Occupier Options in China
The options that occupiers now have with regard to their industrial real estate requirements in China are much greater than they were even three to five years ago. The market, which was solely the domain of development zones, has now expanding to include private developers and investors from both China and abroad. There are many options, but the following are the most common:
- Rent or buy from a development zone
- Rent from a private local developer or investor
- Rent from a foreign developer or investor
- Buy land and build a facility
The value of logistics-related activities has long been overlooked by the Chinese government, which emphasizes attracting foreign production instead of distribution. Until recently, the government usually gave preference to manufacturing companies and charged more for land for uses it deems non-productive, including logistics.
As WTO increasingly opens up the logistics market in China over the next few years, logistics service providers will have much more freedom and flexibility in their options. With more choices and increased manufacturing in China, demand for modern logistics centers, distribution centers and warehouses, led by the multinational 3rd party logistics providers will increase.
There are 2 important trends over the past few years that have changed the landscape in China of the supply chain and logistics real estate in particular.
Land in China is either owned by the State or by collectives. Collective ownership arose out of the land reform movements in the 1950s, and remains relevant only for rural areas. All other land is held by the State with “owners” only holding rights to use the land.
There are two types of Land Use Rights in China: Allocated Land Use Rights and Granted Land Use Rights.
- Allocated Land Use Rights are indefinite usage rights subject to expropriation on demand and to limitations against leasing, mortgaging or otherwise transferring of the rights. Foreign investors are not permitted to occupy Allocated Rights land unless it is injected by a local party into a joint venture (and properly approved) or the Land Use Rights are first converted into Granted Rights.
- Granted Land Use Rights allow land to be used for a fixed period (50 years for industrial land) and approved purposes, in exchange for a fee to be paid to the government. Granted rights may be leased, transferred or mortgaged in the open market for a term not exceeding the term the remaining term that has been granted by the State. For most intents and purposes, granted land use rights are freely transferable.
China Industrial Market Background
China’s government has structured the industrial real estate market to encourage and concentrate foreign direct investment. In a number of “development zones” in China, the government has instituted expedited registration and licensing procedures to ease foreign investors’ entries into China. The government previously provided preferential tax policies to foreign companies, but with China’s entry into the WTO and pressure from local companies, most of the tax policies favoring foreigners have been eliminated in order to harmonize taxes among foreign and local companies. There are currently more than 2,000 zones located in China, including over 150 development zones in and around Shanghai.