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“Rail + Property” Joint Development in China: The Shenzhen Case study
Jan. 16, 2015
World Resources Ins.tute
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BACKGROUND 1. Widened Funding Gap
Financing gap
Capital costs of new
infrastructure
Debt service
Operational costs of existing
lines
155
46
205
34.72
0
50
100
150
200
250
300
350
400
Capital cost Opera?on Cost
Opera?on revenue
Debt service
Gov's contribu?on
Example: cost structure of Beijing’s Metro system
Sources：Beijing DRC. Appraisal Report on Beijing Public Transit Cost
q The capital cost of urban rail transit system requires 1.5 trillion RMB investments between 2015-‐2020, and the pricing of the urban rail transit system alone cannot make the end meet.
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Debt Financing (50-70%)： • Bank loans • Corporate bonds
Gov.’s capital contribution(30-50%): • Land sales • General budget revenue
• The boarder city finance system that relies on land leasing is not healthy for urban development.
q The current transit financing prac?ce consists of government capital contribu?on and debt financing via government financing vehicles.
• Debt financing increases the financial liabili?es of the public sector and exposes local governments to financial risks.
BACKGROUND 2. Structural Problems with the Current Financing Prac?ce.
0% 1% 1% 2% 2% 3% 3% 4% 4%
2008 2009 2010 2011 2012 2020
net land revenue
capital investment of rail transit
% of GDP
Source：World Bank 2014. Urban China: Toward Efficient, Inclusive, and Sustainable Urbanization
capital cost of rail transit
BACKGROUND 3. Benefits of “Rail + Property” Joint Development
q Bundle urban transit and land development State Council released Direc?ve [2014] (37) on “Land Comprehensive Development in Suppor?ng Railway Construc?on” to encourage integrated land development at railway sta?ons.
q Mobilize private investments Strong poli?cal will and na?onal campaigns to promote pilots and guidelines on Public Private Partnership by the NDRC and Ministry of Finance.
q Rail + Property Development is s?ll in the pilot stage, not only facing ins?tu?onal and regulatory barriers, but also being confounded by the lack of knowledge.
q Excellence: champion experimental prac?ce, recognizable innova?on in planning, ins?tu?ons and opera?ons
q Scalability: common macro economic environment, na?onal legal framework and policies s?ll apply
SHENZHEN CASE
SHENZHEN CASE
1. Financial arrangement
2. Value crea?on
3. Value realiza?on
4. Value capture and realloca?on
Life cycle of land value dynamics
Urban planning Land policies Business opera?onFinancial arrangement
Strong mul?-‐agency coordina?on
FINANCIAL ARRANGEMENT
Gov’t
Project company (Metro company, or
consortium)
• Pre-‐rail land price • Payment in installments
Development rights transfer by agreement
Gov’t
• Aier-‐rail land price • Lump sum payment
Development rights transfer by Bid, auc?on, list
Other Interested bidders
Rail Plus Property Current prac?ces
q Major Barriers—The open market auc?on and upfront land payment affect the project company (metro company)’s financial viability and pose the risk on land development rights transfer.
Project company (Metro company, or
consortium)
• Aier-‐rail land price • Lump sum payment
FINANCIAL ARRANGEMENT
Gov’t
Shenzhen Metro. Co
Land prices
Phase II: Exclusive land auc?on + Land concession fee refund
p Full Land price refund p Exclusive land auc?on: lower land sale payment, appoint winners.
p Gov’s contribu?on: 70%à50%
Land price refund
Land development
rights
Land development
rights
Shenzhen Metro. Co
Gov’t
Phase III: In-‐kind land contribu?on as capital asset
p Gov’t financial contribu?on is replaced by land development rights in equal amounts.
p Project company use the appraised value of the land to raise funds in the market.
VALUE CREATION : PLANNING
q Transit oriented development holds the poten?al to achieve op?mal land use, and anain economic, social, and environmental goals.
q Major barriers—current planning prac?ce does not enable TOD：
1. Not market responsive: The government-‐led planning process fail to match the supply with the market demand, resul?ng in oversupplies of housing and/or shortages of ameni?es.
2. Lack integrated urban and transit plans: rail transit plan is not coordinated with urban master/regulatory plans, leading to lack of developable lands around transit sta?ons.
3. Inflexible regulatory zoning: The regulatory plan is too rigid to allow for up-‐zoning or changes of land uses in proximity to transit sta?ons.
VALUE CREATION: PLANNING 1. Market-‐responsive and Integrated Planning
Urban Planning
Urban Master Plan
Urban District Plan
Regulatory Plan
Urban Design
Site Plan and Opera?on Plan
Rail Transit Planning
Long-‐term Rail Transit Plan
Short-‐term Rail Transit Plan
Rail Transit Line Detailed Plan
Rail Transit Feasibility Plan
Inter-‐modal Transit Plan
Agencies/Organiza?ons
Government
Government
Government &
Project Company
Government &
Project Company
Government &
Project Company
Project Company
q Mul?-‐stakeholder engagement—allow project companies to par?cipate and make market-‐oriented adjustments.
q Integrated land use and transit planning process—link transit to urban plans to iden?fy land plots of greatest poten?als or reroute transit lines to access valuable land.
VALUE CREATION : PLANNING 2. Flexibility of Zoning
C1 (FAR *1.2)
C1 (FAR*1.6)
R2 R2 (FAR*1.4)
R2
S3
C1 SD
R2 Special District (SD)
R2
S3+C3
Set up TOD zones (FAR adjustment)
Set up Special Districts (FAR and land use adjustment)
Note: C—Commercial, R—residen?al, S– transport
VALUE REALIZATION: LAND POLICIES Ver?cal separa?on of development (air) rights
Metro tracks
Rolling stock depot
Transfer zone
Commercial and residen?al use
Ground
9m
15m
Land right by alloca?on (no year limits)
Land right by agreement (non-‐compe??ve, year limits )
Land right by listed auc?on (compe??ve, 50-‐70 years)
• Major Barriers—Land planned for urban transit facili?es is leased by agreement. Land planned for commercial development is sold by open auc?on.
• Realize land value increase not only relies on proper institutional designs, but demands business models and operations.
Business mindsets：
Become business savvy, understand the market well.
Shii the tradi?onal focus on short-‐term gains to long-‐term value crea?on.
Phasing of development：
Phase the ?ming of different R+P projects to mi?gate the risk of real estate market fluctua?ons.
Corporate finance and risk sharing：
Spread the risks and cost burdens through diversifying corporate funding sources and forming joint ventures with capable firms.
VALUE CAPTURE: BUSINESS MODEL
POLICY IMPLICATIONS 1. Taken together
1. Ins?tu?onal setup
2. Value crea?on
3. Value realiza?on
4. Value capture and realloca?on
Urban planning Land policies Business opera?onFinancial arrangement
Strong mul?-‐agency coordina?on
• Integrated transit and urban planning.
• Land use compa?bility and flexibility.
• Land banking.
• Cul?vate consul?ng capacity
• Introduce capable firms
• Promote fair compe??on.
• Legalize pilots. • Ver?cal separa?on of development rights
POLICY IMPLICATIONS 2. Enabling condi?ons
Market -‐ General trend of real estate market: booming or shrinking
-‐ Rela?ve demand or supply surplus of specific type of real estate development
-‐ The impacts of large scale supply on local property values
Policy -‐ City leaders’ poli?cal will and commitment
-‐ Trust and confidence in all par?es.
Capacity -‐ Sufficient in-‐house knowledge of R+P management and opera?ons
-‐ Possibility to obtain professional consul?ng services at affordable cost
Thanks!
