Kin Chee Wong

The Evolution of Land

Valuation in China

This article discusses the land tenure system and policy changes in land alloca-
tion in China. Also covered are the granting of leaseholds for land use rights
and the effects of this policy on urban land value and prices. The various meth-
ods prevalent in China, such as the residual method, comparative method,
investment method, and cost method, are examined.

T he first research studies on urban land

value and prices in the People’s Republic of
China came about very recently. It was not
until the early 1980s, following the
government’s decision to make major re-
forms in its urban land policies that the ap-
praisal of urban land became important.
At the inception of the Communist re-
gime, the 1947 Outline Land Law of China1 or-
dered the confiscation of privately owned
rural land and mandated its distribution
among tenant farmers. But private owner-
ship and rental of urban land continued un-
til 1982, when the nation’s constitution na-
tionalized all land, including urban land, in
China. Also in effect were policies intended
to make the most economically efficient use
of land resources. Land use fees were col-
lected at varying amounts, depending on
location and use value. Previously, if work
units or individuals wished to buy a parcel
for urban development or other uses, they
could obtain it from the Bureau of State Land
Administration. The buyers needed to pay
for only the cost of expropriation if the rural
population owned the allocated land collec-
tively. If, on the other hand, the land was
owned by the state, the buyers owed noth-
ing for the use of the land. Moreover, they
incurred no annual rental fees after the allo-
cation. The concept of land price and land
value was nonexistent then.

1. The Outline Land Law of China was enacted by the Chinese Communist Party in 1947. According to this law, in territory occupied
by the Chinese Communist Party, land belonging to rural landlords was to be confiscated and distributed to the peasant popula-
tion through land reform. This 1947 law was later incorporated into the 1950 Land Reform Law of the People’s Republic of China.

Kin Chee Wong teaches valuation at Hong Kong Polytechnic University. He is also a real estate appraiser
and city planner, with experience in a variety of property types in Asia and North America. He earned a
BA and an MSc in urban planning from the University of Hong Kong. Contact: Dept. of Building and Real
Estate; Hong Kong Polytechnic University; Hunghom, Kowloon; Hong Kong. Fax 011-852-2764-5131. Email
bskcwong@polyu.edu.hk.

1
 LAND TENURE SYSTEM
The ratification of Article 10 of the 1982 Con-
stitution was a major step in China’s mod-
ern land use reform. The law declared that
all urban land was owned by the state (own-
ership by the people), while land located in
suburban and rural areas was collectively
The law declared owned (ownership by the working people
that all urban or rural population).2 The 1982 Constitution
effectively expropriated the privately owned
land was owned residential plots of millions of farming and
by the state, urban families. In return, these homeowners
received land use rights to the plots on which
while land their homes stood, while retaining owner-
located in ship of the actual buildings. The Bureau of
State Land Administration was established
suburban and in 1986 to oversee the administration of state
rural areas was land in both urban and rural areas. Local
branches emerged in time.
collectively The concepts of ownership and land use
owned. rights are separate in China. A land user can
obtain land use rights but not absolute
ownership. Land use rights must be
surrendered to the state upon the expiration
of the agreement. This is actually a form of
leasehold system. In the early years of public
land ownership, the state allocated land
directly to the user free of charge. This right
was nontransferable regardless of any
subsequent change in circumstances. The
rules of rent and value, and market and
competition mechanisms were ignored; land
valuation was nonexistent.
As part of its goal to modernize, China
adopted an open door policy in the early
1980s. The economy fostered socialist
characteristics in coastal cities and special
economic zones (SEZs).3 Because land is a
major factor in modernization and
industrialization, the land use rights system
was transformed from a rigid centrally
planned allocation system to a market-
oriented one. The result was the enactment
of the 1986 Land Administration Law,4 which
granted leaseholds for value. According to
the legislation, any domestic or foreign
organization, work unit, or individual
obtaining land use rights must pay land use
fees, which the state as landowner collects.
The amount depends on size, location,
duration, and land use. The fee can be a lump
sum, a premium payable on obtaining the
land use right, or it can be periodic payments
in the form of annual rent. The legislation
also created a national registration system in
which the government issues certificates for
these rights. With this system in place, land
use rights could be transferred, inherited,
leased, and mortgaged.
Transferring land use rights for value
through a premium payment was initiated in
the Shenzhen SEZ, introducing a new source
of revenue for the state. Private treaty, tender,
or public auction are the three ways of mak-
ing the transfer. Determining the amount of
the premium requires an appraisal.
Land uses have maximum lease periods
of 40–70 years, as fixed by the state. But SEZs
and major coastal cities may adjust the lease
periods to suit their needs.
RECENT DEVELOPMENTS
The 1982 land reform brought about the es-
tablishment of a commercial real estate mar-
ket in the SEZs and major cities. Real prop-
erty appraisal began to attract attention. Uni-
versities offered courses in real estate and
property appraisal, while central govern-
ment departments, such as the Ministry of
Construction, Bureau of State Land Admin-
istration, and State Administration for Indus-
try and Commerce, developed regulations
for the licensing of appraisers and the regis-
tration of private appraisal firms.
The first licensing examination for apprais-
ers took place in September 1995. Previously,
licenses were granted to those practicing ap-
praisers who had satisfied what was then pre-
scribed in terms of education, training, and ex-
perience. Now candidates for the licensing ex-
amination are required to have at least two
years of experience in appraisal, attend college-

2. Article 10 of the 1982 Constitution reads as follows: “All urban land is owned by the state; land in rural and suburban areas is
owned by collectives except those portions which belong to the state in accordance with the law; house sites, privately farmed
plots of crop land and hilly land are also owned by collectives. The state has the right to expropriate land for public purposes.“
3. China began to establish SEZs in early 1980 as a major step in carrying out its open door policy. Foreign investments are encour-
aged in SEZs, which act as the testing ground for a market economy having socialist characteristics. Five SEZs have been desig-
nated: Shenzhen, Zhuhai, and Shantou in the Guangdong province, Xiamen in the Fujian province, and Hainan Island.
4. The Land Administration Law was enacted at the Sixth National People’s Congress on June 25, 1986. It was aimed to strengthen
land administration, maintain the socialist public ownership of land, protect and develop land resources, make proper use of
land, effectively protect cultivated land, and meet the needs of the socialist modernization program. The full text of the law
contains seven chapters and 57 articles. Chapter 1 deals with granting leaseholds for value, while Chapter 2 deals with land
ownership and land use rights.

2 The Appraisal Journal, January 1998

level courses in real estate, and pass four pre-
scribed real estate examination papers (namely,
regulations and policies, investment and man-
agement, appraisal theories and practice, and
appraisal case studies and analyses).
In January 1995, a regulation was passed
requiring firms performing appraisals to reg-
ister with the State Administration for Indus-
try and Commerce. The regulation also clas-
sifies these firms into three categories:
1. A firm having two licensed appraisers
and worth 100,000 Chinese yuan may
operate within the city in which it is lo-
cated.
2. A firm having four licensed appraisers
and worth 200,000 Chinese yuan may
operate within the province in which it
is located.
3. A firm having seven licensed appraisers
and worth 500,000 Chinese yuan may
operate anywhere in China.
APPRAISAL METHODS USED
IN CHINA
The field of real estate appraisal is still in its
infancy in China where various appraisal
methods are currently being tested. Chinese
appraisers are eager to learn and adopt meth-
ods from overseas, especially those from
Hong Kong, the United Kingdom, Taiwan,
and Japan. The valuation methods in use are:
• The residual method, which is used to
determine the premium paid for land
use rights, and the comparative method
which is used to determine the basic
standard land price. (Both methods were
introduced from overseas.)
• Those based on economic theories in line
with Marxist economic theory, such as
the investment method.
• Those that are simple and administra-
tively convenient, such as the cost
method.
RESIDUAL METHOD
In SEZs and coastal cities, granting land use
rights in return for a premium payment cre-
ates great demand for appraisals. The re-
sidual method came from Hong Kong, which
used this method to determine the residual
value of a leasehold site.
In Hong Kong, the residual value of a
parcel of land is first determined by finding
the gross development value that is possible
on the site (i.e., the value of the completed de-
velopment). The cost of development (includ-
ing building cost, professional fees, and fi-
nance cost) and the developer’s profit are de-
ducted from the gross development value.
The resulting figure is the residual value, or
the price of the land. Because it takes years to
complete a development, the residual value
has to be discounted to reflect present value.
In Hong Kong, the residual method, con-
trary to what had been practiced in mainland
China, indicates that site and building values
are two separate values. The concept of land
value had long been disregarded in China
because, during the Communist regime, land
was allocated to the users at no cost, and the
only property data available were the build-
ing prices based on cost of construction. The
fallacy that land and building values were
inseparable had been upheld for many years.
Appraisers in mainland China have
modified the residual method as practiced
in Hong Kong, so that:

Land price = Gross development value – building cost – professional fee – cost of finance – profit – taxation (1)

The professional fee is calculated as a certain percentage of the building cost, and is
therefore:

Professional fee = Building cost × i% (2)

Cost of finance = (Building cost + professional fee + land price) × r% (3)
Profit = (Building cost + professional fee + land price) × p% (4)

By substituting equations 2, 3, and 4 into equation 1, the result is:

Land price = Gross development value – building cost – (building cost × i%) − [building cost (1 + i%)
+ land price] × r% – [building cost (1 + i%) + land price] × p% – taxation (5)

Wong: The Evolution of Land Valuation in China 3

 From equation 5, the final equation is:
Gross development value – building cost × (1 + i% + r% + p% + i%r% + i%p%) – taxation
Land price =
1 + r% + p%
Applying this residual method to value
land prices in China has two limitations: Be-
cause this method involves determining
Major cities,
gross development value, which relies on a
such as substantial amount of comparable sales data,
a well-established real estate market is a pre-
Shanghai and
requisite and is possible only within eco-
Beijing, are in nomically advanced coastal cities and SEZs.
The second limitation is that in the interior
the process of
cities, the value of real property is very low.
developing basic After the building cost is deducted from the
gross development value, the residual value,
standard land
which represents the site value, is so low that
prices or it cannot possibly reflect the actual value of
the site.
benchmark
prices for COMPARATIVE METHOD
different types
Major cities, such as Shanghai and Beijing,
and classes of are in the process of developing basic stan-
dard land prices or benchmark prices for dif-
urban land—
ferent types and classes of urban land—a
a concept concept borrowed from Taiwan and Japan.
This comparative method uses compa-
borrowed from rable sales data and determines the basic
Taiwan and standard land price, which represents the
average land price for a certain type and class
Japan. of land within a certain city district during a
specific time period. The land is identified
as commercial, industrial, and residential.
Each is classified according to degree of pros-
perity, external and internal transportation
facilities, existing infrastructure and commu-
nity facilities, environmental condition, and
population density. Once the basic standard
land prices for each of the various types and
classes of land have been established, they
are used as benchmarks by the government
to determine the amount of land use fees and
by appraisers to determine sales price in a
lateral transfer of land use rights in the open
market. The basic standard land price is also
the basis for land assessment and property
taxation and, as such, is a powerful way for
the government to control both land price
and land use. The basic standard land price
must be revised periodically, according to
changes in the real estate market. Further,
because the basic standard land price repre-
5. Articles 27-29, Chapter 4 of the 1986 Land Administration Law.
4 The Appraisal Journal, January 1998
sents the average price for a certain type and
class of land only and no two pieces of land
parcel are exactly alike, adjustments are nec-
essary.
INVESTMENT METHOD
This method is similar to that used by apprais-
ers in other countries. The essence of this
method (called the “land rent capitalization
method”) is to divide the annual land rent of
a land parcel by a selected capitalization rate.
The selection of a capitalization rate is the
subject of much debate. An often used rate is
one that combines safe rate and risk rate.
COST METHOD
This method is used to value urban or po-
tentially urban land where neither the com-
parative nor the residual method can be ap-
plied. Simple and administratively conve-
nient, this method is based on the under-
standing that urban land value consists of
cost of expropriation and associated interest,
cost of site preparation and associated inter-
est, and total land rent for the lease period.
The 1986 Land Administration Law ad-
dresses land expropriation and compensa-
tion. In theory, land compensation is calcu-
lated according to income derived from land
and investment rate of return. To compen-
sate the loss of land, the bank interest rates
set by banks are generally adopted as the
lowest investment rates of return. Thus, land
compensation equals income divided by in-
terest rate. The law thus sets the following
guideline for the compensation of expropri-
ated cultivated land for urban purposes:5
1. For the cultivated land expropriated, the
compensation is about three to six times
the annual output value of the expropri-
ated land for the three years preceding
such expropriation
2. For resettlement of the displaced farm
settlers, the compensation for each set-
tler is about two to three times the aver-
age annual output value of the expro-
 priated land for the three years preced-
ing such expropriation
3. Compensation for numbers 1 and 2 com-
bined should not be more than 20 times
the average annual output value of the
expropriated land for the three years pre-
ceding such expropriation
4. Compensation for vegetation and at-
tached structures on land expropriated
are to be determined by the local gov-
ernment concerned
Site preparation in China refers to the so-
called concept of “three utility connections
and one formation.” The three utility con-
nections are water, electricity, and road, and
one formation is site formation. The average
cost to turn a parcel of raw land into devel-
opable site is approximately 150,000 to
200,000 Chinese yuan per acre.
Land use tax is usually used as the rent
in the cost method. The current land use tax
rates fixed by the land use tax regulations
are as follows:
• Big cities: 0.5–10 Chinese yuan per
square meter per year
• Medium cities: 0.4–8 Chinese yuan per
square meter per year
• Small cities: 0.1–6 Chinese yuan per
square meter per year
• County towns: 0.2–4 Chinese yuan per
square meter per year
The cost method is deficient in that it
usually undervalues a developable site by
failing to reflect its potential. Adding to-
gether three values is a mechanical and ar-
bitrary exercise. Moreover, including the to-
tal land rent for the lease period is a contro-
versial practice.
Clearly, real estate appraisal is still fairly
new in China, and some of the methods used
are not yet refined enough to reflect a
property’s true value. But Chinese apprais-
ers have been eager to learn current appraisal
methodology from overseas organizations
that send delegates to deliver lectures and
offer workshops and seminars there.

REFERENCES
Chen, Guang Yan. “The Property Evaluation in Shenzhen Special Economic Zone,” Symposium on Valua-
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Li, Ling Hin. “The Official Land Value Appraisal System Under the Land Use Rights Reforms in China,” The
Appraisal Journal (January 1995): 102-110.
Li, Ling Hin, and Anthony Walker. “Benchmark Pricing Behavior of Land in China’s Reforms,” Journal of
Property Research (September 1996): 183-196.
Ratcliffe, J., Yig-pui Tsui, and Nai-tung Poon. An Examination of Land and Property Appraisal Techniques
Suitable for Application in the People’s Republic of China. Hong Kong: Department of Building and
Real Estate, Hong Kong Polytechnic, 1993.
Ratcliffe, J., Yig-pui Tsui, and Hong-yu Liu. Land Management in the People’s Republic of China. Hong
Kong: Department of Building and Surveying, Hong Kong Polytechnic, 1990.
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Wong: The Evolution of Land Valuation in China 5