China property

China pledges clarity on dealing with land lease expiry issue

Charging homeowners for renewing land leases could result in falling property valuations

PUBLISHED : Monday, 28 November, 2016, 4:47pm
UPDATED : Monday, 28 November, 2016, 10:48pm

China’s cabinet has pledged to come up with a plan to deal with the expiry of residential land leases, a critical issue given that the country’s hundred-trillion yuan worth of property assets are at stake.

In State Council-issued guidance on property rights protection, the Chinese government has for the first time vowed to “study the legal arrangement” for how to renew expiring leases on residential land.

The contentious issue was in the spotlight in April this year with the upcoming expiry of 20-year residential land use rights in Wenzhou, which triggered a public outcry after the local government tried to charge homeowners for renewing leases.

Leases granted in the 1990s will also soon be up for renewal in Shenzhen and other coastal cities, although the more common tenure of 70 years means most of the current generation of urban homeowners will hand the problem on to their offspring.

Under Communist Party rule all urban land in China is state-owned but housing reform in the 1990s endowed urban Chinese with permanent ownership of their houses but not the land beneath them. The 40, 50 and 70 year land leases gave property buyers a degree of assurance and jump started the property industry and the overall economy over the ensuing two decades, but the issue has come into question again with some shorter term land leases to expire soon.

When the local government in Wenzhou was confronted with the problem, it asked homeowners to pay up to a third of their homes’ value to renew the land rights, sparking an outcry across China. The Property Law of 2007 says land-use rights can be renewed but doesn’t specify the criteria for doing so.

“The State Council’s statement helped relieve homeowners’ anxiety. It is expected that a mature plan that garners wide consensus can come out in the next one to two years,” said Yan Yuejin, a research director with E-house China R&D Institute.

Not all industry insiders are satisfied. Some privately expressed fears that even if the plan was rolled out, it is unlikely that land leases will be renewed for free, causing a drop in the value of pre-owned and new homes built on land requiring renewed leases.

Guo Yi, marketing director for Beijing-based real estate consultancy Yahao, said Beijing has no choice but to face up to the controversy because local governments were puzzled by the lack of clarity from the top, and this has seen some of them adopt different ad hoc measures. A unified, clear response is urgently needed, she added.

A People’s Daily commentary, published in April at the height of the controversy, said either the land lease can be renewed with some compensation paid by the homeowners, or the land could be confiscated and the government compensates homeowners by providing another home somewhere else. It said the first solution was preferable, but pointed out that most homes would be demolished due to age before the land lease expires.

“Even if the leases are allowed to be renewed, with a small compensation fee, it would result in home buyers taking a second look at properties they are considering buying, which would lead to re-valuations,” Guo said. “That’s ominous for property owners and developers.”

A study led by Li Yang from the Chinese Academy of Social Sciences estimated that as of the end of 2013 China’s non-financial asset value totaled 300 trillion yuan, of which property accounted for a considerable portion.