Article of the Month -
July 2007
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Land Markets - Why are They Required and How
Will They Develop?
Robert MAHONEY, Peter DALE, Robin McLAREN, United Kingdom
This article in .pdf-format.
SUMMARY
Land is unlike other commodities that can be bought and sold in that it
is immoveable. Buildings upon it can be dismantled and moved elsewhere but
the land on which they stand cannot be moved. Only the rights to use the
land can be bought and sold.
Land markets exist when and wherever it is possible to exchange rights in
land for agreed amounts of money or services rendered. The ability and
capacity of banks and other financial institutions to lend money is
underpinned by an efficient land market, which in turn requires an efficient
land administration system.
The efficiency of the land market varies across the world together with
its openness to public scrutiny and support for the concepts of sustainable
development. In less economically developed societies, and in particular
where informal settlements exist, it has not always been possible to develop
an effective land market and this leads to under-capitalisation. In order
for a land market to develop and be maintained a number of critical factors
need to be in place. In addition to clear policies and enforceable laws, the
institutional framework needs to provide for consistent, responsible and
accountable decision-making within the overall national land policy. There
must also be a land registration system that is affordable so that all
citizens, especially women and minority groups, rich and poor, can have
access to it.
Continued globalisation will inevitably impact land markets especially as
information technology, including web based services, provides greater
access to national land information services.
This paper examines the current development of land markets and why they
are required; and then explores how these systems might develop, taking into
consideration the introduction of electronic conveyancing, global monetary
transactions, and pan-European land information services. Finally the paper
asks how these developments will impact the less developed economies.
1. INTRODUCTION
Land is part of the culture of a nation and at both a national and
individual level people are prepared to fight to defend it. Throughout
history, the ownership of land has often been a sensitive and politically
controversial issue. Perhaps one reason for this is that land is unlike
other commodities that can be bought and sold in that it is immoveable.
Buildings upon it can be dismantled and moved, even the soil can be dug up
and taken away but the space from which they come cannot be moved.
Some argue that governments should determine who is allowed to own land.
Others maintain that, although a regulatory framework should be established
by the state, the best way to achieve the optimum form of land use is
through the operation of free market forces. This paper explores some of the
issues surrounding the operation of land markets.
2. 2. LAND MARKETS – WHAT ARE THEY?
2.1 The ‘Who’
Land markets exist when and wherever it is possible to exchange rights in
land, usually for agreed amounts of money. Without an integrated and
formalised real property system, a modern economy is not viable since the
ability to create national wealth is severely restricted. An efficient land
market underpins the capacity of banks and other financial organisations to
lend money and for landowners to invest. Less economically developed
societies have, for various political and cultural reasons, failed to create
an efficient land market. As a result, such societies tend to be
under-capitalised.
In one sense land is something physical, a geological or biological part
of the earth. In many juridical systems the legal profession defines the
land in a very different way as an abstract set of property rights that
govern the use of the land and the ability of the owner to acquire or
dispose of these rights. These rights may be considered to extend ‘from the
centre of the Earth to the infinite in the sky’ and include all things in
permanent contact with the soil such as buildings, minerals and vegetation.
In some societies, however, land is deemed to exclude buildings and other
man-made features.
With a few exceptions (such as Antarctica) the ultimate owner of the land
is the state, which retains the right to acquire private property for public
purposes and to control the manner in which the land is used, for instance
through planning legislation. The state may also retain the rights to
minerals and hydrocarbons. Subject to this, many societies permit private
land ownership with rights held either in freehold, which represents the
maximum degree of freedom for the landowner, or leasehold in which there are
greater limitations on how and when the land may be used. Where private
rights in land are recognised, they may be exchanged for a consideration,
usually money. A land market can be said to exist when the number of these
transactions passes a critical threshold (see Figure 1).
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Land markets are generally regulated through land tenure and land
administration systems. Key elements in any land tenure system include the
extent to which land can be bought or sold; whether it can be used as
collateral and if so who then takes over a property if any loans on the land
cannot be repaid; who has rights of access to or passage through the land;
the rules governing inheritance; and the extent of additional use rights and
obligations.
Land administration systems enable security of tenure to be guaranteed
and this is achieved in a number of ways, the details of which are beyond
the scope of this paper. Weaknesses in any land administration system affect
the level of trust that is an essential component of a land market. As van
der Molen (van der Molen, 2006) argued, the impact of such weaknesses can
have extensive consequences:
“In the absence of an in-depth understanding of land tenure
arrangements it will prove difficult, if not impossible, to identify the
processes involved in the determination, recording and dissemination of
information about tenure arrangements required for the provision of the
services needed to ensure for the requisite security of tenure, markets,
planning, taxation and management of resources”.
Dealings in the land market involve a change in ownership of the rights
in land. Ownership (who holds the rights?) differs from land tenure.
Although commonly described as such, the idea that land tenure is about the
man land relationship needs some clarification. A labourer paid to work in
the fields has a man-land relationship but this has no particular bearing on
the nature of the land tenure that is associated with the fields that he is
working. Conditions of employment will be his primary concern and it is the
consequences of his labour that may have an effect on the use rights
associated with the tenure. When it is said that ‘security of tenure’ is a
necessity for stable economic development, the reference is to the security
or safety with which an individual or organization can maintain possession
or occupancy of the land. Thus a tenant in occupation of an apartment will
expect the law to provide protection against the excesses of a landlord who
is the owner of the apartment.
Land markets must operate within a framework of law that is accepted by
all parties concerned. As S. R. Simpson (Simpson 1976) observed:
“….the significant point is that security of tenure,
that vital consideration when good land use is concerned, can be, and
frequently is, enjoyed without any concrete evidence of title other than
occupation. In those countries where individual property rights are
recognized and the rule of law prevails, the courts will uphold
occupation against anybody – including the State or the Government –
other than a person who can prove a better right. In fact, provided that
nobody else can produce evidence establishing some right, the courts
will not require any proof from the occupier, for there is much truth in
the old saying that ‘possession is nine points of the law’”.
3. LAND MARKETS – WHY ARE THEY REQUIRED?
Land markets are a fact of life in most developed societies, yet
surprisingly their impact is not well documented. As Cheshire and Sheppard
(Cheshire and Sheppard 2004) have pointed out:
“Land markets have implications for welfare and social issues such
as segregation going far beyond the shelter houses provide. They are
tightly regulated. Yet economists devote comparatively modest amounts of
attention to their analysis.”
Land markets are important because all economic development depends to
some degree on the availability of land - even a computer software developer
working in ‘virtual reality’ needs an office or other workspace. Industries
need sites for factories, distribution or retail centres, while in agrarian
societies the quality of the land is a key factor in creating a livelihood.
Every citizen needs somewhere to eat and somewhere to sleep and families
require a defendable space in which they can find peace and privacy.
Land markets are mechanisms that, provided there are appropriate
institutional checks and balances, allocate ownership and use rights in a
manner that allows land and its associated assets to be used in the most
economic way. Given secure land rights, land markets can increase the
incentive for people to invest and for financial institutions to lend, since
land can be used as collateral as well as being the basis for production. An
efficient and effective land market can improve the performance of a
nation’s economy and increase prosperity - in the UK, for example, property
related services are estimated to contribute 9% of GDP to the economy (RICS,
2002).
The levels of investment and the impact of land markets vary across the
globe. In general the positive economic consequences have been most
noticeable in Europe and North America. In much of Africa, market activity
is limited - in Southern Africa for example, land sales among smallholders
are rare while in East Africa there has been some buying and selling of
land. In general, throughout Africa, individuals often acquire formal land
rights through the market while land rights that are acquired through
traditional forms of gift or inheritance remain under communal or customary
tenure. In Latin America the markets have been biased by the fact that
access to capital is easier for the wealthy and this has segmented the
market, leaving many people landless and in poverty.
The longer-term investment in land markets in developed countries has
been considered to be one of the major factors that underpin modern
economies. However, on their own, land markets are not a panacea.
There are conflicting views on how well those who are poor can benefit
from the land market and access to capital since formal systems may not
operate very effectively for poorer households and small farms. There is a
danger that land markets may lead to more poor people becoming landless with
the concentration of land into the hands of the rich. There are also
divergent views as to how to prevent land grabbing and asset stripping. Land
markets in developing countries tend to flourish best in urban and
peri-urban areas where commercial opportunities are high and migration can
stimulate land market development.
Land markets help to make the valuation of land and real property more
transparent. The estimated value of a property will depend upon on a variety
of factors, including the purpose for which the property is being evaluated.
There are international standards of valuation that may be used to determine
the best estimate of the value of real estate and these standards help to
support the growth of cross-border mortgage investment and the growth of
secondary mortgaging. The market value of property needs to be known when
transactions take place not only to ensure a fair price and underpin the
mortgage system but also when compensation needs to be paid for land that is
compulsorily acquired by the State, and when taxes are assessed.
An efficient and effective land market will allow landowners to turn
their assets into capital that can be used for other purposes (see Figure
2). The money released through the mortgage system can be used to finance
alternative forms of investment. In Spain, for example, it is estimated that
at least 56% of the money in circulation has been made available through the
real estate market (UNECE, 2005).
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4. LAND MARKETS – HOW WILL THEY DEVELOP?
The efficiency of the land market varies across the world together with
its openness to public scrutiny and support for the concepts of sustainable
development. In less economically developed societies, and in particular
where informal settlements exist, it has not always been possible to develop
an effective land market and this leads to under-capitalisation. In order
for a land market to develop and to be maintained, a number of critical
factors need to be in place. In addition to clear policies and enforceable
laws, the institutional framework needs to provide for consistent,
responsible and accountable decision-making within the overall national land
policy. There must also be a land registration system that is affordable so
that all citizens, especially women and minority groups, rich and poor, can
have access to it.
The development of land markets has historically been closely linked to
the development of a nation, its economic well-being and the quality of life
of its citizens. Will this trend continue? Some commentators suggest that
the continued and recently rapid rise in property prices cannot be
sustained. This will lead to a situation where property price may fall: a
situation that creates negative equity and reduced economic growth. If this
happens then there may be global consequences since land markets now extend
across international borders; as is evidenced in Europe where the European
Land Information Service (EULIS) is being developed to exchange real
property data throughout the European Union (EU). Its aim is to promote the
economy of the EU by breaking down barriers to cross-border lending,
enabling more competition in the secured credit and real property markets,
giving more choice to borrowers, providing links with non-EU countries and
encouraging the spread of best practice.
The EULIS project recognises subsidiarity and seeks to retain national
differences, for example, with regard to systems of land tenure while
allowing for the open exchange of land and property-related information. In
many countries, however, opening land markets to foreigners gives rise to
concern because indigenous people fear that this will adversely affect their
culture and that they will not be able to compete with the external economic
forces.
The trend towards globalisation means that land markets should be seen in
an international rather than a national or regional context. Access to land
for development is necessary if countries are to attract foreign direct
investment. An efficient land market with equal rights for all citizens will
enable a country to participate in the global economy and gain acceptance on
the world stage as an equal partner. Many countries are now establishing
legislation and policies that provide for web-based access to all land
information. Where web-based access is not possible, appropriate
conventional channels must be provided that allow open and timely access to
the information at affordable prices so that corporate investors do not have
an unfair advantage over the local communities.
5. LAND MARKETS – HOW DO THEY IMPACT LESS DEVELOPED ECONOMIES?
Land markets require the injection of capital to enable them to function.
This can be generated from a number of sources. The corporate investor can
normally gain access to capital or credit to fund acquisitions. Communities
or individuals may find it difficult to acquire collateral against which to
borrow monies to finance the acquisition of land and thus enter the land
market. Many of the countries in former Eastern Europe have needed to ensure
that sufficient land and property is locally owned so that it can be used as
collateral to raise funds that can be used for investment. Land can be
mortgaged to release funds for the further development of other current
assets or to support investment in a business or other venture, thereby
stimulating the economy and potentially the quality of life of the
individual citizens.
De Soto, in his attempt to unravel what he calls the “mystery of capital”
(De Soto 2000) concludes that even in areas of great poverty there is great
potential wealth. The poor cannot convert what he describes as “dead
capital” into its real asset value, which is possibly worth trillions of
dollars. He suggests that many poor people who do not live in the rich
western economies are every bit as intelligent, innately skilled and
hardworking as those in successful economies, but remain poor because of
what he describes as the “Bell Jar Effect”. This occurs where those inside
become rich because they are able to exploit property, but those outside are
excluded by invisible barriers such as access to expert lawyers and the
ability to navigate the red tape of their property systems. The poor have no
access to formal land markets and little or no access to credit.
Having a formal structure in place is necessary, but not sufficient to
trigger the creation of greater wealth for more people. For land markets to
work there must be the political will and the empowerment of all people to
permit and encourage them to take part. This may necessitate some state
intervention in the otherwise free market processes. Countries introducing a
land market should ensure provision is made for capacity building to provide
the new skills necessary to support the market, including general management
skills.
In North Vietnam (Mekong Economics, 2004) a project was undertaken to
assess the impact of De Soto’s theory that land markets can be used to
provide capital in under capitalised areas. The objectives of the project
were to make the land market more efficient and effective so that it can be
accessed by the poor and to understand why households choose to participate
in the informal market rather than the formal market. The intention was to
test whether an efficient and effective formal land market with supporting
land administration infrastructure would serve the poor by providing them
with access to land, security of tenure, improved environmental and land-use
management and information to better inform policy development.
The report found that: the present procedures were long and complex; that
there were benefits from economies of scale; that local government officials
have an important role to play in administering the system; that many land
transactions were carried out on a formal basis and that the formal costs of
and transactions were not considered to be high; but the poor participated
very little in land market activities. It also found that the level of
understanding of the formal market procedures was relatively low hence the
continued existence of informal markets. Conversely, it was found that
commune representatives had a good grasp of what was actually going on at
the grass roots level.
6. CONCLUSIONS
Ever increasing globalisation will almost certainly impact land markets
especially as information technology, including web-based services, provides
greater access to national land information services. Within the worldwide
diversity of approaches to land markets a number of common themes are
present when a thriving and efficient land market exists. There must be a
sound land administration system, good land policy and a legal framework in
place to underpin the land market. A fair and open land market needs
guaranteed security of land rights; low transaction costs for all users;
access to credit; transparency with openness and ease of access to all;
protection of minorities; opportunities to raise revenues through land and
property taxes; and support for environmental sustainability. It also can
benefit from public/private partnerships that provide value-for-money
services.
To encourage and support the land market it may be necessary for
governments or international donors to provide start-up finance that will
lead towards a self-financing status. Capacity building will be necessary to
ensure that the appropriate skill sets are available as the market develops.
As societies become more complex, the range of interests in land and the
types of transaction that take place become more complicated. In addition to
simple sales and rental transactions, there may be first and secondary
mortgages, environmental obligations, agricultural quotas etc. all of which
may be bought or sold in the market place. Increasingly, cadastral records
are not only used to support land transfers or land taxation, but as an
information base for the marketing of non landownership-related goods and
services, such as selling insurance policies or household effects.
Future trends in such a complex area are difficult to predict. However,
it is clear that globalisation will mean that land markets will be seen in
an international context and that governments will be encouraged to see land
markets in a holistic way that includes environmental policy. Today there is
pressure from a number of sources to address the issue of the property
rights of those living in informal settlements. In addition, there is a need
to improve the openness and accessibility of good quality land information
for the benefit of all and to reduce the cost of both information and
registration of land and property transactions. Developments in these areas
will occur in the short to medium term. In the less developed economies the
development of an efficient and effective land market may well be one of the
most essential factors that will determine the economic stability of the
national economy.
Perhaps one of the most far-reaching impacts of the land market is that
it should lead to ‘better citizenship’. Private land ownership is seen to
encourage entrepreneurship and commitment and reduced dependency on the
state, allowing governments to focus on their other responsibilities. Those
who practice good stewardship of the land tend to engage in the whole social
and democratic process. An efficient land market can create more favourable
conditions within a country which, when combined with other economic and
social factors, should encourage better citizenship and a better society.
REFERENCES
Cheshire P. Sheppard S. 2004. Land markets and land market regulation:
progress towards understanding. Regional Science and Urban Economics 34
(2004) 619–637
De Soto H. 2000. The Mystery of Capital. Bantam Press.
Mekong Economics, 2004. The Impact of Land Market Processes on the Poor
“Implementing de Soto”- The Case in North Vietnam. Asian Development
Bank
RICS 2002. Property in business - a waste of space? RICS, London
RICS (in press). Land markets and the modern economy. RICS, London
Simpson S.R. 1976. Land Law and Registration. Cambridge University
Press.
UNECE, 2005. Land Administration in the UNECE Region - Development Trends
and Main Principles. Geneva
Van der Molen P. 2006 Tenure and Tools, two aspects of innovative land
administration
Background paper ‘evening lecture’ RICS 13 December 2006 London UK
BIOGRAPHICAL NOTES
Rob Mahoney FRICS, FBCartS is Principal of MahGeo, an independent
GI and LIS Consultancy. Rob is a Fellow of The Royal Institution of
Chartered Surveyors and current Chairman of the RICS’ Faculties and Forums
Board. Rob has extensive experience in the management of land information,
and land registration, together with the associated technologies and
business processes. He has been engaged upon a wide variety of successful
projects worldwide. He is also a former member of the UK Government’s GI
Information Panel.
Peter Dale retired as Professor in Land Information Management at
University College London in 2001 since when he has retained his interest in
land administration, helping to produce two important documents for the
UNECE Working Party on Land Administration. He has been an international
figure in the world of the cadastre for many years having studied and
published widely in the field. He served as President of the International
Federation of Surveyors from 1995-1999 when he was made an Honorary
President.
Robin McLaren is director of Know Edge Ltd a UK based, independent
management consulting company formed in 1986 specialising in optimising the
business benefits of investments in Geographic Information (GI) systems and
services. Robin has been at the forefront of the GIS revolution and is
recognised as a world expert in Land Information Management and has worked
extensively in Eastern Europe and world-wide to strengthen land tenure to
support economic reforms. Robin has recently supported the UK Government in
formulating a UK GI Strategy.
CONTACTS
Robert Mahoney,
Principal – MahGeo,
7 Pellbrook Road,
Lewes,
East Sussex, BN7 2TF
UNITED KINGDOM
Tel: + 44 (0) 7713 270 452
Email: RobMahoney@mahgeo.com
Web Site: www.mahgeo.com
Prof. Peter Dale
retired
Email: peter.dale@talk21.com
Robin McLaren
Director
Know Edge Ltd
33 Lockharton Ave
Edinburgh EH14 1AY
Scotland
UNITED KINGDOM
Tel: +44(0)131-443-1872
E-mail:
robin.mclaren@knowledge.com
Web: www.knowledge.com
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