Land for home rental, commercial conversion

By Mu Song, Zhong Lun Law Firm
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As the central government is putting in place a housing system that encourages both housing purchase and renting, the rental housing sector is presenting blue ocean opportunities that attract a diverse range of market players, including property developers, brokers and hotels, marking the dawn of a new house rental era.

In this article the author discusses the categories of land to be used for developing rental homes and the policy requirements of “commercial-rental conversion” projects by reviewing relevant policies.

穆耸 MU SONG 中伦律师事务所合伙人 Partner Zhong Lun Law Firm
穆耸
MU SONG
中伦律师事务所合伙人
Partner
Zhong Lun Law Firm

CATEGORIES OF LAND FOR USE

Policies have been introduced to encourage land support for rental housing, especially by providing both new land and existing plots of land in urban areas for rental housing developments. Following is a summary of key regulations concerning permitted categories of land for rental housing developments, and some case studies.

State-owned construction land

(1) Transferred land. According to the Several Opinions of the General Office of the State Council on Accelerating the Cultivation and Development of the Rental Housing Market (document No. 39), “Where land for construction of a new rental housing project is transferred through a public auction, the transfer proposal and contract must specify the permitted period of time during which the property is held for rental purpose.”

Our search of publicly available information online finds that most state-owned construction land use rights offered through public auction and used for rental housing projects have been acquired by property developers with strong financial strength. For example, in December 2016, Vanke acquired two plots of land in Xibeiwang town, Haidian district, Beijing at a public auction, which required the completed commercial apartments to be offered exclusively to tenants, but not any buyers.

(2) Granted land. According to the Guiding Opinions on Accelerating the Development of Public Rental Housing, lands for construction of public rental housing projects to be supplied to affordable housing applicants must be provided through granting. Pursuant to the Notice on Using the Public-Private Partnership Model to Promote Investment, Construction, Operation and Management of Public Rental Housing, public rental housing projects may be developed or constructed by taking advantage of public-private partnerships.

In connection with any categories of rental homes other than public rental homes that are built on granted lands, the government has introduced a policy known as the Notice on Accelerating the Development of Rental Housing Market in Large and Medium-sized Cities with Net Population Inflows (document No. 153), which allows state or SOE-held homes on granted and other lands to be operated and managed by entrusted home rental companies under service purchase models.

Collective construction land. It is specified in the document No. 153 that “pursuant to the unified deployment of the Ministry of Land and Resources and the Ministry of Housing and Urban-Rural Development, mega cities and large cities may launch pilot programmes of constructing rental housing projects with collective construction land”.

As far as the construction and operational mechanism of collective rental housing projects are concerned, the Pilot Programme of Using Collective Construction Land to Construct Rental Housing Projects makes it clear that “collective economic organizations of villages and towns may develop and operate collectively-owned rental housing projects, either on their own or through joint venture or equity participation.”

According to the letter of intent of Daxing district, Beijing on contractual transfer of collectively owned business
construction land use right for the construction of rental housing project, dated
6 March 2018, the agreement on the land use right for a rental housing project located in Yinghai town was assigned to Beijing Huiying Heng’an Property.

Based on publicly available information, Vanke will take part in the construction of the project with a proposed investment of approximately RMB1.586 billion, representing 49% equity in the project company (with the remaining 51% equity held by Yinghai Collective Holdings Enterprise).

COMMERCIAL RENTAL CONVERSION

In view of the substantial capital needed for new rental housing developments and the long payback period of upfront costs due to low capital turnover of rental housing projects, some rental home developers prefer renovating and converting existing commercial homes to rental homes.

Document No. 39 sets out basic requirements for “commercial rental conversion” projects (i.e., projects that convert commercial homes to rental homes): “converting commercial homes and other properties to rental homes in compliance with regulations is allowed, provided that the land use period and plot ratio must remain unchanged, and the intended purpose of land must be adjusted so that the land being used becomes residential land.

“The tariffs of utilities upon adjustment, including water, power and gas, must be subject to tariffs for residential use. Leasing existing homes having been renovated pursuant to state and local home design specifications is also allowed, provided that the original fire compartmentation, safety and evacuation plan and fire separation facilities must not be changed during the renovation process, which must ensure the integrity and effectiveness of all fire facilities.”

Except for the above-mentioned requirements at state level, local governments also provide further guidelines, particularly on the qualifying conditions of “commercial rental conversion” projects and relevant procedures. For instance, the Work Plan for the Rental Housing Pilot Programme of Nanjing provides well-defined qualifying conditions for local “commercial rental conversion” projects.

It says that they must be “completed but unsold, and unoperated commercial housing projects with substantial numbers of unoccupied apartments, located in positions near subway stations and with well established living facilities, but with distance from city centre or sub-centres … which can be converted to rental homes according to relevant stipulations”. Another example is Foshan, which establishes explicit procedures for “commercial rental conversion” projects.

CONCLUSION

The rental housing market is expected to win favour from diversified parties in the coming years, given the policy supports and tailwinds for this sector. We hope that the national and local governments will introduce new rental housing guidelines that are more specific, holistic and operable, so that the sector will develop with stronger support, ensuring that “homes are for living in, not for speculation”.

Mu Song is a partner at Zhong Lun Law Firm

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