Understanding the changing logistics landscape

China's rapid economic growth has created an increasing demand for transportation and logistics services, calling for greater infrastructure, warehouse facilities and related services. Recognising both the high demand and relatively relaxed regulations, particularly compared with highly-regulated asset classes such as office, retail and residential, investors have poured billions of dollars into China's logistics industry, and more investment is expected over the next decade.

Land use rights

Land acquisition

In China, neither individuals nor private entities can directly own land. Instead, they may obtain land use rights for a specific period of time by paying a one-time land premium.

PRC law delegates authority to local governments to determine the use of land through zoning regulations; and the transfer of land use rights through a bidding and auction process. Since the rates of investment density, tax revenue and employment for warehouses are low compared with other possible land uses, local governments are often less interested in allocating and zoning land for warehousing and logistics.

In light of the sometimes sparse supply of land specifically zoned for warehousing, some investors have sought to use collectively-owned land for logistics or warehousing purposes. In contrast to state-owned land in urban areas, collectively-owned land is typically rural land owned by local villagers and is generally cheaper. The use of collectively-owned land for logistics and warehouses is neither expressly permitted nor prohibited by law, and could in theory be supported by certain existing regulations. For example, the Opinions on the Policies and Measures for Promoting the Healthy Development of the Logistics Industry (关于促进物流业健康发展政策措施的意见), issued by the State Council on August 2 2011, provide that local governments should prioritise zoning land for logistics purposes when converting rural land into land designated for construction. There have also been several successful cases in Chongqing and Ningxia, where warehouses have been built on collectively-owned land.

Some local governments are also seeking to utilise collectively-owned land for warehousing and construction through leasing arrangements between local villages and companies. For example, the local government of Fengtai (in Beijing) plans to combine the collectively-owned land of five villages and then lease the combined holdings for construction and warehousing purposes. Local authorities have yet to finalise the implementation of this plan, though current options include the villagers who own the property collectively acting as the landlord for leasing the property; or forming a warehousing joint venture company in which both the villagers and warehousing companies are shareholders.

Maximum term

The maximum term for land use rights granted to developers varies based on the proposed usage and location of the land. In general, the maximum land use term for land designated for warehousing, which is classified as industrial land, is 50 years. Shanghai recently issued significant changes to its regulations on industrial land use rights and is also formulating a new standard form for land grant contracts (with the current draft adopted on July 1 2014) with the Several Provisions for Strengthening the Administration of the Grant of Industrial Land in the Municipality (关于加强本市工业用地出让管理的若干规定). Among other things, the regulations stipulate that the maximum term for new grants of industrial land use rights will be shortened from 50 to 20 years, unless otherwise permitted by the relevant government authority. In addition, investors are required to achieve certain targets with respect to investment amounts, annual sales and tax revenues to maintain their usage rights. Failure to meet these targets within an agreed-upon timeframe may result in a breach of the underlying land grant contract, penalties and even reclamation of the land by the Shanghai authorities.

From an investor's perspective, the introduction of these new regulations and their additional restrictions on usage rights for industrial land represents a step back in terms of stability, predictability and affordability. In light of these changes, investors will need to re-evaluate the risks and pricing of industrial projects in Shanghai. While these moves create uncertainty in the investment environment in the short term, they do appear to be the new norm for nationwide land grant policies in the industrial sector, particularly since other Chinese cities (including Shenzhen, Linyi City in Shandong, Foshan City in Guangdong and the Beijing Economic and Technological Development Zone) have already adopted, or are in the process of adopting, similar policies. Nevertheless, in practice, the 20-year term requirements remain optional rather than mandatory. In Shanghai, the term of usage rights for land parcels granted after July 1 2014 will remain 50 years in most cases.

New land grant contract

Since July 1 2014, Shanghai's land administration authority has adopted a new standard contract (land grant contract) to be used for granting industrial land use rights, and it imposes stricter compliance requirements for investors.

Depending on specific project conditions, the local government or land administration authority may require an investor to pay a performance bond or take other market-oriented measures to ensure that the land granted will be used efficiently. Construction is usually required to begin within six months of the delivery of land. Other steps may be subject to negotiation between the authorities and investors. Local media have reported that projects are usually required to be completed within two years of land delivery.

Local authorities will begin monitoring projects involving new grants of industrial land to determine compliance with the investment targets. Failure to achieve targets within the agreed time period may result in damages arising from the breach of the underlying land grant contract and/or reclamation of the land. If the right is reclaimed, the land grant premium for the remaining term will be returned to the investor and the local government will compensate the investor for any buildings on the land based on the residual (not replacement) value of the buildings.

Regulatory policies

The Chinese government has directed foreign investment through the Foreign Investment Industrial Guidance Catalogue (Amended 2011) (外商投资产业指导目录（2011年修订）) (Investment Catalogue), which lays out three fundamental categories in which foreign investment is “encouraged”, “restricted” or “prohibited” in the listed industries. Aside from certain exceptions, such as mail and post, most industries related to modern logistics (i.e. construction, operation and transportation services of warehousing facilities) have been placed in the encouraged category for the last 10 years, and foreign investors in the warehouse industry can engage in business by setting up wholly foreign owned enterprises (WFOEs).

On September 22 2014, The Ministry of Commerce (MOFCOM) announced new policies for advancing China's commerce and trade logistics industry. MOFCOM's Implementing Opinions on Promoting the Development of Commercial Logistics (商务部关于促进商贸物流发展的实施意见) include further developments in both the e-commerce and cold chain sectors, encouraging local governments to implement tax incentives for logistics companies.

In early January 2012, the State Administration of Taxation and the Ministry of Finance announced a tax incentive policy for logistics companies, the Circular on the Urban Land Use Tax Policy for Land for Bulky Good Warehousing Facilities of Logistics Enterprises (关于物流企业大宗商品仓储设施用地城镇土地使用税政策的通知), which reduced by 50% the urban land use tax for land owned and used by logistics enterprises for bulk commodity storage facilities. Even though the tax incentive is set to expire on December 31 2014, it is expected that this tax incentive policy will be extended.

Hoping to aid the development of nationwide logistics parks, in 2013 the National Development and Reform Commission (NDRC) promulgated a plan for national logistics parks in its Circular on the Issuance of the Plan for the Development of Logistics Parks Nationwide (关于印发全国物流园区发展规划的通知) which listed 29 first-tier and 70 second-tier logistics parks cities where the development of logistics and warehousing industries are encouraged. Provincial governments, including those of Jiangsu and Chongqing, and the local governments of big cities such as Tianjin and Chengdu, have already announced their plans for the development of logistics parks in accordance with the NDRC.

Foreign investment

Unlike foreign-invested real estate enterprises (FIREEs), which have been categorised as restricted industries under the Investment Catalogue, foreign-invested logistics enterprises (Logistics FIEs) are not FIREEs and are subject to fewer regulatory limitations. These do not need to be filed with MOFCOM and are not subject to limitations placed on FIREEs, such as foreign debt limitations, special registered capital adequacy ratios or onshore borrowing limitations.

No MOFCOM filing requirements

Under PRC laws, foreign investors are generally required to establish FIREEs to engage in real estate investment activities, and the FIREEs must make a filing with and receive approval from MOFCOM. Although Circular 340 attempts to simplify the filing process, Local MOFCOM requirements and filing applications can still present significant uncertainty and difficulties for FIREEs. In contrast to FIREEs, Logistics FIEs fall under the encouraged foreign investment category and are therefore free from these requirements.

No foreign debt limits

FIREEs established after June 1 2007 are generally prohibited from borrowing foreign debt, while those established before may do so only if they meet the following requirements:

• all registered capital is paid in;
• the State Land Usage Certificate has been obtained; and
• the capital contributed to the development project is no less than 35% of its total investment.

As a consequence of these requirements, leveraging FIREEs by borrowing from onshore entities may be a limited option for investors. In contrast, Logistics FIEs are not subject to restrictions on foreign debt loans.


Alex Wang, Eddie Hsu and Julian Zhu, Dentons, Shanghai



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E-commerce surge boosts logistics deals
Investors eye Chinese industrial real estate
Setting up a WFOE just got easier
Foreign Investment Industrial Guidance Catalogue (Amended 2011)
Beijing Municipality, List of Newly Added Industries that are Prohibited and Restricted (2014 Version)
Shanghai Municipality, Special Administrative Measures for Foreign Investment Access in the China (Shanghai) Pilot Free Trade Zone (Negative List) (Revised in 2014)
Guangzhou City, Opinion on Improving the Regulation and Control of the Real Property Market
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