China’s rapid urbanization has dramatically increased the need for public transit infrastructure. To accommodate these changes, it’s estimated that China needs to expand urban rail by at least 3,000 kilometers by 2020—approximately a $4 trillion investment.

In Chinese cities, funding for large-scale urban transit infrastructure traditionally comes from two sources: sales of land development rights and bank loans. However, these approaches can not only financially burden city governments, but also lead to costly urban sprawl. Recently, the city of Shenzhen has been successfully experimenting with alternative approaches to overcome these significant challenges. Shenzhen’s experience demonstrates that financing transport infrastructure by harnessing the value of land can also be an opportunity for sustainable transit-oriented development (TOD) in Chinese cities.

Sustainable Development Needs Sustainable Financing

Building a transit station on a given plot of land expands access to transport, which typically raises the value of the surrounding properties as a result. For the average Chinese city, it’s estimated that this added value—known as land premiums—amounts to roughly US $300 million – $1.6 billion. These land premiums from the surrounding property make up about 20 – 90 percent of the cost of developing a single subway line, and can be a potential source of funding for transport infrastructure projects, which often either end up too expensive to be worth the investment or rely on large subsidies from local governments to keep them operating.

This way of capturing land value is commonly known as rail plus property (R + P) development. Since R+P means that one entity develops both rail and property, the future revenue from the property compensates for the construction costs of building rail. This strategy incentivizes developers to build compact developments around stations, as doing so allows them to cash into higher land premiums. R+P has already proved successful in Hong Kong and is a promising solution for making TOD a reality in Chinese cities as well.

Four Strategies for R+P Development

The first Chinese city to successfully pilot R+P at scale, Shenzhen is using four strategies to bring TOD to the region.

1. Innovative Financing Arrangements

Shenzhen realized early on that R+P requires a proper financing arrangement, as city-owned metro operators are not only responsible for the costs and risks of metro construction, but also the new business of property development. Therefore, Shenzhen decided to split land premiums with developers so that projects could be completed without overburdening either side.

In the beginning, the metro company had to pay concession fees to obtain land development rights through auction, despite receiving reimbursements from the city to ease its financial burdens. However, since 2011, the city has directly granted land to the metro company as an equity asset, thanks to the national government’s decision to pilot land policy reforms in Shenzhen. To further reduce the costs and risks associated with R+P, the metro company will be allowed soon to form a partnership with developers to share the costs and gains of property development and hedge against fluctuations in the real estate market.

2. Planning Integration

To ensure dense, mixed-use development around transit stations, Shenzhen coordinates agencies and simultaneously adjusts its master plans, detailed land use plans, and transit plans. Planning authorities and the metro company work together continuously to evaluate land values and plan for integrated transit infrastructure and urban development.

To encourage denser development and mixed land uses, Shenzhen created a new type of land use so that planners and developers can co-determine land use and density already at the implementation stage. The city also reformed its zoning code to allow for more flexible commercial, residential, and office development on land parcels that were previously designated for transport use only.

3. Flexible Zoning

Shenzhen expanded land development rights, issuing development rights according to land uses on different building floors. This encourages mixed-used development, as commercial, residential, and underground transit building rights can be obtained separately.

4. Multi-Stakeholder Dialogue

Shenzhen also has introduced multiple ways for stakeholders to engage one another and work across silos. In particular, the city encourages dialogue between different departments and coordinates with developers to match projects to market demand. In fact, the local planning institute and the metro company have worked closely from the very beginning of the financing and planning stages. Finally, strong leadership and external consulting services can also prove critical to managing complicated urban development. The city realizes that R+P development hinges not only on carefully designed public policies but also on efficient operations at the firm level.

Paving the way for the future

Shenzhen’s success has profound implications for other Chinese cities. If Shenzhen can successfully implement R+P under the same regulatory and legislative environment, other Chinese cities can follow suite. However, R+P does not offer quick wins. In Shenzhen, it took over a decade to implement viable solutions. Hong Kong also took about a decade to make a profit. Change won’t be possible without a booming real estate market, a mature capital market, a capable and willing private sector, and—more importantly—a strong political will that is open to new approaches. Given the need for sustainable transit-oriented development in China, leaders can’t afford to overlook Shenzhen’s successes and the opportunities that R+P presents.

To learn more about Shenzhen and transit-oriented development in Chinese studies, you can read the publication Rail Plus Property Development in China: the Pilot Case of Shenzhen from WRI China here.