land.
While specific financial targets may be open to negotiation with the local government, it will be difficult for logistics developers to qualify if measured against these criteria, so more warehouse projects can expect to be pushed to smaller cities surrounding Shanghai, such as Kunshan.
Bonds, Restrictions, Appraisals and Inspections
To remove potential doubts about the enforcement of the new statutes, the government has included a number of terms designed to keep an eye on use of the land and crack down on any failures to meet targets for land use.
The rules include a new standard contract for industrial land users that stipulates project development milestones designed to ensure investment targets are reached,and in some cases investors may be required to pay a performance bond. The authorities indicate periodic inspections will be held to measure project performance.
Companies that fail to meet the new guidelines may be denied the opportunity to renew their land rights under the new rules. Transfers of industrial land will also require prior approval from the land administration authority according to the new statutes.
In addition to the term rates and other restrictions, the new regulations also put in place guidelines that limit the ability of district governments or industrial zones to offer discounts on industrial land.
The new draft rules stipulate that land used for standard industrial or warehouse purposes cannot be sold for less than benchmark rates for the sector and location. There are also guidelines for sale of land for use in R&D headquarters projects designed to limit potential discounts.
While the new statutes are specific to Shanghai, other major cities in China including Shenzhen, Linyi in Shandong, Foshan in Guangdong and Beijing’s Economic and Technical Development Zone already have similar measures in place or on the way.
The draft measures are outlined in Several Opinions on Further Improving the Administration of Land Saving and Intensive Use of Land in Shanghai (关于进一步提高本市土地节约集约利用水平的若干意见) issued by the Shanghai Municipal Government on February 22, 2014, and the Several Provisions on Strengthening the Administration of Grants of Industrial Land in Shanghai (关于加强本市工业用地出让管理的若干规定) issued by the Shanghai Municipal Planning and Land Resources Administration Bureau, effective April 1, 2014.