Understanding Industrial Land Use Rights in China
Find out what you are buying when you purchase industrial real estate
Many investors interested in China's property market have heard horror stories of land which could not be legally transferred, or of deals falling through because of a lack of necessary land use rights. When selecting a location, investors should be aware of how land use rights work in China, and how to make sure they are buying the appropriate rights to a site.
While the system used in China for land use rights is different from that in many Western countries, it can be understood through some simple investigation, and it is similar in many ways to leasehold systems used in some more developed markets.
What You Are Buying
Notwithstanding the recent recognition of private property ownership in the constitution, it is fundamental to the Chinese socialist system that land is publicly owned and therefore there is no outright private ownership of land in China. Land either belongs to collectives or is state-owned.
Land which forms part of a collective is usually used for agricultural purposes. It needs to be acquired from the collective in order to be converted into State owned land for which Land Use Rights may be granted.
Users are granted contractual rights to use and profit from designated land, in the form of “Land Use Rights”. For the purpose of this discussion, the word “user” or “owner” is used to mean the registered owner of the land use rights.
There are two types of grant of land use rights: “allocated” or “granted”.
Allocated Land Use Rights
Many state-owned entities are provided with land by the government in the form of allocated land. Allocated land use rights are granted usually for specific purposes related to the welfare or utility of the public, such as military sites or infrastructure sites. Allocated land use rights may not be freely transferred, mortgaged or leased without the prior approval of the relevant land administration bureau. Allocated land use rights have no set term and may be subject to expropriation by the government on demand. Foreign investors are not permitted to occupy Allocated Rights land unless it is injected by a local party into a joint venture (and properly approved).
In some cases, allocated land can be converted to Granted Rights. This conversion involves the payment of associated fees to the government and is subject to government approval (and such approval can often be withheld depending on government development priorities).
Granted Land Use Rights
In the past, land use rights were initially granted by government through bi-lateral agreement – where contracts are entered between the State and the owner, without auction or tender. However regulations now dictate that all Land Use Rights should be granted by way of a public auction or tender.
When a commercial entity obtains land from an appropriate government body (through auction etc), a contract for the sale of land is initially signed stating the price, the use and the duration of the grant. An initial land grant premium is payable for the land use rights, together with an annual ground rent. Once the land use fee is paid a formal Land Use Right certificate is issued by the local land bureau for the property clearly stating the intended use and duration of the grant.
Granted rights may be leased, transferred or mortgaged in the open market during the term of the grant. These rights are still dependent on the land being used in a manner substantially consistent with the purpose stipulated when the grant was originally approved by the government, so buyers should be careful that the rights they are purchasing were not granted on the basis of some other purpose, such as agricultural land being offered for industrial purposes.
Can My Company Buy Land Use Rights?
Over the last several years the government has taken steps to improve the transparency of land use rights sales. Once land use rights have been sold to a private entity, use rights can then be transferred on the open market, creating more transparency for the market value of the land. The upshot of this is that if your company is in the property development business, or is building a chip fab plant or other large scale facility, then participating in a land-use rights auction may be feasible. Most investors, however, should direct their efforts at re-purchasing land use rights from an industrial zone or other seller.
How Long You Are Buying It For
The term of land use rights varies depending on different land use purpose. The legal system allows users to acquire the rights to develop on a piece of land and retain the structures on it for periods of 40, 50 or 70 years, depending on the specific use. However, for industrial use Land Use Rights duration is usually 50 years.
What Happens Next
Land use rights can be renewed at the end of the initial term, subject to application to and approval by the land administration bureau.
The procedure for renewing land use rights are set out as follows:
- The owner must submit any application to the State at least one year before expiration.
- The land administration bureau reviews the application and, unless there are conflicting public or social issues, the application to renew the land use rights should be approved within a reasonable time.
- Following approval, the owner will be required to pay a land grant premium and sign a new land grant contract. The terms of the land grant contract and the amount of the land grant premium will be determined by relevant regulations at the time. Ownership of buildings and structures on the land remain with the applicant.
- If the owner of the land use rights does not submit an application for renewal of the land use rights, the land use rights will expire. No compensation is payable to the owner in such circumstances, and ownership of any structures on the land would revert to the State without compensation.
- As the history of granting of land use rights is relatively brief, there have not been any land use rights due for renewal at this time.
The Future of Land Ownership in China – Freehold?
At the present stage, there have been no reliable indications that the nature of land ownership in China will change from the existing system, although more land may become available to be granted land use rights.