UBS Group AG has released a report noting that Guangzhou and Shanghai have both announced formal policies regarding the renewal of commercial and industrial land use rights, marking the first systematic clarification of renewal terms in mainland China. The policy specifies that the renewal price must be no less than 70% of the benchmark land price, with a maximum renewal term of 20 years. UBS believes this move eliminates uncertainty surrounding the valuation of commercial properties, REITs spin-offs, and physical asset transactions, which is a positive development for the market.
The report indicates that the standard land grant period for commercial land is typically 40 years. When the remaining term falls below 20 years, the depreciation of asset valuations accelerates. Since Hong Kong developers entered the mainland market earlier, they hold properties with older building ages, resulting in a greater impact. UBS estimates that, among the developers it covers, an average of approximately 9% of their total investment property gross asset value (GAV) has a remaining land term of less than 20 years. Among these, HANG LUNG PPT (00101) has the highest proportion at 35%, followed by WHARF HOLDINGS (00004) at 11%, SWIREPROPERTIES (01972) at 10%, KERRY PPT (00683) at 6%, and LINK REIT (00823) at 5%.
UBS analyzes that the mainland China REITs market already includes 48 commercial properties, and data shows a highly negative correlation between capitalization rates and the remaining lease term of properties. The investment bank believes developers can recycle capital through REITs or property transactions. If the increase in valuation can cover the cost of renewal, this would have a positive impact on stock prices. The report cites the example of Tianjin Joy City, which renewed its land term early, extending it by 16 years, and estimates that this could boost the property's valuation by approximately 18%.
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