Development land valuation accuracy in China – a case study of Beijing
| DOI | https://doi.org/10.1108/JPIF-06-2020-0072 |
| Published date | 14 October 2020 |
| Date | 14 October 2020 |
| Pages | 426-449 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Mengmeng Dou,Lesley Anne Hemphill,Lay Cheng Lim |
Development land valuation
accuracy in China –a case study
of Beijing
Mengmeng Dou, Lesley Anne Hemphill and Lay Cheng Lim
Faculty of Computing, Engineering and the Built Environment,
Belfast School of Architecture and Built Environment, Ulster University,
Newtownabbey, UK
Abstract
Purpose –The paper aims to quantitatively investigate vacant industrial land valuation accuracy in China,
given the importance of the industrial market as an underlying pillar to promote urban growth especially in
emerging economies.
Design/methodology/approach –In China, the government formulates a Land Benchmark Price (LBP) to
serve as a price reference point to sell land rights. To gain an in-depth understanding of the valuation practice
by LBP, this paper uses correlation analysis to investigate the varying dynamics between the transaction-
based prices and LBP appraisal-based estimates. Furthermore, a margin of error examination investigates the
distortion in LBP land appraisals, with an amended LBP presented to improve the accuracy of the current LBP
method.
Findings –Different influencing factors are identified to impact the actual market transaction prices and the
LBP construction, leading to a large discrepancy in industrial land appraisals. A systematic problem is
recognised that the constructionof the LBP follows urban bid curve theory, whereas the land transaction prices
do not, demonstrating that an urgent LBP update is needed to capture the market dynamics for industrial
market.
Practicalimplications –The paper sets out discrepancies in valuation accuracy surrounding the application
of the LBP valuation approach in China. This has practical implications for valuers in terms of raising their
awareness of the deficiencies in the approach and the pitfalls they need to guard against in their appraisals. It
also has implications for developers and investors who rely on valuer appraisals to assess the viability of land
purchases; hence, they need to express caution in the appraisal advicesought. Finally, the results demonstrate
to the standard setters how they need to modify the LBP equations to better capture market dynamics.
Originality/value –The paper examines valuation accuracy in transitional economies, through valuation
differentials between appraised price and the transacted price. The value of the work lies in the analysis of the
fundamental differentials between market price and appraised value, which is of importance to investors/
developers, practicing valuers, as well as government officials responsible for setting the valuation standards.
Keywords Land valuation accuracy, Margin of error, Land benchmark price, Industrial land, Real estate
development, China
Paper type Research paper
1. Introduction
The majority of valuation accuracy studies have focussed on the commercial property sector
for investment purposes, given its significant impacts on investment portfolio management,
property performance and acquisition or disposal decision-making processes (Baum et al.,
2001;Kallio et al., 2012;Adegoke, 2016). In recent years, there is an increasing focus on the
residential sector, for bank lending and lowering financial risk (McGreal and Taltavull, 2012;
Hu et al., 2016;Glennon et al., 2018). The industrial market in terms of high-tech development
zones, logistics and warehouse sectors, however, has witnessed limited research on valuation
accuracy. This is largely due to the relatively small investment allocation of industrial
properties compared to other investment assets such as office, retail and specialist sectors in
developed economies, for example, the United Kingdom. While valuation accuracy has been
predominantly emphasised in the income-producing commercial real estate sector, as well as
JPIF
39,5
426
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 9 September 2020
Revised 15 September 2020
Accepted 15 September 2020
Journal of Property Investment &
Finance
Vol. 39 No. 5, 2021
pp. 426-449
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-06-2020-0072
mortgage-lending residential sector, studies concerning valuation accuracy of industrial
development sites represent a research gap in the existing literature. Yet, valuation accuracy
in this sector is important, as the industrial market linked to manufacturing and logistics
helps to promote urban growth, especially in emerging economies (Deng, 2003).
This paper investigates valuation accuracy within vacant industrial development land
in China. This is significant given that commercial real estate development helps bring
active capital flows into property investment, hence contributes to economic growth
(Newell et al., 2010). Development site transactions in China accounted for almost 68% of
global transactions from 2007 to 2014, with the total transaction value making up 80% of
global transactions, highlighting the magnitude of Chinese development transaction
activities (Newell and McGreal, 2017). Rapid development growth with increased demand
for land resources requires the government to come up with an efficient pricing
mechanism to maintain a sustainable market. Furthermore, as a world factory, China relies
heavily on industrial development for the economic performance and growth, with various
Industrial Development Zones established to attract Foreign Direct Investment (FDI)
revitalising economic development (Huang et al.,2015). The 2030 Sustainable
Development Goals (SDGs) link the importance of the increasing access to industrial
enterprises and resource-use efficiency in developing countries in achieving their goals
(SDG 9). To this end, an accurate industrial land appraisal in China and other emerging
economies will help enhance developers and investors’confidence in portfolio
management and attract FDI by indicating the value which land holds while
understanding the variations in industrial rents in the local market. According to
Bencure et al. (2019), a reliable land valuation also assists in maintaining a sustainable
government land-related transaction market including land reallocation, consolidation,
expropriation and taxation, as well as sustaining efficient land administration and
management. This investigation of vacant industrial land valuation accuracy, therefore,
represents significant importance to ensure an appropriate site value and help the market
maintain a sustainable pricing model in China.
Previous studies have tended to compare valuation estimates with the associated open
market transaction price (Matysiak and Wang, 1995;Blundell and Ward, 2008). In contrast,
this study considers valuation accuracy by quantifying the extent to which the application of
the government-published benchmark price in appraisal estimates reflects market
transaction prices. An important distinction of Chinese land appraisal is that, aside from
the internationally recognised development valuation methods (market comparable
approach and residual approach), the Chinese government adopts a Land Benchmark
Price (LBP) approach to reflect the lack of transaction data to guide market transaction prices
(Li and Walker, 1996). This LBP is characterised by an average land price allocated to each
homogeneous land area in a city. A more specific land price determination for a particular
land plot is calculated based on the LBP mathematical formula set by the local government
department. Li and Walker (1996) note that the calculated LBP reflects a government-based
hypothetical transaction price, which indicates the quality of land management and the
income-earning potential of that particular piece of land. Ni (2014) comments that LBP is
regarded as a common land assessment method for its ease of use and authoritativeness,
especially for areas where the market is immature with low volumes of land transactions.
However, there is a set of sophisticated and restrictive rules in applying LBP to land valuation
which results in prescribed valuation practice within Chinese cities. The ability and reliability
of the LBP to accurately represent the land market price, therefore, require careful
investigation to ensure a sustainable Chinese land market.
The analysis in this paper employs a modelling-based approach drawing on an
extensive database of market transactions. This paper empirically examines valuation
differentials to determine the reliability of LBP appraisals from an industrial land
Development
land valuation
accuracy in
China
427
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