Tao Ran
Professor, School of Economics, Renmin University of China; Member of the China City 100 Forum
Thank you to the China City 100 Forum for the invitation. The recent round of large-scale macroeconomic easing by the government has once again led to rapid housing price increases and housing regulations in some cities. If cities in population-inflow regions such as the Pearl River Delta and the Yangtze River Delta cannot effectively supply land in good locations, it would be tantamount to wasting the favorable environment of macroeconomic easing.
Taking the Pearl River Delta as an example, the current housing prices in many cities in this region have long made the renovation of many urban villages and old residential communities valuable for demolition and reconstruction. Therefore, this round of macroeconomic easing provides the best opportunity for many cities to carry out demolition-and-reconstruction renewal for urban villages, urban fringe villages, and old residential communities. Once this type of renewal is successfully implemented, not only will the urban landscape be significantly improved, and the asset value and living conditions of the original property owners in the renewed areas be substantially enhanced, but local fiscal revenue will also effectively increase, providing a solid financial foundation for upgrading urban infrastructure and public services. Meanwhile, developers, while obtaining substantial development profits, will also effectively increase the supply of urban housing, industrial land, and industrial space, achieving industry-city integration. Clearly, this is a sustainable win-win situation.
However, this win-win situation is often difficult to achieve in the current urban renewal practice in the Pearl River Delta. Whether it is the "Three Olds" Renovation or general urban renewal, many old area renovation projects have encountered severe game-theoretic dilemmas and time traps. The so-called game-theoretic dilemma here refers to the fact that the three-way strategic game among property owners (villagers, residents, and holders of collective properties, etc.), development enterprises, and the government often fails to achieve a cooperative equilibrium during project implementation. In particular, holdout households lead to slow demolition, and overly time-consuming government approval procedures inevitably create a time trap in urban renewal. Many renewal projects take a long time without seeing the end in sight. It is normal for a project to take five or six years, and some projects have made no substantial progress even after ten years.
Why has a potentially win-win situation turned into a lose-lose-lose for developers, property owners, and the government? The key lies in the major flaws in the existing demolition negotiation game mechanism, which makes it difficult to reconcile the interests of all parties involved in the renewal game. Coupled with the over-complication and excessive time consumption of the current urban renewal process, the result is that the game-theoretic dilemma in current renewals cannot be effectively alleviated; instead, they reinforce each other, ultimately leading to slow progress and low efficiency in urban renewal.
How to solve the dilemma of slow urban renewal speed? Here, we propose a strategy of "Two Competitions and One Spatial Relocation" for the future. The first competition refers to the inter-area competition among various renewal areas, as potential land suppliers, to join the annual renewal plan based on the level of support for the demolition and compensation standards. The second competition occurs after the first competition is completed and the areas selected for the annual renewal plan are determined; it involves various developers, as potential land demanders for area renewal, competing for the renewal projects based on their renewal plans, land premium payments, and supporting investment attraction targets. The "One Spatial Relocation" refers to, on the basis of obtaining support from the majority of relevant property owners, making full use of general farmland contiguous to the renewal area, or collective industrial land near the renewal area, or even relatively contiguous and easily demolished plots within the area itself, to advance financing development and resettlement property construction (in whole or in part) first. This aims to minimize the possibility of a few holdout households interfering with the overall renewal process. Then, through the joint efforts of the government, developers, and other property owners who support the renewal, using a combination of carrots and sticks to centrally deal with the few holdout households, the comprehensive renovation of the area is finally achieved.
Specifically, the approach to strengthening competition on both the supply and demand sides of land is as follows:
First, formulate a relatively unified market-oriented demolition and compensation standard for the entire district, including standards for both collective and individual properties. Then, conduct the first round of property owner voting in each potential area. Based on the voting results, rank all areas within the policy coverage by their level of support. The top-ranked areas will be included in the government's renewal plan for the next year and will directly receive policy support for related planning, infrastructure construction, and public service facilities.
Once this cross-area ranking work begins to operate, it will, in principle, be conducted every year, including re-identifying potential renewal areas and re-ranking their support levels. This continuous rolling determination and ranking mechanism will comprehensively stimulate the sense of competition among all potential renewable areas within the policy coverage and the sense of urgency among all property owners. At the same time, it prevents the renewal speed from being too fast, which could lead to a situation where the real estate market cannot absorb the supply.
Second, for the areas included in the annual renewal plan after passing the first round of inter-area competition, select relevant working parties (such as third-party working groups or early-stage service providers) to complete the survey of existing individual and collective properties in the area at once. Then, invite planning institutes and multiple potential developers to provide competitive area planning and unit planning proposals. The relevant working party will then determine an optimized plan based on sufficient communication with the government and property owners (villagers, village collectives). On this basis, a second property owner vote will be conducted on the area planning and unit planning proposals, as well as the specific demolition and compensation plans for individual and collective properties, to quickly gain the support of the majority of property owners while locking in the remaining few holdout households.
Third, introduce cooperative developers through government bidding to promote old area renovation. The final winning bidder for the old area renovation will be comprehensively determined based on factors such as the land premium the developer can pay, the public facility land they can contribute, and the enterprises they can attract for investment, followed by comprehensive implementation of the renewal.
At this stage, the government launches bidding to introduce cooperative developers for the old area renovation projects. During the bidding, the government can communicate directly with multiple potential developers regarding relevant information about all property owners who have agreed in the renewal area and the few remaining holdout households. After comprehensively evaluating this information, each developer participates in government-led competitive negotiations. Developers propose to the government the land premium they can pay, the public facility land they can contribute, supporting investment attraction conditions, and other obligations they are willing to fulfill. The government then selects the final winning developer based on the conditions proposed by each developer through competitive negotiations. Since at this point both the government and the developers have understood the information about the holdout households and their distribution, all parties have more symmetric information regarding various issues such as how high the execution risk of the renewal project is, the approximate cost of dealing with holdout households, and roughly how many property owners who originally agreed might renege later. Therefore, the government gains more initiative in the competitive negotiations with developers.
Depending on different goals, the government can consider implementing one of the following two bidding models, or a combination of both:
The first is the pure residential-to-residential renewal model. Under this model, the government does not focus much on introducing industries during the renovation, but mainly considers land transfer fee revenue and public welfare land contributions. The second is the synergistic renewal model combining investment attraction and old residential area renovation. In this model, in addition to completing the residential-to-residential renewal of the area, the government also has the goal of introducing high-end manufacturing and service industries that can bring future tax revenue and employment to the local area. In fact, in many places, especially city governments with underdeveloped industries or a strong need for industrial upgrading, there is a certain need to obtain higher immediate land transfer fees, but there is an even greater need to upgrade the local industrial structure and consolidate the foundation for the city's long-term development. In this case, if the simultaneous renovation of industrial upgrading and old residential areas (old residential communities and urban villages) in urban renewal can be promoted and achieve mutual assistance, it will strongly promote industry-city integration and promote the sustainable development of the city's economy, society, and environment.
The aforementioned model of competition between land suppliers (renewal areas) and land demanders largely alleviates the problems of frequent emergence of holdout households, the lack of incentives for the government and other property owners to cooperate with developers in demolition, and the renewal falling into game-theoretic dilemmas and time traps.
The areas included in the annual renewal plan through the first step of support ranking competition are themselves the areas with the highest support for the existing demolition and compensation standards, so the number of holdout households is the smallest. The relatively unified demolition and compensation standards also effectively stabilize villagers' expectations, avoiding the adverse situation where demolition and compensation standards rise with the tide and demolition becomes increasingly difficult over time. In particular, once the renewal areas to be covered by the annual plan are effectively selected through competition among land suppliers, and then competition is carried out among land demanders (developers) regarding land premiums, public facility land contributions, and investment attraction conditions, it will greatly help the government achieve higher immediate land transfer fee revenue, public supporting facilities, and industrial development goals.
In actual renewal operations, having only the above two competitions is not enough, because even if the method of annual competition among suppliers to be included in the renewal plan can reduce the probability of holdout households appearing, it may not completely eliminate the negative impact of the remaining few holdout households on the overall financing development and reconstruction resettlement. This is because a very small number of holdout households can completely lead to an excessively prolonged negotiation time, making it difficult to launch the implementation of the renewal project, or making it difficult to fully complete it once launched. So, how to more effectively solve this problem?
We believe that local governments should consciously look for corresponding spatial relocation space within or near the renewal areas, and use various flexible means such as planning adjustments to more effectively eliminate the negative impact of a few holdout households on the launch and completion of renewal projects. At the same time, more targeted investment attraction plans should be designed based on the land conditions of the renewal projects. Only by making full use of spatial relocation space and simultaneously promoting competition in both land supply and demand directions can the full effect be played, and the effect of using old area renovation to promote investment attraction can be truly reflected.
Let me give an example. Suppose there are currently 1,000 mu of construction land in an old village, of which 500 mu are contiguous homesteads and the other 500 mu are relatively contiguous village collective property land. The traditional old area renovation operation model is to work on these 1,000 mu of construction land. Generally speaking, since it does not involve the demolition of individual villagers' homesteads, as long as the developer is willing to pay reasonable related transition period fees, the consent of the village collective and the majority of villagers can be obtained to demolish the 500 mu of collective industrial land. However, in the vast majority of cases, the resettlement and development land for this area will definitely exceed 500 mu. Therefore, merely demolishing the collective industrial land is not enough to complete the task. This means that the developer must obtain the support of the vast majority of villagers for the demolition of their personal homesteads to smoothly launch the renewal work. Once a few holdout households appear and are relatively scattered, the renewal work may face major challenges.
But if the village also has a certain amount of general farmland (non-basic farmland), say 400 mu, then as long as the location conditions are suitable, it is entirely possible to use this part of the general farmland, together with the aforementioned 500 mu of relatively contiguous collective industrial land, to carry out financing development and resettlement property construction simultaneously. As long as the support of the vast majority of villagers for the demolition and compensation plan for individual and collective properties is obtained through prior negotiations, this part of the general farmland can be expropriated first (in the land expropriation, not only will land expropriation fees be paid to the villagers, but corresponding reserved land quotas will also be given to the villagers at the same time, or this part of the quota will be directly converted into the area of renewed collective properties or cash). At the same time, the collective industrial land will be demolished, and then financing plot development and resettlement property construction will be carried out simultaneously on this 900 mu of vacant land. After the resettlement properties are completed, the owners on the homesteads can directly move into the resettlement properties, and the government will then reclaim the vacated homesteads into farmland.
The aforementioned spatial relocation is essentially an operation of the "linkage between the increase and decrease of construction land" (urban-rural construction land quota linkage). This not only has a policy basis but also has relatively mature practical experience in various places. However, in the "Three Olds" Renovation in the Pearl River Delta, this policy has not been fully and effectively utilized to solve the difficulties in demolition negotiations. Once the government consciously utilizes the linkage policy, it will very effectively solve the demolition negotiation difficulties encountered in urban renewal in areas with general farmland, greatly accelerating the renewal.
Although the above case of the linkage operation is an ideal one, its logic can be completely extended to other renewal operations where land conditions are not so ideal. For example, some renewal areas do not have general farmland nearby, but there is a considerable amount of collective industrial or even state-owned industrial land within or near the area. Then, as long as reasonable benefit distribution conditions can be reached through negotiations with the owners of the relevant land, these additional lands can be used as spatial relocation space for early-stage financing development and reconstruction property construction. Finally, the residential land finally obtained through demolition can be developed, and industrial development can be carried out on part or all of it. Through such operations, the government will also obtain most of the benefits similar to the renewal model that uses the linkage policy to achieve spatial relocation.
One point that needs to be specifically pointed out is that many cities emphasize the need to preserve industries in urban renewal, but the main means currently used is still to mechanically preserve the space of existing industrial land and give preferential land prices. However, such practices of preserving land space and preferential land prices may not truly achieve the goal of preserving industries. On the contrary, it is precisely through the operation of "Two Competitions and One Spatial Relocation" that the renovation costs of old residential areas are significantly reduced, creating extra returns obtained from model innovation. Then, developers can be used to attract powerful industries through multiple means such as preferential housing conditions. In fact, the land conditions needed for the development of those industries that can bring long-term development to the local area, as well as the high-quality education and medical resources needed for urban development, are relatively easy to meet in any city. But if local governments can use developers to provide additional preferential housing conditions through the innovation of old area renovation models, the attractiveness of the city's investment promotion will be greatly increased. It is precisely in this sense that in the future, providing preferential or even free property housing to investment targets through developers based on old area renovation projects may become a key means for a city to attract high-end industries and related talents.
Source: This article is compiled by the Secretariat of the China City 100 Forum based on the speech delivered by Professor Tao Ran of the School of Economics, Renmin University of China, at the Autumn Forum 2020 of the China City 100 Forum, reviewed and published by the author.
