Highlights: 

• To address issues of sufficient protection for farmers’ property rights, tensions and conflicts arising from land rights, and monopolies on land supply that cause systematic corruption, China’s Ministry of Land and Resources (MLR) approved Beijing and Shanghai to start a pilot program on building and leasing residential properties on rural land.
• The pilot policy aims to create opportunities for investors and developers. The pilot policy allows farmers to adopt various methods to build and lease residential properties. Farmers may build and lease by themselves, or rent their land to developers/investors for the purposes of building and leasing, or alternatively set up a joint venture with investors or developers by contributing their land to the joint venture.

Main Article:

For many years China has been implementing separate policies for urban and rural land, under which urban and rural land are governed by different legal systems and governmental authorities and are traded in different markets and have different rights.  Use of farm land for non-agriculture purposes is monopolized by government.  Rural land to be used for urban construction needs to be expropriated from farmers first and then to be sold to land users by government.  Government benefits from this process, i.e. government pockets differentials between land premiums paid by land users on the one side and compensation paid to farmers plus infrastructure development costs incurred by government on the other.  Farmers do not have a say in expropriation process and their property rights might not be fully protected. The dual-track land policy in recent years has contributed greatly to high speed industrialization and urbanization of China.  But its problem is obvious: there is a lack of sufficient protection for farmers’ property rights, tensions and conflicts arising from land rights continue to aggravate, and a monopoly on land supply causes systematic corruption among governmental officials.

At the beginning of this year, the Ministry of Land and Resources (MLR) approved Beijing and Shanghai to start a pilot program on building and leasing residential properties on rural land.  We believe that this move is a significant breakthrough of the existing land policy and may open a door for farmers to participate in urbanization.

Highlights of the pilot policy are summarized as follows:

• Counties or villages may use rural construction land (non-agriculture land) to build and lease residential properties, to which counties or villages will own the title.
• The first pilot program in Beijing has been launched at Tangjialing Village, Haidian, under which the village will build and lease 100,000 sqm residential properties on its land.  Upon the completion of construction work, Haidian Low-Income Housing Centre (a government agency) will rent the entire project and operate it as low-income housing.  The first pilot program in Shanghai will start in Chongming, Qingpu, Baoshan and Fengxian, building and leasing residential properties with total gross floor area reaching 1,000,000 sqm.
• Counties or villages may choose different methods to build and lease residential properties on rural land. They may independently develop residential properties on their land, or contribute their land as equity to a joint venture, which will develop residential properties, or lease its land to developers or investors to build and lease.
• The development and operation of residential properties on rural land will be covered by the construction plan for low-income housing and will be entitled to certain tax incentives from government.

Underlying Reasons for the Pilot Policy

The tension and division in the land market has acted as a catalyst for the MLR to deviate from the dual-track land system and release the pilot policy.  On the one hand, government is under great pressure from the aspects of land and capital in connection with building low-income housing. Building and leasing residential properties on rural land would help to lower land costs and alleviate imbalances between supply and demand for residential housing in urban areas. In addition, by allowing farmers to build and lease residential properties and benefit from rental income, the pilot policy should help to avoid tensions and conflicts arising from expropriation of rural land by government.

Investors Opportunities

The pilot policy aims to create opportunities for investors and developers. The pilot policy allows farmers to adopt various methods to build and lease residential properties. Farmers may build and lease by themselves, or rent their land to developers/investors for the purposes of building and leasing, or alternatively set up a joint venture with investors or developers by contributing their land to the joint venture.  The advantages for renting rural land or setting up a joint venture with farmers include the followings:

• Because there are no land premiums, or taxes and fees to be collected by government, land cost is lower compared with renting and acquiring stated-owned land.
• A majority of rural land included in the pilot program is located in the proximity to urban area and there are relatively mature infrastructure facilities.  As a result, the infrastructure costs are expected to be lower than other rural areas.
• Government will grant certain tax incentives for building and leasing residential properties on rural land.
• There is great need for low-income housing in the market. For example, in 2010, Qibao County (Minghang district, Shanghai) has built and leased a residential project called “Lianming Yayuan”, with over 300 one-bed-room units. Qibao County rented Lianming Yayuan to its neighboring manufacturers as staff dormitories and has maintained 100% occupancy since its opening.

Possible Expansion of the Pilot Policy

According to the head of MLR, subject to the approval of MLR, the municipalities directly under the central government and a few vice-provincial cities (these cities are subject to the administration of the relevant provinces but economic and social development planning can be made separately from the provinces), whose housing prices are relatively high and which lack sufficient urban construction land, may implement a pilot program to build and lease on rural land.  In May of this year, MLR will finalize a list of cities permitted to implement the pilot policy. We expect that the pilot policy will spread beyond Beijing and Shanghai in the near future.