Rail Plus Property Development in China: the Pilot Case of Shenzhen
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WORKING PAPER RAIL PLUS PROPERTY DEVELOPMENT IN CHINA: THE PILOT CASE OF SHENZHEN LULU XUE, WANLI FANG EXECUTIVE SUMMARY China’s rapid urbanization has increased the demand CONTENTS for both housing and transport, leading to a continuing Executive Summary .......................................1 need for urban transit. Cities face significant challenges 1. Introduction ............................................. 2 in financing the growth of urban transit infrastructure. The current practice of financing urban metro or subway 2. Financing Urban Rail Transit Projects in Chinese projects through municipal fiscal revenues (partly from Cities: The Current Situation ............................. 4 land concession fees) and government-backed bank 3. Implementing R+P in China: Opportunities loans is not only inadequate to meet the demand, but and Challenges ........................................... 6 also exacerbates deep-seated problems like mounting municipal financial liabilities, urban sprawl, and urban 4. Analytical Framework ................................ 10 encroachment on farmland. To address these problems, 5. Shenzhen Case Study ................................ 12 Chinese cities need to diversify the ways in which they 6. Summary and Recommendations ...................29 finance urban metro projects. Appendix............................... ...................... 37 Endnotes 38 In a variety of approaches that aim to alleviate the financ- .................................................. ing problems of local governments, Rail plus Property References ...............................................39 (R+P) development offers a promising solution. R+P development leverages the partnership between the public Working Papers contain preliminary research, analysis, sector, transit companies, and developers to coordinate findings, and recommendations. They are circulated to planning and financing of transit systems and adjacent stimulate timely discussion and critical feedback, and to real-estate developments. By capturing the land value influence ongoing debate on emerging issues. Working appreciation that follows transit projects, R+P can partly papers may eventually be published in another form and or completely fill the funding gaps in constructing costly their content may be revised. metro projects. Compared to financing tools such as infrastructure bonds and bank loans, R+P provides a new stream of funding for the construction and operation of Suggested Citation: Xue, L.L., Fang, W.L. 2015. “Rail Plus public transit facilities without creating additional debt Property Development in China: The Pilot Case of Shenzhen”. Working Paper. Beijing: World Resource Institute. Available burdens. In addition, when properly implemented, R+P online at http://www.wri.org/publication/rail-plus-property- can lead to sustainable transit-oriented development in development-in-china. Chinese cities, mitigating various structural problems such as the government’s over-reliance on land concession fees. WORKING PAPER | March 2017 | 1 Despite these opportunities, the broad adoption of R+P Issue consistent legal documents at the local level that development in Chinese cities is still hindered by wide- ▪ loosen restrictions and provide a legal foundation for spread conceptual misunderstandings, lack of political will, R+P development. and multiple legal, regulatory, and institutional limitations. Reinforce local capacities to manage sophisticated ▪ This paper analyzes the experience of the coastal city of projects through external consulting services, dedi- Shenzhen as a successful example of R+P experimentation cated institutions, and research funding sources. in China. Through semi-structured interviews, field visits, and a literature review, the study unravels the integrated To implement R+P, the following areas require particular approach employed by Shenzhen that contributed to its attention: success. The city’s integrated approach includes innova- tive financial arrangements, integrated urban and transit First, R+P is a risky undertaking. Being risk-conscious and planning, land policy reforms, savvy and demand-driven safeguarding against potential macroeconomic, real-estate business operation at the corporate level, and institutional market, and institutional risks from the very beginning is mechanisms that facilitate multi-stakeholder dialogues. essential for the success of a project. Furthermore, our research indicates that the successful implementation of R+P also depends on strong political Second, reasonable risk-sharing between government and will, a booming real estate market, mature capital mar- the metro company is key to incentivizing the company kets, and a capable and willing private sector. while ensuring the public benefit. In China, this means that R+P schemes are not one-size-fits-all; they should be The study also underscores the necessity of legal, regula- innovatively tailored. tory, and institutional reforms at both the national and municipal levels to enable the implementation of R+P. Third, R+P is a long-term undertaking, and does not offer At the national level: quick wins. It requires persistent top leadership, constant evolutions of funding arrangements, and continued opti- Reform the current land legislation to permit leasing mization of development proposals. It is also necessary ▪ out land-use rights around transit stations at different to match developments with market demand, improve prices and in installments based on metro projects’ institutional safeguards (and coordination mechanisms), funding gaps and metro companies’ cash flows. and strengthen government oversight and enforcement. Amend the land legislation to allow for-profit develop- ▪ ments above and around transit stations. 1. INTRODUCTION Reform the government-led urban planning process China is currently experiencing a rapid upswing in urban- ▪ through relevant planning legislation and guidelines ization. By 2030, 70 percent of the country’s population to facilitate integrated land use and transit planning will be living in cities (Development Research Center of and transit-oriented development. the State Council and World Bank 2013). The influx of rural-urban migrants and the increasing traffic gridlock in At the local level: cities have created demands for housing and transit ser- vices. How to make sustainable urban development finan- Promote cross-departmental coordination and dia- cially viable is a real and immediate challenge facing city ▪ logues among different departments and developers to decision makers. Limited funding is a major constraint match projects to market demand. that prevents cities from closing the fiscal gaps in transit Improve local urban planning and transit planning sys- infrastructure needed to meet soaring demand. With the ▪ tems, and establish local, market-responsive planning exponential growth of urban transit systems, continued regulations to allow for pro-transit-oriented develop- reliance on governmental fiscal revenues or government- ment zoning codes and private-sector engagement. guaranteed loans as major sources of funding is becoming increasingly inadequate and less sustainable. At the same Create multiple layers of land development rights for time, the long payback periods and low returns on invest- ▪ a single piece of land, and link different land develop- ment typical of urban transit projects make it difficult to ment rights to mixed land uses to facilitate transfer of attract private investment. the rights. 2 | Rail Plus Property Development in China: The Pilot Case of Shenzhen Value capture is one powerful tool capable of driving ects, R+P can partly or fully fill the funding gaps of these sustainable urban development. State-owned land in costly projects. On the other hand, the need to maximize China is a valuable asset as is the management of urban land-value increments around transit stations ensures the land resources. However, current planning structures and dense concentration of housing and employment oppor- financing practices used to plan and fund transit projects tunities in these areas. This dense development further in China result in many missed opportunities to create and boosts transit ridership and increases transit’s farebox capitalize on land premiums that result from improved revenues, thereby strengthening the financial performance transit services. In a strong property market, transit of transit projects. Hong Kong, Tokyo, and Singapore have projects can lead to land-value appreciation, especially for successfully demonstrated the benefits of R+P projects. land surrounding transit stations. Particularly in China, For example, R+P development has enabled Hong Kong’s the inelastic demand for housing spurred by rapid urban- MRT Corporation to break free of reliance on government ization and an undersupply of urban transit services has operation subsidies and enjoy a certain degree of return created uniquely favorable conditions for value capture. on investments (Suzuki et al. 2015). However, the lack of coordination between the financ- Inspired by the experience with R+P development in Hong ing and planning of transit projects and nearby property Kong, a few mainland Chinese cities like Shenzhen and developments means that the land-value increments Tianjin have adapted R+P for their own transit projects. have not been effectively captured and redistributed. For However, because of multiple legal, regulatory, and insti- example: tutional barriers, success has been limited. On