For many years China has been implementing separate policies for urban and rural land, under which they 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-agricultural purposes is monopolised by the government. Rural land to be used for urban construction needs to be expropriated from farmers first and then sold to land users by the government.
The government benefits from this process: it pockets the differentials between land premiums paid by land users on the one side and compensation paid to farmers plus infrastructure development costs incurred by the government on the other. Farmers do not have a say in the expropriation process and their property rights are not fully protected.
The dual-track land policy in recent years has contributed greatly to the high-speed industrialisation and urbanisation of China. But the 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 PRC Ministry of Land and Resources (MLR) allowed Beijing and Shanghai to start a pilot programme on building and leasing residential properties on rural land. This move is a significant breakthrough in the context of the existing land policy and may open the door for farmers to participate in urbanisation.
Under the pilot programme, counties or villages may use rural construction land (non-agricultural land) to build and lease residential properties, to which counties or villages will own the title.
The first pilot programme in Beijing was launched at Tangjialing Village, Haidian, where 100,000 square metres of residential properties will be built and leased. Upon the completion of the 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 programme in Shanghai will start in Chongming, Qingpu, Baoshan and Fengxian, building and leasing residential properties with total gross floor area reaching 1 million square metres.
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 the 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 the government.
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. The 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.
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.
There are several advantages for renting rural land or setting up a joint venture with farmers. First, because there are no land premiums, taxes and fees to be collected by government, land cost is low compared with renting and acquiring stated-owned land. Secondly, the majority of rural land included in the pilot programme is located in 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. Thirdly, the government will grant certain tax incentives for building and leasing residential properties on rural land. Finally, there is a great need for low-income housing in the market.
In May 2012, the MLR will finalise a list of cities which will be allowed to implement the pilot policy. It is expected that the policy will spread beyond Beijing and Shanghai in the near future.
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