China’s land system breakthrough is allowing rural land for rental housing

China’s recent launch of the pilot scheme that allows the development of collectively owned land into residential properties for leasing will have a profound impact not only on the residential leasing market, but also on the land market and the housing system.

Announced by the Ministry of Land and Resources and Ministry of Housing and Urban-Rural Development last month, it also confirmed the first batch of trial sites in 13 cities – Beijing, Shanghai, Shenyang, Nanjing, Hangzhou, Hefei, Xiamen, Zhengzhou, Wuhan, Guangzhou, Foshan, Zhaoqing and Chengdu – to build rental housing on collectively owned land.

The scheme which represents a breakthrough of the land supply system, is firstly, expected to boost the supply of rental housing and help meet the demand of the low-income groups.

With strong economic fundamentals, full-blown municipal planning and higher income levels, popular first and second-tier cities have seen a continuous net population inflow that has prompted a new and robust demand for homes and a supply shortage in the real estate market. Amid the rebound of the property industry, housing prices have rapidly escalatedin these cities since 2016, which in turn have pushed rents up.

Triggered by the rise in housing prices and rents, migrant workers from some large and medium-sized cities have returned to their townships, and some technological and innovative enterprises have also relocated from the eastern coastal areas to the middle and the western regions in the country.

China turns rural land into rental housing for the first time to stabilise property prices

Using collectively owned land to build rental housing could hopefully boost supply, lessen the upward pressure on rents induced by rising prices and fulfil as much as possible, the housing demand of the less privileged.

Located mostly in the suburbs and remote areas, collectively owned land however, entails the problem of insufficient municipal facilities. Yet the scheme explicitly requires the pilot areas to be equipped with comprehensive infrastructure and public facilities catering to health care and educational needs. Tenants are entitled to apply for residence permits and enjoy fundamental public services. Cities with more resources would further perfect the social security mechanism for non local tenants.

Pilot cities that build rental housing on collective land and improve municipal planning together with basic public services, could help relieve tenants’ concerns, raise the attractiveness among leasers in the city and avoid market chaos such as abandoning properties that have been leased and substituting rent with sale.

Secondly, the scheme could reduce the pressure of land supply among popular first and second-tier cities.

As the land auction market has introduced the system of bidding, auction and listing, China’s land system is a dualistic structure covering the urban and rural areas. But this framework is eroding.

On the one hand, popular cities have shown an unusual shortage of residential land supply, resulting in increasingly fierce land auctions and skyrocketing land prices.

On the other hand, rural land resources have not been allowed to directly convert into urban construction land, as they must first be acquired by the government before they could enter the market. With strict government controls in the primary market, it is inevitable that the huge potential in the country’s rural land resources have not fully been utilised.

Using collective land to build rental housing can be considered as a significant innovation of the land system. It helps to release the dividends of collectively owned land resources, by attracting township, real estate developers and various economic entities to participate in the construction and operation of rental housing. This could benefit peasants who can profit from the appreciated value of the land assets.

Time to unlock rights to rural land: China’s finance minister

In addition, it guarantees the land supply of rental housing and relieves the burden in the first and second-tier cities.

Take the case of Shanghai. Some districts in the city such as Jiading, Pudong, Xuhui, Changning have allocated land for rental housing, converting these sites for leasing use.

However, according to the 13th five-year plan of Shanghai’s housing and urban-rural development office, housing supply is expected to increase by 1.7 million units, with rental housing accounting for 0.7 million units. With a considerable gap to the government’s targetfor land supply for rental housing, the use of collective land could be seen as a critical channel to meet the supply shortage.

The pilot cities are expected to promote the development of the residential leasing market, realise the full potential of the collective land and reach the goal of efficient use of land.

Finally, the scheme will speed up the formation of a market in which the leasing and sales markets develop in parallel.

China’s 13th five-year plan is the time for establishing a long-term and sustainable system for the property market, in which both leasing and transactions play a vital role. At present, the rental housing market is flourishing, with cities like Beijing, Chengdu and Hefei showing support to cultivating a residential leasing market by increasing land supply for rental housing, encouraging the development of property leasing firms and strengthening financial aid.

Collective land for constructing rental housing will further expand the scale of the market, promote a more balanced system between leasing and sales, stabilise the market and undermine the abnormal market expectation of an endless price rise in the first and second-tier cities that counter regulatory policies and market movement. Over the long haul, China’s housing market will enter a new stage, where commercial and secured housing develop under a dual track system.

In the high-end market where there is sufficient supply, commercial buildings could be transacted freely. High income groups could acquire homes at a higher price and pay property taxes that would be used to subsidise the lower income groups. The latter could rent secured housing until they are able to purchase commercial properties.

David Hong is head of research at China Real Estate Information Corp