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The official land value appraisal system under the land-use rights reforms in China.

In a newly developed economy such as the one evolving in China, industrialization and increased economic activity may bring about substantial changes in the living standard of the local people. One of the more tangible changes comes from the real estate market. This can be observed from the real estate development in China's southeastern coastal cities, Thailand, and Vietnam. The major reason for the increase in demand for real estate is the increase in derived demand for land to build more industrial units: offices, retail space, hotels, and leisure facilities resulting from the economic growth. Moreover, land prices in these areas are relatively cheaper when compared with neighboring, more developed nations (e.g., Hong Kong, Singapore). As a result, investors both within and outside of the country can, with the same amount of capital, purchase more properties and development opportunities in these transitional economies.

With this type of foreign and domestic demand, the operation of the market mechanism is instrumental to the allocation of land resources to the most efficient uses. In such a case, the problem being faced in China is understanding the determination of land value in the real estate market. This is important to Chinese citizens because, prior to the recent reforms of land-use rights (LUR), land had not been a tradable market commodity since the Chinese Communist Party took power in 1949.

During the initial stage of the LURs some local authorities failed to establish a basis of measurement for land value. Consequently, some of the provinces or cities tried to set land price at an unrealistically low level when negotiating with investors to attract foreign investment funds to their particular region. This underpricing of land by provincial and city governments eventually led to substantial loss in the national state's revenue from the selling of the land-use rights. The mere existence of market activities did not guarantee that the state would be able to recover full land value from the sale of land-use rights at the beginning of the reforms. This is especially true because most of the transactions were conducted by private treaty and the local governments had the authority to set the land price at their will. This further motivated the state to speed up the establishment of a set of guidelines for the local authorities as reference in this very inefficient market.


LUR reforms started more or less officially in April 1988, when the Seventh National People's Congress amended Clause 4 of Article 10. This amendment allows "land-use" rights to be separated from the "ownership" rights to become tradable and transferable in the open market (by way of private treaty, open auction, or tender). Because land ownership is still with the state, what the reforms release is the sale of LURs with specific terms of duration. For instance, LURs for residential use are normally granted for 70 years and those for industrial use are 50-year leases. Nevertheless, under section 41, chapter six of the 1990 Ordinance of the Conveyance and Transfer of Land Use Rights, LURs can be renewed when the term expires upon payment of a renewal fee.

Because the land markets have been opened to investors, the government needs to establish land values in a market where virtually no comparison data are available. The authority came up with the idea that a market reference point of average land prices in each city should be compiled, so that the local authorities can have a set of guidelines when selling land to investors. This formulated the "benchmark price" (BMP) or "datum land price." This is the estimation of land value on the basis of various land grades (established by the local authority) for different land uses in the city. It also serves as an initial step by the authority to fix a price tag on land. The introduction of the BMPs is regarded as essential considering that land is sold collectively under a state monopoly primarily by way of private negotiation, which relies heavily on guidelines.

Reforms in the real estate market are different from other price reforms in the consumer goods markets in China, because prices already existed in the consumer goods markets before any formal price reforms were undertaken. Allocation of such goods was based on the planned operation as well as the price mechanism, although in a subsidized and distorted way. In the real estate market, however, land was allocated administratively. The conveyance and use of land was dealt with by means of application through the administrative channels. Land was not required to be valued in monetary terms. After the LUR reforms, the establishment of an efficient price mechanism to allocate land resources among different users is regarded as of the utmost importance.

In the past, the doctrine of state ownership of land stopped further conceptual development in the examination of land value in most socialist countries. Recently, China's land economists have become more flexible in interpreting and applying Karl Marx's ideas under the newly initiated LUR reforms. For instance, Bi, in Land Economics,(1) argues that Marx's ideas of absolute rent and differential rent do exist in mainland China, and the utilization of land should therefore be compensated by the payment of land rent. The most important implication of this change in attitude is the acceptance of the fact that land, like labor and capital, commands a price in the process of utilization and transfer.

BMPs thus are being established in various cities. The idea of this reference-point appraisal system comes mainly from the research of Hu, who regards valuation as a means of control over the property market rather than as an appraisal of economic performance in the real estate market.(2) What is desired is a system that can exert "control from the macro level and fine-tuning capability from the micro level."(3) Ideally, land value is seen as a means to achieve three functions: 1) to control the real estate market through price mechanisms; 2) to facilitate the transaction of LURs; and 3) to strengthen the management of the state's land resources.

According to Hu, land value is determined after three stages of assessment: 1) a BMP; 2) a land transaction base price (LTBP); and 3) a transaction price (TP). A BMP is the average price level established within a specific time period in a particular area or locality for a particular land use. It is set by the government land management departments and the state valuation committee according to the land transaction data as well as actual and expected revenue from land. It also provides a basis for the assessment of property taxes and capital gains tax. The BMP serves as the baseline assessment of average land prices in the neighborhood. It provides a guideline for negotiation of land price when a specific site is about to be bought or sold.


The LTBP is the price level determined by each party when the LUR is to be sold, transferred, or leased. It is estimated separately by both the landowner and the land user (i.e., potential LUR buyer). They will base their valuations on such factors as supply and demand of real property, supply and demand of LURs in the market, land revenue, planning regulations, locational differences, and prevailing state land policies. The LTBP is a reflection of both parties' idea of a hypothetical transaction price. It reflects the quality of land management and income-earning potential from a particular piece of land. It is based on the BMP, and fluctuates along the BMP. Unlike a BMP, however, it is determined by land management departments, valuation committees, real estate and housing departments, independent valuation agencies, banks, and financial institutions as well as both parties. This is because the determination process is part of the market process that involves both the seller (the state) and the buyer (the investor).

When both parties have concluded their own valuations, they will negotiate and agree on a contract price by which the LURs are conveyed from the state to the investor. This is the TP. It expresses the actual market exchange price level and forms the payment basis of the transaction. It establishes the price for a particular piece of land within a specific range of time and under the current market demand and supply, policy, and economic factors. After the transaction, the land management departments will register the TPs and take them into consideration when modifying BMPs in the future.

The three levels of the appraisal process are therefore linked together. The base level is the BMP, which is determined by the state. It provides the minimum land price in the neighborhood. From this level, buyers and sellers can adjust their appraisals on specific site values (LTBP) according to various micro factors such as size and location. This level is equivalent to the appraisals carried out by professionals for buyers and sellers in a market economy. At the final stage, it is the negotiation powers of both parties under the prevailing market conditions that determine the final market land price. This market land price will then be used as a reference when a new BMP level is to be assessed again in the future. Therefore, each level of appraisal can use the information provided by the preceding level. Theoretically, there is a coherent relationship between the three levels of appraisal process that takes into account the changes in the market.

The top section of Figure 1 represents the various considerations that will be taken into account when the BMPs are assessed. Cost analysis is the application of the cost approach to value land. Differential revenue estimate is based on the concept of differential rent. For instance, in 1985, the city government of Shanghai assessed the differential profit among sites in different locations. Based on the profit-earning potential of different enterprises and businesses on different sites, land is classified into different grades. This differential revenue approach mainly takes into account the effect of location. Expected revenue is very much related to the differential revenue. Apart from such differential revenue, it also accounts for various land taxes and land-use fees. Finally, market transaction prices are also compared and considered, and market demand and supply factors are analyzed.


This is the ideal approach for the measurement of BMPs, or the market average land prices in China. The effectiveness of this appraisal process, however, depends very much on the extent to which this system reflects the actual market activities. This is because BMPs are supposed to be relied on as a base that the local authorities can modify according to the specific characteristics of the site being negotiated, assuming the BMPs established represent the general market demand and supply situation.

In Shenzhen, for instance, the BMP appraisal process more or less follows the theoretical approach described previously. In addition to grading land into different zones for the purpose of determining BMPs, the local authority also applies the so-called delphi analysis, by which experts are called upon to rank these different zones under the following criteria:

* Degree of prosperity

* Physical and social infrastructure

* External communication

* Internal transportation facilities

* Town planning conditions

* Amenities

* Environmental and natural conditions

* Population density

* Security in the neighborhood

From all of these analyses, a breakdown of land price (for sale of land by private treaty) in the city was obtained for 1992, and is presented in Table 1.

To allow for market changes, there is an allowance of 20% fluctuation or variance among any uses in Use Type 1 in the same grade, while a 10% fluctuation is allowed among any uses in Use Type 2 in the same grade.

Table 1 represents the reference points for land sale by private treaty only. The practicality of the BMP rationale is challenged when compared with the actual market transaction. Market land prices deviate substantially from the BMPs. For instance, Table 2 shows the land sales in Shenzhen in 1991-1992 by way of open tender.

The substantial divergence between [TABULAR DATA OMITTED] [TABULAR DATA OMITTED] the figures used in the two tables represents the divergence in the market expectation of and potential from that of the local authority. One of the objectives of the formulation of the BMPs is to provide local authorities with a set of guidelines to determine a reasonable land price when negotiating with real estate developers for the conveyance of LURs. Table 1 in this case does not provide a realistic reference that reflects the actual market demand and supply situation. Of the 15 land sales, only one piece of land has a price within the range covered by Table 1. That means a number of market factors were excluded when the authority assessed the BMPs.

Such divergence is almost impossible to explain in terms of valuation theory, and there is an obvious mismatch in the assumptions of the BMP compilation and the actual market expectation. This is probably a common problem in all immature and transitional economies. This transitional problem is also evident from the existence of the double-track land-use system in China.(4) This double-track system allows on one hand the LURs to be sold in an open-market system (accounting for only a small portion of the land conversion process), and on the other hand allows them to be allocated to various government institutions and state enterprises without payment of land price, even after the LUR reforms have been initiated. Therefore, assessing BMPs by examining the differential profits of the existing land users may distort the actual income-earning potential of different sites. This is because some of the land users (e.g., state enterprises) who obtain land through administrative channels do not necessarily carry out the economic activities that reflect the highest and best use of those sites. Assessment of land value based on the information from these land users will therefore diverge from what the market should expect under a competitive environment, toward which China is moving slowly, step by step.

There is also the problem of price discrimination between different artificial submarkets. Because of the substantial wage and earning differential between local Chinese residents and foreign investors, the Chinese authority has divided the market, especially the so-called commodity housing units market,(5) into internal and external markets, each regulated by different sets of market prices. Foreigners cannot purchase internal market housing units, while local residents can purchase both. For instance, in January 1993 the average price for a residential flat in the external market in Shenzhen was about U.S.$168.8 per square meter(6) (the official exchange rate between U.S. dollars and yuan, the Chinese currency, is about 1 : 10). Again, this may distort the actual profitability of different locations.

Theoretically, the BMP system provides a method by which the state can provide baseline land values, thus allowing market operation to be carried out more easily. The three levels of appraisal process described here provide a consistent and coherent relationship between the government's effort in monitoring the market and the actual market performance. For the BMPs to expand from a baseline reference into a more representative analysis of the actual market, more frequent market data updates of the BMP tables are needed. This is not easy given the lack of a relatively efficient real estate market in China from which to collect information. Further, even if the BMPs are constantly updated by actual market transactions, there is also the problem of whether land-price records of land sold by open tender or auction, or those records of land sold under private treaty, should be taken into consideration. This is because land prices achieved under these two different means of conveyance diverge quite substantially. The following table shows the differences between the average land prices when land is sold by private treaty and when sold by open tender in Shenzhen:
 By Private
 Treaty By Open Tender

1990 $67 $305
1991 $76.9 $491.1
1992 up to July $76.9 $531.1

SOURCE: Chinese and Foreign Real Estate Times v. 25, no. 7 (1992).

NOTE: Figures are given in U.S. dollars per square meter. Exchange rate
between U.S. dollars and Chinese yuan: $1 U.S. to 10 Chinese yuan.

The divergence in the land prices achieved under different land sale procedures reflects the maturity and efficiency of the market. In any case, land price should be able to reflect future cash flow patterns of the particular site, even in a market where few comparables exist. In "Applying Discounted Cash Flow Analyses to Land in Transition," Keith comments that discounted cash flow (DCF) analysis may be one of the best techniques for appraising nonagricultural tracts in transition when few comparable sales exist.(7) The rationale of the DCF model is to examine the residual value of land from a more realistic and financial point of view. Land is more a financial asset than a management tool of the real estate market. This is also in line with traditional and established land economics principles. For instance, in Urban Land Economics, Ratcliff defines the market price of space as the expression of its productivity or of the forecasts of people with respect to its future productivity.(8)

Another unique characteristic of this state appraisal system is the fact that BMPs in China may include elements that may not be explicitly found in another economy, such as that of the United States. For instance, the BMP figures for Beijing in 1993 are shown in Table 3.

The BMP for a particular use at a particular land grade is obtained by the following formula:

BMP/sq.m. = (1) x plot ratio factor + [(2) + (3)] x plot ratio + (4) x adjustment factor + (5) or (6)


Adjustment factor = 2 when the sitting tenant to be resettled is a state enterprise, or 4 when it is a commercial or special land user

Plot ratio = Ratio of gross floor area to site area

Plot ratio factor = Value obtained by the following table

Plot Ratio Factor

1 or less 1
2 1.91
3 2.74
4 3.5
5 4.2
6 4.9
7 5.6
8 6.3
9 7
10 7.7

For instance, an average site of grade-one land for commercial use with a plot ratio of 7 when the existing tenant is a state enterprise may have a base land price roughly around:

U.S. $540 x 5.6 + [U.S. $84 + U.S. $35] x 7 + U.S. $860 x 2 = U.S. $5,577.00/sq. m.

In such a case, the average land price as appraised by the authority comprises several elements. They are the "value" of land; that is, the conveyance fee, the payment for infrastructure development in the neighborhood, and the compensation payment for the sitting tenants. Such a definition of land price may be very different from what is normally perceived as open market value in a market economy.(9) This is because land price normally should represent the discounted total future income obtainable from that particular site within town planning controls. The addition of the infrastructure development costs and the burden of resettlement to the land price directly does not resemble the normal flow of future income.

What is suggested by the BMP compilation is the conception that the production cost function of development land accounts for a major role in the determination of land price in China. This contradicts the established concept that value is not equal to cost. Moreover, it may create a conceptual problem: On the one hand, if the conveyance fee in the BMP table reflects the improvement of infrastructure and resettlement sum, the developer is actually paying double. On the other hand, if the fee does not include these factors, using market transaction records of land prices as input data for future compilation of BMPs may be a problem. This is because land prices achieved under normal transactions may not appear as a combination of these different elements, but more often as a lump sum.


The latest edition of the BMP table for Beijing (compiled in July 1993) states that the purpose of the compilation is to serve as a market control system, so that land will not be sold at too low a price. The BMPs also serve as reference points for both investors and the authority when individual pieces of land are being considered for conveyance. An increasing number of Chinese cities are in the process of compiling BMP tables for their localities.(10) There is little doubt that a reliable land value appraisal system needs to be set up in a transitional market like China. This concept is especially important to a market in which there are no track records of market activities. The idea of setting a baseline land price for reference in such a transitional market is useful and logical. It is the process by which the BMP compilation can, in the long run, merge with the development of the real estate market that should concern the Chinese authority.

The problem of the state appraisal system at this stage in China is not about which method or theory should be followed; this is merely a technical issue. The major problem is defining the reason for valuation to be carried out and establishing how it can be coordinated with the actual operation of the market. It seems that in a transitional economy, China's real estate market is operating within the general environment of a Socialist system. Efforts by state and local authorities to carry out a guideline land-price system, such as a BMP table, will invariably be affected by the dominant social-political perception of land value.

Thus, the success of the BMP concept will depend on the purpose of this system, whether it be for the assessment of property taxes, for the assessment of profit sharing between central and local governments, or for pure reference only. If an efficient system can be set up to input market transaction data into the compilation process of the BMPs in the future, a state appraisal system such as this may be one of the best ways to implement a market system in China.

1. B. D. Bi, Land Economics (in Chinese) (Beijing: People's University Press, 1991).

2. C. Z. Hu, On the Development, Methodology and Management of Land Value Appraisal Systems (in Chinese) (where published?: who published?, 1990).

3. Ibid.

4.Detailed discussion of the double-track land-use system can be found in the Report on Urban Land Use and Management in China, 1991 (Joint report by the Institute of Public Administration of New York and the Institute of Finance and Trade Economics of Beijing).

5. Basically, the housing market in China is divided into welfare housing units, which are sold at very low prices; and the commodity housing units, which are supposed to be sold freely like other market commodities.

6. Chinese and Foreign Real Estate Times (in Chinese) v. 31-33, nos. 1-3 (1993).

7. T. J. Keith, "Applying Discounted Cash Flow Analyses to Land in Transition," The Appraisal Journal (October 1991): 458-470.

8. R. U. Ratcliff, Urban Land Economics (New York: McGraw-Hill, 1949).

9. For instance, see the definition of market value given in Real Estate Appraisal Terminology, rev. ed. (Chicago: American Inst. of Real Estate Appraisers and Society of Real Estate Appraisers, 1981), 160.

10. For instance, both Haikou city of Hainan Province and Guangdong Province had their BMP tables published and made public in 1993.


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Ling Hin Li is a PhD student in the Department of Surveying, University of Hong Kong. His research involves land values in China's real estate market.
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Author:Ling, Hin Li
Publication:Appraisal Journal
Date:Jan 1, 1995
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