Largely due to it’s communist DNA the Chinese government has never ‘sold’ land to anyone. Concerns about a backlash against disposing of communal property to individuals led them in the 1980’s down the fudge-tastic path of granting limited use leases.
For residential property these were/are for 70-years, for industrial property they’re for 50-years and for commercial property they’re for 40-years. If I can mix metaphors some; the fudge therefore is now close to coming home to roost.
Gregory M. Stein, Associate Dean for Faculty Development, Woolf, McClane, Bright, Allen and Carpenter Distinguished Professor of Law at the University of Tennessee College of Law, Knoxville, Tennessee has had some thoughts on how the government might respond to this issue.
There are four potential solutions:
Charge lessees the full value of their property to renew
Charge lessees somewhat less than the full value of their property to renew
Charge lessees considerably less than the fair market value of their property to renew or, more likely, make payments on an ongoing basis, or
Charge lessees nothing to renew
Professor Stein plumps for option three as the most likely outcome as options one, two and four could generate considerable unrest, a commodity the Chinese government prefer to keep in short supply. Property owners the world over accept the need for regular payments to their governments and Chinese owners are unlikely to complain (too much) if the rates set are reasonable.
Not only is it probably the safest option it’s the one most likely to produce most all round benefit. Government gets a more stable revenue source than from lumpy, cyclical land sales, lenders get comfort that collateral has ongoing value, owners are inclined to maintain their properties in good order and first-mover developers collect significant gains as what were speculatively acquired portfolios become rule-of-law protected assets.
The last point, if the Professor is right, would of course be splendid news for Chinese property stock investors (Ahem!). There’s little in their present valuations that suggests much good news on the horizon so this presents the kind of risk asymmetry we value-hounds are always alive to. Here’s hoping.
Happy Sunday
[The paper (an easy to read and math-free 39-pager) can be downloaded free at the SSRN website via the following link http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2565563]