The people of Wenzhou are known for being business trailblazers in China, and now the citizens of this eastern Chinese city are making headlines for being the first mainlanders to wrestle with the problem of expiring land-use rights.
With all land in China belonging to the government, homebuyers at best are able to purchase 70-year land use rights under the country’s property laws. And while these rights are technically renewable, the authorities have never specified under what terms these rights to the land that holds up an individual home might be refreshed.
Now, city leaders in Wenzhou, which granted some of its first homebuyers 20-year land-use rights in the 1990s, are asking those who wish to keep homes bought two decades ago to pay as much as one-third of the current value of that housing, if they wish to keep it.
The Wenzhou case reveals some of the risks involve in buying Chinese real estate, and how the government eventually decides to resolve the issue will have a long-term impact on Chinese property values.
Pay $46K or Lose Your Home
The expiring land use rights have already tripped up one homeowner, who recently purchased an apartment in Wenzhou. It was only after the unfortunate buyer paid RMB 658,000 ($101,000) for an apartment in this city of 1.9 million people south of Hangzhou in Zhejiang province, that they learned the 20-year land-use rights expired on March 4th. Now, according to an account in the Chinese business publication Caixin, the homeowner is being told by the city that they need to pay another RMB 300,000 ($46,314) if they want to have rights to their home.
Wenzhou, which is one of a number of cities in China to have offered shorter than normal land-use rights is now providing a preview of a problem that will one day affect all Chinese homeowners, and which the Chinese government has yet to address.
The city says that there are 1,700 sets of residential land-use rights set to expire between now and 2019, and homeowners may need to pay fees of 33 percent of the home value or more if they want to keep their properties. On April 16th the city issued a notice demanding that property owners renew land use rights, but has not specified the consequences for not renewing these permits.
While China’s 2007 Urban Real Estate Administration Law specifies that land-use permits should be extended automatically, when fees are paid, it does not specify what fees may be applied to the renewal.
Land-use rights for residential units can range up to 70 years, while commercial properties typically have 50 year land-use rights. In 2014, Shanghai and some other Chinese cities shortened the length of use rights for industrial land to 20 years from the standard 50-year term.
The cities of Qingdao, in Shandong province, and Shenzhen, also are said to have many cases of homes with 20-year land-use rights that are currently expiring.
Government Decision Will Determine Value of New Housing
The cases in Wenzhou, Shenzhen and other cities with expiring land-use rights will be closely watched by investors and developers, as they anxiously await word on how the government will treat expiring permits.
High renewal fees, such as those being charged in Shenzhen, will rapidly pull down the value of second-hand, and even new homes, as buyers begin to see Chinese housing as an asset class that could depreciate as fast as it can appreciate in value.
Draft versions of China’s property tax law have indicated that land use rights renewal fees might be waived for homeowners who pay their property tax, however, a final version of the proposed law has yet to be implemented.
After delaying the property tax law repeatedly, Chinese authorities are now said to be hopeful that the terms of the long-awaited reform measure might be settled by the end of 2017.