Liu Zhi
Director of the Peking University-Lincoln Institute Center for Urban Development and Land Policy, and Member of the China City 100 Forum
The "Three Olds" Renovation model in Guangdong Province can be classified into two main categories based on the leading entity: government-led and market-led. The market-led category is further divided into five sub-categories: self-renovation by rural collectives, self-renovation by enterprises, village-enterprise cooperation, enterprise acquisition and renovation, and consolidation under a single entity.
The land value increment generated by urban renewal is the foundation for market participation. The market-led model for urban village renovation generally comprises three parts: the public welfare portion, the resettlement portion, and the financing portion, all of which are supported by the land value increment. Because market-led urban village renovation projects are not strictly public interest projects, demolition compensation is negotiated between developers and the original property rights holders. However, these negotiations are often time-consuming and have a low success rate. This is because villagers, influenced by news reports of people becoming multi-millionaires through urban village renovations, generally have very high expectations for compensation; on the other hand, developers seek to maximize profits by controlling costs. The huge gap between the two parties often makes it difficult to reach an agreement, prolonging the process and easily leading to the emergence of "holdout households." This problem is common worldwide; whenever fragmented property rights are consolidated into a large parcel of land for development through land assembly, holdout households can emerge.
The success of an urban village renovation project hinges on the negotiations between the developer and the original property rights holders. The general procedure for urban village renovation involves several steps. The first is planning, where the government maps and catalogs the areas, delineates renewal units, and determines the renovation model. As Professor Zhao Yanjing just detailed, the government needs to conduct extensive calculations in advance to decide which renovation model to adopt. If the market-led model is chosen, the next step is to introduce market entities, such as enterprises, village collectives, or village-enterprise partnerships. When introducing market entities, there are two key aspects: first, whether developers are introduced through a competitive process. Based on the experience of the "Three Olds" Renovation in Guangdong, competitive methods were rarely used in the early days, but now various localities generally adopt varying degrees of competition when introducing market entities. Second, whether a Floor Area Ratio (FAR) incentive mechanism is adopted. This practice is suitable for urban village renovation projects that are difficult and unprofitable, using FAR incentives to attract developers and capital. However, the problem this brings, as Professor Zhao mentioned earlier, is that it will increase the government's future expenditures on the investment, operation, and maintenance of public facilities. In current practice, this cost is rarely accounted for. After the developer enters, they negotiate with the original property rights holders to reach a compensation agreement, which is currently the most time-consuming step in urban village renovation. Professor Tao Ran just proposed some suggestions to make this step proceed more smoothly. Once an agreement is reached through negotiation, the subsequent tasks become much easier to handle, including demolition, construction, resettlement, and the sale of commercial housing. Based on current experience in Guangdong Province, these tasks are relatively smooth.
Holdout households are a global issue. The root cause lies in the fact that the overall real estate value of an entire renewal unit is greater than the sum of the individual real estate values, allowing holdouts the possibility of capturing a portion of the difference. The holdout household in Caiwuwei Village, Shenzhen, is very famous; during the renovation of Caiwuwei, only one building was left, delaying the entire project for over a year. A small white building next to the Trump Plaza building in Atlantic City, New Jersey, USA, is also a holdout property, with newly developed real estate built around it. The emergence of holdout households in China is not entirely unusual; the real issue is how to effectively resolve the holdout dilemma.
It can be estimated that the renovation of urban villages will become increasingly difficult in the future. Many urban villages that were easy to renovate have already been transformed, such as those with good locations, large footprints, loose land use conditions, and high expected value increments. Dachong Village in Shenzhen is a typical example. The remaining urban villages are much harder to renovate due to poor land conditions, high net density, little room for value increment, and a large number of illegal constructions. To reduce obstacles in future negotiations, two issues need to be addressed: first, information asymmetry, and second, unclear rules.
Information asymmetry refers to the fact that villagers and developers possess different information during negotiations, with developers holding more information regarding costs and returns. For villagers, the more accurate and transparent the information, the smoother the negotiation should be. However, for developers, the less transparent the information, the more advantageous their position to push down compensation during negotiations, and to maximize the FAR when negotiating with the government. Faced with this situation, villagers can only adopt a tit-for-tat strategy: negotiating for a while, then resisting, stopping negotiations, and then resuming. This process drags on for a long time and ultimately leads to the emergence of holdout households.
Unclear rules refer to the lack of explicit regulations on key issues during compensation negotiations for urban village renovation, which increases the arbitrariness of the negotiations. Urban village renovation often requires dealing with many historical legacy issues. For example, some villagers own multiple buildings, meaning they have several homesteads, which is inconsistent with the original allocation method of one homestead per household. There are also many cases of illegal constructions, such as seven- or eight-story buildings built on homesteads, exceeding the originally permitted 3.5 stories. How should these illegal constructions be compensated? Without clear rules, treating illegal and legal constructions equally would be unfair to compliant villager households. We need to think more about the rules: should they be more flexible or more rigid? This requires careful consideration. In current practice in Guangdong Province, there are no very explicit rules; specific compensation is determined through negotiations between developers and villagers, which appears flexible and pragmatic. However, while this flexibility helps the government avoid some troubles, it also brings new problems. The issue of compensation expectations rising with the tide, mentioned by Professor Tao earlier, is also related to the rules being too flexible; villagers see what compensation prices were offered in previous urban village renovations and now demand even higher prices. Because of these factors, urban renewal will become increasingly difficult in the future.
How can we solve these two problems? Let me first give an example of land readjustment in the Taiwan region, which is somewhat similar to our urban village renovation. Land readjustment involves taking inefficiently used land, redefining its boundaries through exchange and consolidation, enhancing public facilities, and transforming it into neat, regular parcels suitable for efficient use, which are then redistributed to the original landowners. Similar to our urban village renovation, land readjustment also considers the public welfare portion, the portion redistributed to original property rights holders, and the portion allocated for commercial use. There are two models for land readjustment: public (government-led) and private (self-organized). In the public model, the government plays a crucial role: it selects the readjustment area, drafts the plan, conducts surveys and measurements, makes land price assessments, calculates costs, and formulates a profit distribution plan; then it enters the stage of building demolition and engineering construction; followed by cadastral arrangement, rights clearance, handover, settlement, and financial settlement. All these tasks are undertaken by the government. The work done by local planning departments in planning and financial balancing, as mentioned by Professor Zhao earlier, is very similar to the work done by some city governments in the Taiwan region during land readjustment.
The experience of public land readjustment in the Taiwan region tells us that official real estate value assessment is an important foundation for land readjustment; the success of land readjustment indicates that all parties recognize the official assessment. In the market-led model of the "Three Olds" Renovation in Guangdong, there seems to be no universally recognized real estate assessment value to serve as the basis for negotiation. When negotiating, the government, developers, investors, banks, and property rights holders should all have a universally recognized professional assessment result, which would make the negotiation process much smoother. Therefore, I believe that to solve the problem of information asymmetry, we can leverage the government's credibility and adopt the real estate assessment results from government appraisal institutions as the basis for negotiations in urban village renovation.
To solve the problem of unclear rules, some rules need to be established. For example, establishing demolition compensation rules to resolve historical legacy issues. This rule must first consider the principle of fairness, meaning that any windfall gains or unexpected losses that defy common sense are unfair. The locations of homesteads in urban villages vary, and therefore their market values are also different. However, I believe that the compensation principle for homesteads should be location-independent, treating all values equally. This is because when homesteads were originally allocated, they were distributed based on the principle of fairness. At that time, it was rural land, and no consideration was given to the specific location of a particular homestead or its market value. Therefore, in urban village renovation, for homesteads, a uniform compensation standard per unit area should be adopted, and only one homestead should be compensated per household. In some urban villages, due to historical reasons, some families hold homesteads belonging to relatives and friends who have emigrated overseas. A single household may own more than two buildings. They receive very high compensation during urban village renovation, actually obtaining compensation beyond the reasonable scope, because the homesteads of emigrated relatives and friends belong to the collective, not the individual. Illegal constructions are also caused by historical reasons. In terms of compensation standards, discounted compensation should be considered rather than full-price compensation; otherwise, it would be unfair to compliant households.
Finally, returning to the issue of holdout households, this is indeed a thorny problem, but are there flexible workarounds? We can look at engineering solutions at home and abroad. First is the holdout household at the Haizhu Yong Bridge in Guangzhou, where a "holdout" is sandwiched in the middle of the approach bridge and has even become an internet-famous tourist spot. This is a pragmatic example of bypassing the holdout through engineering methods, solving the traffic problem first, and leaving the holdout issue to be resolved later. On the streets of New York and Seattle in the US, one can see holdout properties sandwiched between newly built skyscrapers; in some cases, parts of the new buildings are even built on top of the holdout properties. This kind of engineering approach is worth considering; otherwise, the renovation and development of an entire real estate project, involving the interests of hundreds or even thousands of villagers, would be hijacked by just one or two holdout households, delaying the entire project by several years. The actual loss from this would be enormous. We do not necessarily have to complete negotiations with holdout households before proceeding with the project; we can adopt flexible engineering methods to solve the problem.
Source: This article is compiled based on the speech delivered by Liu Zhi, Director of the Peking University-Lincoln Institute Center for Urban Development and Land Policy, at the Autumn Forum 2020 of the China City 100 Forum, reviewed and published by the author.
