Property, Talking Point

A nation of homeowners?

Why a dispute in Wenzhou has rattled property investors across China

Wenzhou skyline w

The people of Wenzhou are voracious buyers of property but their ownership rights are now in question

Before the People’s Liberation Army took control of Shanghai in 1949, China’s Communist Party promised that ‘patriotic capitalists’ could keep their businesses and contribute to the rise of a ‘new’ China.

Indeed, when troops first marched onto the Bund at midnight on May 25, they were told not to demand food and shelter from residents. Legend has it that locals only realised that Shanghai had fallen when they opened their doors the next morning and saw PLA soldiers sleeping on pavements outside.

For some Shanghai capitalists this persuaded them not to flee. But the rapprochement didn’t last long. In 1952 there was a crackdown on ‘capitalistic crimes’ including bribery and tax evasion. Business owners were forced to report their wrongdoings to government officials, as well as their own staff. According to Southern Weekend, nearly 900 businessmen opted to kill themselves during the first four months of the anti-capitalist campaign. Private property also ceased to exist: urban land was nationalised and in the countryside it was distributed among rural collectives.

The private sector only slowly reappeared when Deng Xiaoping took power and launched his 1978 economic reforms, although it wasn’t until 2007 that protection for property ownership was written into law. Almost a decade later the assumption from China’s urban homeowners is that their property rights are enforceable. Indeed the country’s growing middle class has invested much of its wealth in bricks and mortar, expecting to profit from their property.

But could a widely reported story on a land title dispute in Wenzhou have thrown some of these assumptions into doubt?

What has happened in Wenzhou?

Wenzhou is home to some of China’s most buccaneering businessmen. Wenzhouers were some of the first to open private firms in the post-Mao period and they have earned a reputation for investing in businesses across China – as well as for driving up property prices in other cities, thanks to their swarm-like buying practices.

Now events in the city’s own real estate market have caught the attention of China’s property investors on a national basis. Earlier this month, Wenzhou Daily reported that a homebuyer was close to buying an apartment when the local land bureau refused to register the transaction because the land lease of the property in question had expired.

To complete the deal, a premium of close to Rmb300,000 ($46,200) was required so as to “extend” the land use agreement.

Residential properties in China typically carry a 70-year lease. But some of the older developments in downtown Wenzhou were granted 20-year titles when the land was first sold. According to Wenzhou Daily, the land leases of more than 600 apartments are going to expire next year, and the number will increase to 1,700 by the end of 2019.

The newspaper then interviewed Zhang Shaoqing, an official from the local branch of the Ministry of Land Resources, who said that owners of these apartments must pay extension fees to have their titles properly renewed.

The official even came up with a metaphor to help homebuyers understand the concept. “An apartment on a 70-year lease is like a brand new car. Those expiring in two or three years are like second-hand vehicles which have been driven for more than 10 years,” he said.

The central government hasn’t established nationwide rules to deal with this kind of situation, Zhang suggested, so the Wenzhou authorities decided they would calculate the additional fees as if the land was being put on sale again.

“We have to commission an independent third party to value the property. We then collect the land premium and extend the land use permit,” Zhang told Wenzhou Daily. “In this way the land premium could easily cost around one third of the transaction price of an apartment.”

How have homeowners reacted?

The Wenzhou Daily article soon became one of the most-read items on China’s major news portals. “The news has sent shockwaves across the country,” National Business Daily noted. In particular, the dramatic phrase “one-third of the property value” exploded in weibo and WeChat circles, two of China’s most popular social media platforms. ‘Wenzhou model’ and ‘land lease expiry’ also became the most searched (and most commented on) topics online.

Netizens were quick to interpret what the Wenzhou case could mean for their own finances. “I spent all my savings to buy an apartment. When I am just about to finish repaying the mortgage, I have to start worrying about the expiring land lease,” one homeowner complained on Sina Weibo.

“So we are back to 1956. The government can simply nationalise our private properties at will,” suggested another.

Wenzhou officials are in a difficult position on the land lease issue. If they had decided to extend land titles for free, they could have been accused of giving away state assets too cheaply (technically, land is still ‘owned’ by the state according to the constitution – that is to say, when someone buys an apartment they are purchasing a lease rather than the freehold).

But the brouhaha over the additional land fees has now forced the local government to clarify Wenzhou Daily’s original report. And in a sign of backtracking, it told Xinhua that it is seeking advice from “higher authorities” for clearer policy guidelines.

Are there any precedents?

In the late 1980s and early 1990s it wasn’t uncommon for local governments to grant land leases with shorter durations, especially when developers were strapped for cash. In these earlier cases the local governments were reluctant to impose more punishing premiums because they were worried about suffocating the local real estate market (a crucial source of fiscal revenues).

The trade-off was straightforward: developers paid less for the land, but the leases for the land they got were shorter as a result.

Most of this happened before the property boom began at a national level. So it is those cities that set the early pace in residential property development that have been first to encounter the issue. Wenzhou is one of them. Shenzhen, China’s oldest special economic zone, is another. A few property owners there started experiencing problems about 15 years ago. In that case most were given an option to renew their expired titles by paying 35% of a ‘baseline land value’, calculated on a historic rate far lower than the prevailing market price, Guangzhou Daily has reported.

More than 5,000 homeowners in Qingdao faced a similar challenge in 2009, when their 20-year leases expired. There, the city government chose to procrastinate rather than set a precedent. “It was been seven years but the problem remains unresolved,” Shandong Business Daily reported this month. Only a few of the out-of-title units have since been sold, the newspaper says, although the transaction prices have usually shown hefty discounts to those of comparably sized homes with ‘proper’ 70-year titles.

What does China’s Property Law say about land leases?

In fact, the problem was foreseen years ago when legal experts were framing legislation to enshrine the right to private property in 2007. Step forward Article 149 of the Property Law: “The term of the right to the use of land for building houses shall automatically be renewed upon expiration.”

This short but crucial clause is now the subject of greater debate. On one side are those that believe the stipulation is clear: the state cannot reclaim land even when title expires, and property owners can continue to live in their homes without additional cost.

The opposing intepretation is that the clause was kept deliberately vague, and that the law doesn’t make clear whether the automatic renewal comes free of charge.

“Many authorities say the law has more than a few loopholes,” state broadcaster CCTV admits. “And many local governments have had to roll out their own regulations before the law has been better explained.”

Property analysts are now demanding that the National People’s Congress – China’s lawmaking body – give a more authoritative interpretation of Article 149 as soon as possible.

How big a problem is it?

China’s property boom didn’t really begin in earnest until about 15 years ago, so it will be many years before the first major wave of residential land leases expire.

That said, the uncertainty could become a factor for purchasers in the secondary market in the not-too-distant future – and nervous homeowners are already looking to the decision in Wenzhou as an indicator of how the government might handle the issue.

Local governments are another interested party because renewals of land leases could become a much-needed revenue source.

“This has undermined trust in the rule of law, because as time passes an increasing number of people will face a similar situation, and they too are asking whether the law will be able to defend their interests or whether it will be bent in the interests of local governments,” an op-ed in the China Daily also suggested.

Xinhua thinks a major distinction should be drawn between ‘good’ leases (the 70-year variety) and the far less common 20-year type.

“Obviously the land sale income from a 20-year title is different from a 70-year one. When a 20-year lease expires, the local government’s fiscal income would be affected should it not ask for a renewal fee. But it is unfair [to do the same] for those homebuyers who have paid for a 70-year title,” the news agency claimed.

Since the Property Law was enacted in 2007, real estate has become a major asset class for millions of investors. Given the recent surge in home prices in major cities (values in Shenzhen have climbed more than 50% year-on-year), it is time for the central government to sort out the uncertainty, the People’s Daily agrees. “The 70-year deadline remains a big concern for homebuyers who may be anxious over an unaffordable land use renewal fee in the future. A proper system in respect to land sale and the transfer of land use titles is a key part of our country’s economic reforms.”

CCTV took a similar view, saying that the issue is already concerning property investors. “How can you sell an apartment, or buy one, if you can’t begin to estimate what its value will be 40 or 50 years from now?” the broadcaster asked.

Will there be clearer rules?

One legal expert told Southern Weekend that it made sense for the drafters of the Property Law to keep Article 149 ambiguous.

“Should the land use renewal be free? Should it be a one-off levy or a perpetual tax? How long should any new extension be? There were simply too many clashing opinions at the time,” he told the newspaper.

“At the end of the process the lawmakers decided ‘time’ would be the best solution. Seventy years is a very long time indeed… After several decades, as our country prospers, the government may no longer need to collect the land use renewal fee. That’s why the Property Law has left the key question unanswered. ”

Reaction to the Wenzhou situation may force the government to abandon this ambiguous stance.

That said, one area of consensus among the drafters of the legislation, Southern Weekend has suggested, was the principle that the state’s interests should not override those of individual property owners. Thus the stipulation that renewal be ‘automatic’ implies that land repossession by state authorities is illegal.

Others have argued that the practicalities of charging hundreds of millions of homeowners for new land leases are too daunting for the government to contemplate. “In 40 years time, if a lot of homeowners refuse to cough up for a new land lease, do you really think the government would dare to drive them out of their homes?” asked one home owner on Zhihu, a discussion website.

Another theory is that the potential levy might only apply when an out-of-lease property changes hands – meaning the existing homeowner would face no renewal fees so long as they live in it.

Still, this doesn’t answer the uncertainty about what it might cost should they want to sell, nor whether a nationwide levy might have a knock-on effect on sentiment in the wider market. Certainly, if the fee is set at a third of the property’s current value – the figure that emerged from Wenzhou this month – the howl from homeowners will be heard across China.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.