From Policy to Reality: Shanghai Sells First Land Site With Shortened Usage Rights

Transcription

1 From Policy to Reality: Shanghai Sells First Land Site With Shortened Usage Rights

2 Contents 2 Background 3 Intended Effect 4 The Market Reaction 6 First Sale Under The New Terms 8 Capturing Value: No R&D On Industrial Land 9 Shanghai, Trial And Model 9 Going Forward 10 Appendix - A Close Look At The New Land Contract 11 Shanghai Sells First Land Site With Shortened Usage Rights February 2015 Colliers International

3 Background China s central government has made clear that it wants to better utilise its land resources. Provincial or city-level governments have responded by announcing changes to the land usage terms for industrial land. One major aim of this change is to eliminate the grey area in industrial land policy that has allowed real estate development, in the form of higher-value office parks or research and development centres, on land technically classified for manufacturing use. While more than 20 cities, or even entire provinces, have announced new policies towards industrial land use, Shanghai has gone the farthest in executing them, with the introduction of a two-year trial policy in March This policy goes some way towards detailing changes, including guidelines for development on industrial land, and, most notably, the announcement that usage rights for industrial land will be reduced from the previous 50 years to 20 years. The announcement of the policy had a noticeable effect on the industrial land sale market, though this was primarily speculative. No concrete example of the change was seen until the last days of 2014, when a land site in Baoshan District was sold with a 20-year usage term. This paper looks at the intention of the trial period, and how and why it has gone from policy to reality since it was announced in March It ends with a detailed look at several of the clauses that have changed or been added in the new land sale contract, and explains the difference with older, comparable contracts. Usage rights for industrial land will be reduced from the previous 50 years to 20 years. 50 years 20 years Colliers International February 2015 Shanghai Sells First Land Site With Shortened Usage Rights 3

4 Intended Effect The price of industrial land in Shanghai has been growing rapidly in recent years, climbing from an average of RMB522 psm in 2008 to RMB792 psm in In many cases, this increase has been driven not by an increase in the value of manufacturing, but by real estate speculation. The speculation has been based on the fact that, until the guidelines were announced in March 2014, industrial land policy didn t explicitly ban the development of commercial real estate projects such as R&D centres, offices and amenities on relatively inexpensive industrial-use land. In Qingpu district, for example, land prices have jumped from RMB455 psm to RMB916 psm in the past six years a much faster pace than the growth of industrial output. Chart 1: Average Price of Industrial Land in Shanghai RMB psm 40% % % % 300 0% % % Change y-o-y Average Industrial Land Price Source: Research, Colliers International, Shanghai, 2015 Chart 2: Qingpu Land Price and Industrial Output The city s trial policy is intended to stop this. It provides a pathway to convert industrial land to R&D or office use by paying a land premium, benchmarked by current land prices, and gives the local government much stronger oversight and control of the sale of property on such sites. The intended outcome would boost the government s land revenue as well as lower the cost of land for manufacturers the city wants to attract or retain, who are finding that land prices have reached or even exceeded levels they can accept. 1, Average Industrial Land Price (RMB psm) Industrial Output (RMB billion) Source: National Bureau of Statistics, Research, Colliers International, Shanghai, 2015 Chart 3: Qingpu Land Price and Industrial Output Growth 70% Exceptions The most widely reported change has been the reduction in the usage right terms, from a 50 year maximum to a 20 year maximum. However, the government has allowed a measure of flexibility in this new change in order to achieve its basic goal, increasing the manufacturing output of industrial land. For significant manufacturing projects or factories/r&d centres built for self-use, however, the government may still grant 50 year terms. 60% 50% 40% 30% 20% 10% 0% -10% % Change of Average Land Price y-o-y Change of Industrial Output y-o-y Source: National Bureau of Statistics, Research, Colliers International, Shanghai, Shanghai Sells First Land Site With Shortened Usage Rights February 2015 Colliers International

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6 The Market Reaction Almost one year on, the effect on the market has not been everything the government intended. Whilst second-hand industrial properties were successfully regenerated, the market for newly supplied industrial land has reacted differently. The number of land transactions fell dramatically during the first 10 months of 2014 and the price of industrial land has remained high. Land sales spiked in November and December, in apparent anticipation of further policy tightening, though no new information was publicly released. Though more than 200 sites have been sold since March 2014, when the government introduced the policy, all but one was transacted with 50-year usage rights. Chart 4: Industrial Land Transaction Volume Number of plots Industrial Land Transaction Volume The sharp drop in industrial land sales is a direct reflection of the uncertainty in the market in response to the new regulations. In the past six years, Shanghai s industrial land market has seen an average of 362 transactions per year. In 2014, this fell to 257. Between April and June 2014, only two industrial sites were sold in Shanghai. Source: Research, Colliers International, Shanghai, 2015 Chart 5: Industrial Land Transaction Volume by Month Number of plots past six years 362 transactions per year transactions Jan Feb Mar Apr May Jun Jul Aug Source: Research, Colliers International, Shanghai, 2015 Shanghai Sells First Land Site With Shortened Usage Rights February 2015 Colliers International Sep Oct Nov Dec

7 This can be attributed to two major questions that Shanghai s trial policy left unanswered: what will happen when the 20-year term expires, and at what price? Given the fact that only one transaction has taken place with the newly reduced terms, it is unclear what effect the revised terms will have on the sales price. Will land prices be reduced in line with the reduction in usage rights, or will they remain at the same level as sites sold under the previous 50-year terms? Until these questions are addressed, this uncertainty will persist. While the government is not required to make further adjustments to this trial period, it is widely expected to clarify the answers to these questions before March 2016, when the trial period expires. Prices have remained at a high level for one major reason: district governments have a reserve of land with 50-year usage rights. The terms for these sites were approved before the new policy was implemented. As such, these remaining sites are able to command a premium. The result is that land prices stayed near the RMB792 psm level throughout In certain districts, land prices continue to climb. Until these stocks of 50-year land are depleted, this situation is expected to continue. Chart 6: Industrial Land Price by District/Region RMB psm 1,600 1,400 1,200 1, Note: Chongming began sales of industrial land in Source: Research, Colliers International, Shanghai, 2015 Chart 7: Growth of Industrial Land Price by District/Region, % 60% 50% 40% 30% 20% 10% 0% Industrial Land Price y-o-y Growth Note: Chongming began sales of industrial land in Source: Research, Colliers International, Shanghai, 2015 Colliers International February 2015 Shanghai Sells First Land Site With Shortened Usage Rights 7

8 First Sale Under The New Terms Shanghai sold its first land site with a 20-year usage term on 30 December, in a transaction for a site in Baoshan Industrial Park s North Zone to manufacturer Shanghai Kelai. While Colliers cautions against using this single transaction in a single district as a forecast for all future industrial sales, it does give a clearer idea of how future sales of industrial land may vary under the new policy. Notably, the site in Baoshan district did not sell at a significant discount, in spite of the significantly shortened lease period. According to the Shanghai Bureau of Land and Resources, the site was transacted for RMB580,000 per mu, or RMB870 psm, which was in line with comparable sites sold in previous years under the 50-year terms. In 2013, for example, two sites in the same zone were sold for an average of RMB620,000 per mu, or RMB930 psm. This transaction also showed a change in valuation. Given the shortened lease terms, a valuation of the site using the income approach principle shows a 25% discount in the land s capital value, compared to the previous 50-year term. Table: Transaction Information for the First Land Site Under 20-Year Terms This premium effect was seen in several other transactions during December 2014 in Baoshan. On 18 December, four sites with 50-year terms in the Baoshan Industrial Park s South Zone were sold for an average of RMB905,000 per mu, or RMB1,355 psm. Comparable sites in 2013 sold for RMB700,000 per mu, or RMB1,046 psm, indicating that the remaining sites that qualify for 50-year terms are now commanding a premium. A review of the land sales contract for the 30 December transaction also showed amendments to other factors, including the terms of the deposit, the method of renewal and the process for an en bloc sale. These changes tightened the oversight required for renewals or sale, and were in line with the stated aim of the trial policy. At the present moment, it remains unclear if Shanghai Kelai s 30 December purchase will be representative of the pricing structure in all districts in Shanghai. However, this is expected to become clearer as 2015 progresses and other district governments begin transacting industrial land sites under the amended terms. Map: The location of Baoshan Industrial Zone Site Name BAOSHAN INDUSTRIAL ZONE Shanghai Baoshan Industrial Zone (North) Plot Land Area (sqm) 20,100 JIADING BAOSHAN Plot Ratio 1.5 YANGPU Total Price (RMB) HONGKOU ZHABEI 17.4 mil. Unit Price (RMB per mu) JINGAN QINGPU HUANGPU CHANGNING 580,000 PUDONG XUHUI Unit Price (RMB psm) 870 MINHANG Accommodation Value (RMB psm) 577 SONGJIANG Buyer Shanghai Kelai Luojin Automation Machinery Address South to NKSH, West to Shanghai Kelai Sanluo FENGXIAN Automation Machinery, North to Jinshi Rd. Transaction Date JINSHAN 30 December 2014 Source: Research, Colliers International, Shanghai, Shanghai Sells First Land Site With Shortened Usage Rights February 2015 Colliers International

9 Capturing Value: No R&D On Industrial Land The market uncertainty is primarily in the first-hand industrial land market, for land supplied directly by the government. In the second-hand market, there already appears to be a stricter adherence to the regulations, which can be colloquially summed up as No R&D on Industrial Land, although this also applies to office parks. Shanghai s economic structure has shifted dramatically in the past two decades. The service industry now accounts for 62.8% of the city s GDP and much of its low-value manufacturing has moved to other cities or regions. The transformation of these former factories into higher-value uses is key to the city s development plans. Understandably, the city wants to capture the value from this transformation, in the form of increased land prices. The regulations lay out a clear path to achieve this: a land premium charged to investors or developers who intend to convert industrial-use sites to higher value uses. In the past, many developers took advantage of a grey area, created by the price differential between industrial land and commercial land, and the lack of a policy explicitly barring R&D centres, office parks, and amenities on industrial use land. Now, in addition to the premium, they will face much stronger oversight and control on both the type of projects they can build and how they are able to dispose of them. This has already been seen at one project in Pudong, in which an investor has been in negotiations to redevelop a large-scale former factory site. The investor intended to demolish the factory and construct a single build-to-suit office campus. Negotiations were delayed as the government rejected this plan. Following the introduction of the trial regulations, the site became subject to the land premium, which resulted in the price of the land increasing by 50%. It should be noted that premiums are determined by geographic location, and are either charged at 150% of the price of industrial land, for sites beyond the outer ring road, or 70% of the price of commercial land, for sites within the outer ring road. The government then permitted the investor to build office and R&D buildings but restricted the investor from selling more than 30% of its project. Negotiations are ongoing and no deal has been concluded to date. This case shows the effect on a potentially new project. However, the No R&D on Industrial Land policy applies to existing projects as well. Whilst no major campaign to retroactively enforce this policy is expected, this may become an issue for land holders when they attempt to dispose of their projects. If the land is technically designated for industrial use, but the actual developments on the site do not match the newly clarified definition, it can be expected that the abovementioned premium will be charged at the time of sale. The degree to which this cost will be passed on to the buyer, and the degree to which the buyer will accept an increase, is yet to be seen, though the general direction is clear: the cost to develop R&D centres and office parks in Shanghai will increase. Shanghai, Trial And Model Shenzhen was the first mainland Chinese city to have faced the issue of expiring land usage rights, as a result of its early experiments with market reform. However, Shanghai is likely to look towards both Singapore and Hong Kong for guidance - both cities having made changes to their land usage terms. In Hong Kong s case, usage rights for all land will now expire in 2047, a change made with the 1997 handover, meaning any new land sales in 2015 will have a maximum usage terms of 32 years. While there have been challenges, this remains the general practice. In Singapore, the maximum terms for industrial land Hong Kong Shanghai Singapore were reduced from 60 years to 30 years, effective from the second half of 2012, citing the government s need for flexibility in land redevelopment and affordability for industrialists as primary reasons for the change. These cities have served as models of government policy for many Chinese cities, including Shanghai, in the past and may do so again. However, any specifics of what terms Shanghai s government may or may not adopt, and how they will manage their implementation, is only speculation at this point. In the bigger picture, many cities will be looking to Shanghai for guidance on adjusting their own industrial land policies. Each government will need to assess its specific situation, as development conditions, land supply and demand varies significantly by region, but the city will undoubtedly provide a starting point for officials keen to meet the Central Government s policy direction. Colliers International February 2015 Shanghai Sells First Land Site With Shortened Usage Rights 9

10 Going Forward Shanghai s new policy is on a 24-month trial, from March 2014 to 31 March Given the amount of uncertainty the trial regulations have caused and the visible effects on transaction volume and price, it seems possible that the city will amend the policy or issue additional regulations in order to settle the market before March These policies are designed to boost high-end manufacturing and other higher value industries in 104 planned industrial areas, while transitioning 195 industrial sites in urban areas into sites for public services and modern commerce, a recognition of and response to the change in Shanghai s industrial structure. At the same time, they lay out specific guidelines for converting the category of usage rights, and clearly define the differences between land for R&D, industrial, commercial and self use, including benchmark pricing minimums. They provide more comprehensive oversight, which will cut down on story-telling when a project is described in one way and then executed in a different way. Taken together, the guidelines create more transparency in the future value of developments and their approved uses. Going forward, investors or developers will be able to have a greater degree of confidence in rebuilding former industrial sites, as their permitted use has now been made clear. The increased level of transparency will require owners or tenants to pay careful attention to the land usage policies, but will also benefit manufacturers who were feeling cost pressures from the rising prices of industrial land. 10 Shanghai Sells First Land Site With Shortened Usage Rights February 2015 Colliers International

11 Appendix - A Close Look At The New Land Contract The contract signed between the Baoshan Bureau of Planning and Land Resourcesand Shanghai Kelai in 2014 offers a clear look at how the Shanghai government is instituting policies from the March 2014 trial period. Essentially, the changes tighten government oversight on the construction and production of projects, set tax revenue targets and implement a system to enforce them, introduce a new function in the renewal process, strongly limit the purchaser s ability to make changes to ownership structures or sales, and expressly forbid changes to land use without prior approval. 50 Year Colliers has chosen eight key clauses from the Shanghai Kelai land contract, and contrasted it against a similar and comparable land contract for a transfer under the 50-year terms. This comparison is intended to be a general guide to the changes in sales contracts for land contracts, and perhaps a guide for how other industrial zones or districts will modify their own contracts going forward. However, Colliers cautions that this comparison is based on a single deal and may not be representative of all future land sales contracts. While we have tried our best to accurately translate the terms in these contracts, this document is for reference only, and any discrepancies should treat the original Chinese document as the legal standard. 20 Year Explanation No specific requirement Clause 13 The Assignee should commence the construction, complete the construction and commence the production on time. This will be guaranteed by paying 20% of total land price to the Committee of Baoshan Industrial Zone (administrative department of industrial management or zone management) as a performance bond (or via letter of guarantee), within five days after contract signing date. The deposit for construction date is required to be 60% of the performance bond; the deposit for completion date 20%; the deposit for production date 20%. While the down payment remains the same under the new contract (20%), the new contract introduces an additional 20% payment known as a performance bond. The return of this bond is tied to meeting targets for the start of construction (60% of the bond), the completion of the construction (20% of the bond) and the start of production (20% of the bond). The bond is repaid in phases as the targets are met. Clause 17 The Assignee should commence the construction within six months after land delivery, and complete the construction within 18 months after the beginning of construction. Clause 18 The Assignee should commence the construction within six months after land delivery, complete the construction within 24 months after land delivery, and commence the production within 36 months after land delivery. Special projects shall be separately stipulated in special terms and conditions. The new rules specify that construction should be completed 24 months after land delivery. This is different in language only to the previous contract. In both cases, the maximum period given from delivery to completion is 24 months. If the Assignee is unable to commence the construction on time, the application for extension should be submitted to the Assignor 30 days in advance. If approved, the extension should be no longer than three months, and the completion date will be extended accordingly. However, the new contract introduces a 36-month limit for the beginning of production (starting on the date of delivery). No such limit was previously specified. If the Assignee is unable to complete the construction on time, the application for extension should be submitted to the Assignor 30 days in advance. If approved, the extension should be no longer than three months. In addition, it shortens the time of extensions. Builders who could not meet the 18-month time before were able to apply for a 12-month extension. Under the new terms, extensions have been cut to three months. No specific requirement Clause 20 The sales revenue with the design capacity should be no less than RMB155 million per year, the tax output with the design capacity should be no less than RMB26.52 million per year, and the tax output per unit with the design capacity should be no less than RMB1,319 psm per year, within the five years after land delivery. Specific requirements on revenue and tax are stipulated in the contract. The new contract specifies revenue and tax targets for the use of the property. Previous contracts did not include these requirements. Clause 24 After paying the assignment charge of the state-owned construction land use right in accordance with this contract, and obtaining the certificate for the use of state-owned land, Assignee is entitled to transfer, lease or mortgage all or part of the state-owned construction land use right. Clause 26 Land use rights under this contract may not be wholly or partially transferred. This clause eliminates the ability to transfer usage rights for land, buildings or partial areas of buildings, which was possible under the old terms. It also introduces tighter control on any possible sale or financial transaction, as changes to capital structure or equity ownership must now be approved by the government. Clause 25 The transfer, lease, and mortgage contract of state-owned construction land use right are not allowed to violate the national law, regulation and agreements under this contract. Clause 27 En bloc transfer of land and properties under this contract should be conducted in accordance with provision (1) within this section: If the Assignee is unable to commence the construction on time, the application for extension should be submitted to the Assignor 30 days in advance. If approved, the extension should be no longer than 12 months, and the completion date will be extended accordingly. Properties within the boundaries of the assigned land under this contract may not be separately transferred by buildings, floor, or unit. Any change in the land user's capital structure or equity ownership should be approved by Assignor. (1) Apply to Assignor, consent by Assignor, and conform to relevant laws and regulations. (2) Assignor or administrative institution of industrial park has priority in the acquisition. This new clause goes farther in stipulating that any changes made to the ownership of land usage rights must be approved by the government, and that the government has the first right of acquisition in the case of a sale or transfer. Land and properties for en bloc should be implemented under the city's unified land transaction market. No specific requirement Clause 30 Before submitting the renewal application, Assignee should apply for the comprehensive assessment by the Committee of Baoshan Industrial Zone (administrative department of industrial management or zone management). If assessed as qualified, the Assignor should approve. The renewal of a land lease will require a Comprehensive Assessment by the relevant zone, though no information about what this includes or how it is assessed are given. No specific requirement Clause 42 Within one month of the company s target date for reaching its full production capacity, the administrative department of industrial management or zone management will check if actual production meets the previously stated production capacity. In the case that actual tax revenue does not meet the proposed tax revenue (but is at least 30% of the proposed tax revenue), the producer must pay a penalty equivalent to 80% of the difference between actual tax revenue and targeted tax revenue. This clause gives a zone the financial power to check that companies meet the production capacity and tax generation they outline in their proposal to acquire land. No specific requirement Clause 49 If the land use is illegally and seriously changed without authorisation, and the rectification is not fulfilled in due course, the Assignor has the right to terminate contract and recall the land usage rights without compensation. Changes on land use without approvals are strictly forbidden, and land in these situations will be reclaimed by the government. Source: Shanghai Bureau of Planning and Land Resources, and Research, Colliers International, Shanghai, 2015 Colliers International February 2015 Shanghai Sells First Land Site With Shortened Usage Rights 11

12 For further information, please contact: 63 countries on 6 continents United States: 146 Canada: 44 Latin America: EMEA: 84 $2.1 billion in annual revenue Lina Wong MRICS, CCIM Managing Director East and Southwest China Investment Services China lina.wong@colliers.com Carlby Xie MSc, MRICS Director Research China carlby.xie@colliers.com Colliers International Shanghai 16F Hong Kong New World Tower 300 Huai Hai Zhong Road PRC TEL million square metre under management 15,800 professionals About Colliers International Colliers International is a global leader in commercial real estate services, with over 15,800 Corporation, Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, colliers.com Copyright 2014 Colliers International. ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.