China’s cities face significant challenges in financing the growth of urban transit infrastructure. The current practice of financing urban metro or subway projects through municipal fiscal revenues (partly from land concession fees) and government-backed bank loans is not only inadequate to meet the demand, but also exacerbates deep-seated problems. In a variety of approaches that aim to alleviate the financing problems of local governments, Rail plus Property (R+P) development offers a promising solution. R+P development leverages the partnership between the public sector, transit companies, and developers to coordinate planning and financing of transit systems and adjacent real-estate developments. By capturing the land value appreciation that follows transit projects, R+P can partly or completely fill the funding gaps in constructing costly metro projects. Despite these opportunities, the broad adoption of R+P development in Chinese cities is still hindered by widespread conceptual misunderstandings, lack of political will, and multiple legal, regulatory, and institutional limitations. This paper analyzes the experience of the coastal city of Shenzhen as a successful example of R+P experimentation in China.
The study unravels the integrated approach employed by Shenzhen that contributed to its success of Rail plus Property Development. The city’s integrated approach includes innovative financial arrangements, integrated urban and transit planning, land policy reforms, savvy and demand-driven business operation at the corporate level, and institutional mechanisms that facilitate multi-stakeholder dialogues. Furthermore, our research indicates that the successful implementation of R+P also depends on strong political will, a booming real estate market, mature capital markets, and a capable and willing private sector.
The study also underscores the necessity of legal, regulatory, and institutional reforms at both the national and municipal levels to enable the implementation of R+P.
At the national level:
Reform the current land legislation to permit leasing out land-use rights around transit stations at different prices and in installments based on metro projects’ funding gaps and metro companies’ cash flows.
Amend the land legislation to allow for-profit developments above and around transit stations.
Reform the government-led urban planning process through relevant planning legislation and guidelines to facilitate integrated land use and transit planning and transit-oriented development.
At the local level:
Promote cross-departmental coordination and dialogues among different departments and developers to match projects to market demand.
Improve local urban planning and transit planning systems, and establish local, market-responsive planning regulations to allow for pro-transit-oriented development zoning codes and private-sector engagement.
Create multiple layers of land development rights for a single piece of land, and link different land development rights to mixed land uses to facilitate transfer of the rights.
Issue consistent legal documents at the local level that loosen restrictions and provide a legal foundation for R+P development.
Reinforce local capacities to manage sophisticated projects through external consulting services, dedicated institutions, and research funding sources.
To implement R+P, the following areas require particular attention:
First, R+P is a risky undertaking. Being risk-conscious and safeguarding against potential macroeconomic, real-estate market, and institutional risks from the very beginning is essential for the success of a project.
Second, reasonable risk-sharing between government and the metro company is key to incentivizing the company while ensuring the public benefit. In China, this means that R+P schemes are not one-size-fits-all; they should be innovatively tailored.
Third, R+P is a long-term undertaking, and does not offer quick wins. It requires persistent top leadership, constant evolutions of funding arrangements, and continued optimization of development proposals. It is also necessary to match developments with market demand, improve institutional safeguards (and coordination mechanisms), and strengthen government oversight and enforcement.
Mounting housing and travel demands fueled by the rapid urbanization in China have created huge transit infrastructure gaps. However, the lumpy land lease payment and governmental borrowing through special purpose vehicles as the major source of transit funding, have not only aggravated municipal financial liabilities, but also led to boarder adverse impacts such as urban sprawl and farmland depletion.
On the other hand, ample opportunities exist to capture land value increments around transit station as new alternatives to finance transit systems. In China, although the land premiums accrued from the improved accessibility of transit services abound, they have been mostly captured by real estate developers.
To finance transit infrastructure through land value capture, Hong Kong’s Rail plus Property Development—a mechanism that leverage public-private-partnerships to create and capture land premiums—provides more relevant and plausible solution. Although in China, a growing number of cities, such as Shenzhen and Hangzhou, have spearheaded Rail plus Property Development, the widespread adoption of this model is still hampered by conceptual misunderstandings, institutional and regulatory barriers, lack of financial incentives, and capacity constraints.
This paper analyzes the experience of the coastal city of Shenzhen as a successful example of R+P experimentation in China. Through semi-structured interviews, field visits, and a literature review, the study unravels the integrated approach employed by Shenzhen that contributed to its success. The city’s integrated approach includes innovative financial arrangements, integrated urban and transit planning, land policy reforms, savvy and demand-driven business operation at the corporate level, and institutional mechanisms that facilitate multi-stakeholder dialogues. Furthermore, our research indicates that the successful implementation of R+P also depends on strong political will, a booming real estate market, mature capital markets, and a capable and willing private sector.