A CONVERSATION WITH C. Y. LEUNG, DIRECTOR OF JONES LANG WOOTEN (HONG KONG)1
AUGUST 31, 1988
ZRJ: Shanghai has started a pilot program for paid acquisitions of land usage rights, or you might call it land leasing. Mr. Leung, what impressions do you have of Shanghai’s trials in this area? And how are they viewed outside China?
CYL: The significance of reforms of the land–usage system lies not only in increased fiscal revenues. More important, they embody the degree of reforms and opening up. Many people abroad have taken notice of the plot of land in Hongqiao that Shanghai has just leased out: it is the first piece of land in China where usage rights have been acquired by foreign investors through market means. Many people are saying that Shanghai has taken the first step in leasing land, and this is an indication both of its determination to reform and open up and of the improvement in its investment environment. Compared with cities in the interior, Shanghai has done quite well in taking land development seriously, in tangible construction and in the “seven connections and one leveling.”2 However, Shanghai is also doing more comprehensive work and developing more quickly than other cities in intangibles, that is, in “soft” conditions, including policies, laws, bidding documents, market publicity, and auction organization. This shows that there is a lot of talent in Shanghai so that when things are done, they are done quite properly. These “soft” conditions are very important to people in other countries. I believe that if future work is well organized, land prices in Shanghai will continue to rise. This is the assessment of those of us in the real estate profession.
Jones Lang Wooten of Hong Kong has branches in over 40 places around the world. Now our offices in the United States, Europe, and Australia are all asking about land leasing in Shanghai. The banking, legal, and real estate sectors abroad are all paying a lot of attention to Shanghai. You received six bids for your first piece of land—that’s quite a few. We’ve had over 40 auctions in Hong Kong this year, and on average there are only three to four bids each time. Overall, your land price can also be considered reasonable, though it was higher than most people expected. Many people felt in particular that Shanghai has already acquired a definite amount of know-how in land transfers: they thought your bidding papers and documents were quite rigorously written and understandable. This shows that Shanghai has gotten off to a good start in its land-leasing pilot program, and its significance already goes beyond that of the program itself.
ZRJ: When he met with me, Mr. Hu Fa Kuang3 of Hong Kong asked, “Was the price of that land in Hongqiao really US$28 million? Were you colluding with the buyer?” I told him that price was reached through competitive bidding.
CYL: There were also various comments about this in the Hong Kong papers. Losing bidders or those who might bid in the future all hope to keep current land prices low. I think that as long as open market means are used to lease out land, market price levels will find themselves after a while and the market’s credibility will be even better.
ZRJ: We want to step up our reforms of the land-usage system. Mr. Leung, what suggestions and ideas do you have for Shanghai in this regard?
CYL: Compensation for land usage is the broad trend. At present, enterprises in China don’t factor real estate expenses into their production costs. This doesn’t reflect the value of land resources. It creates unequal competition as well as wastage of land. If you don’t lease land to foreigners and only let them do short-term joint ventures and collaboration, it will not only encourage foreign investors to engage in short-term operations, it will also not be conducive to their operating and managing according to market principles. Real estate itself is a type of long-term, high-priced investment. To the greatest extent possible, you should use approaches that are in broad international use. I think the method Shanghai is using for land leasing and transfers is basically the same as that in Hong Kong as well as the real estate markets in most parts of the world. This path has very good potential.
However, in order to expand and speed up land-leasing trials, I think you first have to focus on developing the “soft” conditions. Although Shanghai is already doing better in this area than other cities in the interior, from a perspective from outside China, there are still three issues you must pay attention to.
The first is the issue of matching laws and regulations. Right now many cities in China have started to lease land, but their laws and regulations aren’t all consistent. I think consistency is a very important principle. Take, for example, land-ownership relations: the relationships from the central government on down to local governments and enterprises should be spelled out in legal forms—economic contracts, deeds, and so forth. It should also be made clear whether the city government or the district government represents the state as landowner. In some large cities in other countries, land administration and management powers are quite centralized. Even in Hong Kong, only the Buildings and Lands Bureau, which was designated by the governor, has the power to approve land leases, while land suboffices at the district level are only in charge of supervision and management. Also, Shanghai can introduce more laws and regulations related to land leasing, such as registrations, sales, transfers, recoveries, relations between primary and secondary landowners, relations between landlords and tenants, tax rules, and so on. The clearer the laws, the more investors will feel they are protected and the more they will dare to come invest.
Related to laws and regulations is the question of land-usage formats. Currently, regarding land use, the interior of China only has clear regulations on land leases. There is still some confusion about other formats. For example, it’s possible to obtain land-usage rights through joint ventures and collaborations, and there can also be real estate development. However, the cost of obtaining land-usage rights through land leases is very high. This sort of inequality cannot continue over the long term. I suggest first settling on two or three formats over three to five years, and then transitioning over a fairly long time to fully compensated land use. In Hong Kong right now, apart from formats for nonprofits, social welfare agencies, public interest undertakings, and public housing—which are allocated land by the government—land used for all other projects must be leased.
ZRJ: We are currently studying several questions of principle in this area. The land use of foreign investments in nonindustrial projects in Shanghai—such as hotels, offices, apartments, mixed-use buildings, and residences marketed abroad and to expatriates should all be put on the path of land leases. Shanghai’s relevant regulations are already very explicit: land leasing will be conducted by the city’s Bureau of Lands on behalf of the city government, while the districts participate in land management. At the same time, we need to motivate all districts to participate in early-stage development and prepare sites. They can receive proportionate shares of the total lease [income]. In the future, other land usage of an operational nature will also have to gradually move onto the path of compensated use.
CYL: The second thing is that you must do good market surveys. During the bidding for Hongqiao, one company came to us hoping to get materials analyzing the Shanghai land market—it was willing to pay over HK$500,000 for such a study. With detailed materials on this subject, investors would be much bolder in decisionmaking, bankers would also be glad to make loans for mortgages, buyers would have greater interest, and land prices would also be higher. All major cities in the world compile property reports that list the areas and construction progress of all types of buildings, current building rents, sales prices, and rental rates. These are updated and published every three to six months. This way, the real estate market will be relatively stable, and government management and adjustments in this area won’t be done blindly. Because this sort of work wasn’t done initially in Taiwan, the Philippines, Indonesia, and Thailand, their markets are now very large, and it would be very difficult to do this now.
Shanghai definitely has the conditions needed to do good work on market statistics and information. Our company could do such a study together with Shanghai and also use foreign channels to publicize it. This would also be very good publicity for Shanghai in creating an image of opening to the outside.
The third thing is the training of human resources. The real estate sector touches on a great many areas. In Hong Kong, surveyors are divided into estate surveyors and quantity surveyors, valuers, and auctioneers. Lawyers are indispensable in real estate sales, and there are also many organizations of middlemen and brokers. Shanghai should have a group of people and agencies essential to a real estate market system that are organized along professional lines. Of course, first and foremost the government must have a group of people who are well-versed in these areas and who can draw up policies and be involved in management. This is because once the real estate market is opened up, you will immediately be facing a number of the world’s real estate veterans and without such preparations, you will be at a disadvantage. Shenzhen has already sent some people to Hong Kong to study and receive training. Although Shanghai already has a considerable foundation, it still must be adequately prepared.
ZRJ: Laws and regulations, market information, and human resources—these are all very important “soft” conditions and should be given very high priority in our considerations and arrangements. We can start doing a market survey right away. Mr. Leung, I hope you will identify some experts from Hong Kong and elsewhere around the world who will offer us guidance. The land departments must hurry up and assign people from various areas to study laws and policies and to do a market survey. We should organize training as soon as possible, including going to Hong Kong for training and internships. At the same time, we must pay attention to running the pilot program well, to summing up experiences and constantly improving through practice. What factors are considered in Hong Kong in setting land prices?
CYL: Right now, land prices in most areas of Hong Kong are three times higher than those in the Shanghai Hongqiao Development Zone. However, land prices aren’t predetermined; rather, they are established through market transactions. At any given time, the same types of buildings will naturally fetch different prices depending on their location, and then people will be able to extrapolate. Internationally, land prices are very seldom based on unit land area; they are usually based on the land price of the floor area of each building on that land. Because buildings are what are sold in real estate transactions, the prices of land with different plot ratios will differ.
In Hong Kong, prices are higher for land used for commerce, hotels, luxury residences, offices, and banks, and lower for industrial use. Most industrial development zones in the world cannot directly recover their development costs through land prices. They can only make up the difference through future tax revenues. The same is true for small villas because the land price for such buildings cannot be too high, yet land development costs are high and they might become unaffordable.
ZRJ: Mr. Leung, what next steps do you think Shanghai should take in land leasing?
FYI: For the past few days, I’ve been discussing this with leaders of the city’s Office of Land Leasing. Right now, Shanghai should take care to lease land according to demand because at any given time, market capacity is a fixed value. If you lease out too much land, building prices will fall and land prices will follow; that’s why market surveys are a prerequisite. Some people are suggesting that the plot ratio in the Hongqiao Development Zone be increased. In fact, this will only increase the economic benefits from this piece of land, but it will not increase market capacity. Conditions are already in place at the Hongqiao Development Zone. If you continue leasing land there, it might be easier for such work to progress.
There are two possible scenarios for land-price trends in the next phase. In the first one, a second piece of land will sell for less than the first one. If that happens, the buyer of the first piece will regret it, banks that have already made mortgage loans will tighten up when they see land prices falling, and those who come later will be hesitant. The other possibility is that the second piece of land sells for a better price than the first, or there may be a slight rise and steady growth. Then the buyer of the first piece will be very pleased; those who come later will psychologically feel that those who buy early will gain the most, and banks will also feel confident about lending. You should therefore try to make the second scenario happen. To keep land prices from falling, in addition to good economic accounting, the supply and demand of land must be coordinated. The city government should also exercise centralized control over policies for foreign investments in the real estate market, as this will give people a sense of security.
ZRJ: The Foreign Investment Commission and the Foreign Economic Relations and Trade Commission are the gatekeepers for real estate projects involving foreign capital, and we have already started studying management principles. Under the precondition of ensuring basic stability in land prices, we will continue to focus tightly on land-leasing pilot programs. This will, on the one hand, increase the impact abroad, and on the other hand it will accumulate funds needed for economic construction and urban rebuilding.
CYL: I think that if you want to both meet market demand and also increase fiscal revenues, charging “land premiums” is a method to consider for joint ventures and cooperative ventures. Currently, most such ventures have a contract term of only 15 to 20 years. Once the contract period ends, the buildings all belong to the Chinese party and the land is taken back. However, the life span of this type of building is much longer than these term limits. If you permit the foreign parties to continue to operate for 30 to 40 years and ask them to fully pay the land and building premiums now, this would not affect current market demand, nor would it increase the city government’s investment in infrastructure construction. However, you would immediately receive the revenue, and this would also motivate the investors to do a good job of maintaining and using the existing buildings. That’s why “land premiums” should be feasible.
Xia Keqiang:4 The crux of the problem here is that the Chinese parties in joint ventures feel that when the contract expires, the buildings and land will be theirs, so the resistance is mainly from the Chinese side.
ZRJ: I think we must resolve this problem. The Chinese parties use their land-usage rights as equity, but they did not obtain those rights by paying for them. Therefore, when the contract expires, the land-usage rights and the associated real estate should belong to the government and not to the enterprises or units. Of course we can give Chinese units compensated usage, or allow them to use economic means to obtain land-usage rights and associated real estate. First we have to clarify land-usage rights, then propose a plan for “land premiums.” On this matter, I would like to ask the city’s Bureau of Lands, the Office of Land Leasing, and the Foreign Investment Commission to jointly draft some regulations. These will be approved and issued by the city government and, at the same time, be recorded with the Municipal People’s Congress. On this basis and after conducting a pilot program, we will further revise and improve the regulations and then submit them to the People’s Congress to be legislated on.
CYL: I’ve come to Shanghai several times but am still rather unfamiliar with the region as a whole. Given the first land-leasing pilot program, foreigners are still confident about the Hongqiao Development Zone. If Hongqiao focuses on construction, it will become a very attractive place.
In Taipei, I saw an international trade exhibition hall. It was eight stories high and had many display booths inside where samples of some export products like light industrial goods, daily necessities, Chinese paintings, and local products were exhibited. I think a similar commercial exhibition hall could also be built in Hongqiao.
ZRJ: I already discussed this issue a few days ago at the Hongqiao Development Zone. In the United States, I also saw a similar international trade center—it was a beautiful building. We can also build an international trade center in Hongqiao. The city’s Construction Commission should adjust its investment plans and concentrate first on doing a good job with these development zones. Utilities for infrastructure should be put in place quickly. The magnetic tape factory in the Hongqiao Development Zone should be moved out quickly. Appropriate adjustments should be made to the land used by foreign consulates in the Hongqiao zone, and we can have some foreign-operated stores selling imported goods for daily use.
Strategically, we must proceed in two steps. First, we should complete the development zones we have already spent money on as soon as possible; lease out land there, accumulate experiences, and let a market take shape. Second, extend the successful experiences to Pudong and apply them there. We have to correct the type of thinking that regards all land as leasable. Actually, not all land can fetch high prices—we might even lose money on industrial land. Also, a zone cannot have only high-priced projects—there must still be a land-use plan that includes other types of projects. Therefore the idea that the development of Pudong must rely mainly on land leasing is incorrect. Initially, we must use loans from the World Bank, the International Monetary Fund, and foreign governments for infrastructure construction, in order to create favorable conditions for building a “New Shanghai.”
CYL: Mr. Mayor, I fully agree with your view. After preliminary conditions are in place, the same plot of land can fetch a very good price. If a zone doesn’t offer various types of land-use plans, it will not mature. In developing many new zones, Hong Kong takes employment, population, commerce, and social welfare into consideration. There must also be sufficient population density in order to promote the economic development of an area.
ZRJ: I think that for its next step, Shanghai must focus on developing “soft” conditions. At the same time, while paying attention to balancing supply and demand and maintaining land prices, we should focus hard on pilot programs for land leases. Things that must be done for this should be done quickly, and money that should be spent must be spent. We must allocate a sum of money to the expenses incurred by “soft” conditions, including publicity, advertisements, consulting, and so on. A certain proportion of the income from leases should be set aside to ensure this work is done. The city’s Office of Land Leasing must come up with a work plan and then focus on leasing for the second half of this year and for next year according to this plan.
CYL: Regarding the format of your work in the next step, I suggest that you not conduct bid negotiations behind closed doors. After information about the land is made public, someone will come to negotiate a bid. You can propose a price to him and after this is agreed to by both sides, a market auction is conducted. If he makes the highest bid, you give it to him; otherwise there is open competition. The Hong Kong government uses this method, which is quite fair.
At the same time, you must pay attention to developing the domestic market. Most of the consumers in a real estate market should be local enterprises and local people; otherwise the market will not become large. China must also pay attention to separating the markets for domestic and foreign capital in order to prevent the market chaos that could ensue from implementation of different policies.
ZRJ: The direction of reform of the land-use system is already very clear, and the State Council will soon issue related regulations that have been approved in principle. Although Shanghai already has a pilot program, many issues still need to be studied and improved upon. However, we cannot wait—we must work hard on expanding the pilot program. Mr. Leung, you may still have many other comments and suggestions. Perhaps you could propose a plan or an idea for our reference.
1. To meet the needs of reform and opening up, China began in the mid- to late 1980s to borrow from the experiences of Hong Kong and other places in land leasing, and to do trial explorations of paid land usage of state-owned land. At that time, C. Y. Leung was appointed adviser to Shanghai’s leading group on reform of the land-use system.
2. The “seven connections and one leveling” referred at that time to connections for water, power, gas, communications, rainwater drainage, sewers, and roads, and to the leveling of sites.
3. Hu Fa Kuang was then a member of the Hong Kong Legislative Council and chairman of Ryoden (Holdings) Limited of Hong Kong.
4. See chapter 23, note 6.