LAND JOURNAL

How to value unregistered land

Groundbreaking RICS research examines the operation of informal land markets in developing countries and suggests that a fairer and more exible approach to market value is needed

Author: James Kavanagh and Steven Matz

21 January 2019

In many developing countries, only 30% of land and property rights, at best, are registered and often the rate is much lower. As forced displacement for infrastructure expansion, natural resource extraction and other developments reach into previously informal or socially tenured domains, there is a pressing need to understand current valuation methods and their suitability.

Recognising the inherent value of legitimate rights over land is critical when dealing with compulsory purchases so as to achieve fair compensation. Fair value is often the foundation of tenure security and the start of a formalisation process. These are big global issues, at the core of several of the UN's Sustainable Development Goals and the New Urban Agenda (see Land Journal May/June 2016, pp.20-22).

New RICS report

There is a widely discussed claim that title registration and formalisation are essential prerequisites for valuing unregistered land. But a new RICS report, Valuing unregistered land, examines how informal land markets operate in Ghana, Indonesia, and Peru. The study is particularly important because governments, valuers and professional bodies need to ensure they are informed about, and can respond to, future scenarios for the expansion of informal land markets.

The report builds on RICS research on valuation of unregistered land in Kenya in 2011 and evaluation of valuation practice in sub-Saharan Africa in 2016, and also helps to provide an evidence base for the International Land Measurement Standard (ILMS) Coalition, of which RICS is part. Consultation on the ILMS concludes on 31 December and it is due for launch at FIG Working Week in Hanoi in 2019. The ILMS aims to provide new ways of classifying, defining, measuring and reporting land information, improving land tenure security around the world and enabling fair compensation during large-scale land acquisition.

The research has also informed other closely aligned initiatives, including the GLTN Valuation of unregistered lands: A policy guide. RICS is a partner of GLTN and the research now features on the latter's website under partner publications and in the UN Food and Agriculture Organization (FAO)'s voluntary guidelines on tenure, having helped provide a strong empirical evidence base for both.

It is the first time that anyone has looked closely at the working of informal land and property markets. Most land and property in the developing world is held informally and is therefore outside functioning administration systems. The knock-on effects of this are abysmal levels of property taxation revenue generation and service provision in addition to endemic corruption.

"The knock-on effects are abysmal levels of property taxation revenue generation and service provision in addition to endemic corruption"

Furthermore, the RICS research will act as a platform for future initiatives such as standards for environmental and natural capital and ecosystem valuation as well as the International Valuation Standards. RICS, FIG and GLTN have committed to using the research and the GLTN output to produce a new best-practice protocol for valuing unregistered land, at a time when communal tenure is increasingly becoming recognised in national and international legislation (see pp.15–17 of this issue). NGOs such as Landesa, Cloudburst, the PRindex initiative and Namati are starting to bring land value issues to the forefront of sustainable development and communal empowerment.

Ghana, Indonesia and Peru offer useful case studies because much of their land is unregistered. They have embarked on extensive infrastructure development along with expansive registration processes and, compared to other countries, the capacity for land valuation is weak. Furthermore, valuers in Peru overwhelmingly limit their practice to the traditional, formal economy. Registered valuers, land agency officers responsible for registration and valuation and academics who specialise in valuation were interviewed for the RICS research in these countries, as were architects, anthropologists and urban planners who work with occupants of unregistered land.

The research focused on:

  • identifying the nature of the system of land use and ownership
  • understanding how valuation is practised and how valuers estimate value for unregistered land
  • gaining insight into the way informal land and property markets operate.

Ghana

In Ghana, the customary tenure system accounts for nearly four-fifths of all land, meaning it is usually unregistered. While it might be expected that the lack of registration would cause problems obtaining a mortgage or where a legal dispute arises, in practice banks are willing to lend on unregistered land, and courts prefer the principle of equity to the western principles of registration conferring an indefeasible title, that is, one which cannot be annulled.

However, undervaluation is a major issue in Ghana, and can lead to inequities through inadequate compensation, for example, where land owned is required for public infrastructure projects. The replacement cost method is widely used by professional valuers on unregistered land, and involves estimating the gross replacement cost, ascertaining depreciation to reflect, say, any property defects, and then calculating the net replacement value. Where valuers have little local knowledge, or do not consult with residents and fail to understand the impact on livelihoods, significant undervaluation can occur.

Indonesia

In Indonesia, registration is not only encouraged but assisted. However, relatively few parcels of land are registered and many of them are held under the adat system, which is based on the customary law of a region or ethnic group. This raises the question of what happens when land is publicly acquired: the usual methods of valuation are used for land held under adat, namely cost approach, market comparison, income capitalisation, residual approach and the profits method.

A key difference in valuation compared with registered land is a 10% reduction in prices on the basis that registration will cost this proportion of the land value. Furthermore, contrary to what proponents of registration contend, no automatic indefeasibility privilege is given because courts prefer to adjudicate on a case-by-case basis. Although undervaluation is common, this is more to do with valuers' limited ability to carry out systematic research.

Peru

In Peru, informal landownership is widespread. In 1996, the country built on previous reform to confer registration on informal properties and established the Commission for the Regularisation of Informal Property (COFOPRI). A COFOPRI registration can in some instances increase the land value by around 50% over that of the original unregistered land. The commission is now considering standards for housing and services as well, to address structural concerns with self-built homes, which families often construct floor by floor as their financial circumstances improve.

Peruvian regulations make it clear that registration is not needed for the valuation of land that is still held informally. Despite provisions for valuing unregistered land, professional valuers are not usually involved in the process or in disputes and mostly operate within the formal system.

Overall findings

The research concludes that the assumption that registration is needed for valuation is misleading. Ghanaian and Indonesian valuers have adapted established valuation methods for different types of land and tenure, whether registered or unregistered. The courts in these countries do not place strong weight on registration either.

"Valuers have adapted their methods, and, as such, local valuation practices have been quite resilient"

Valuing unregistered land highlights important strengths in, but also challenges to, valuation practice. The study finds that valuers have adapted their methods, and, as such, local valuation practices have been quite resilient. However, there are also challenges specific to the valuation of unregistered land. Undervaluation is one, as is overvaluation in some instances. On the whole, most conflicts associated with compensation for the expropriation of unregistered lands arise from the top-down nature of the valuation process, a view of value limited to legally created structures alone, and an overreliance on asocial valuation techniques for establishing value. There is a chronic lack of professional and technical capacity in these sectors.

Major finding

Another major finding is that various forms of evidence of tenure such as tax and utility bills, affidavits from neighbours and proof of occupation are admissible in all three markets during lending and dispute resolution processes. This is a major insight into the way informal land markets operate outside formalised titling and registration systems. It could have significant ramifications for the way major agencies such as the World Bank think about formalisation projects or how software systems deal with informal and communal tenure information. Some risk needs to be recognised with regard to data held in land administration systems that have typically been configured for formal purposes with an emphasis on "clean" landownership data.

The call for a more flexible concept of market value and the understanding that a uniform approach will not work is gaining some traction, as can be seen in the recently published UN FAO voluntary guidelines on tenure and the GLTN Valuation of unregistered lands, the latter of which states: "When valuing unregistered lands, social market values need to be taken into account, as value is a socially constructed phenomenon. They cannot be divorced from the social context in which it occurs."

A flexible and reasonable theory of value can generate even more variations, but why should that be a problem? Value is a socialconstruct, varying from one community to another and one country to another. Rather than be left in the hands of individuals or valuers, valuation must be a social activity, involving unions, assemblies and social movements, the courts, the media, religious institutions and others. Valuers need to consult widely, but also study the corpus of legal judgments on what constitutes reasonable value. Sticking to the valuation standards of national or even international bodies alone is necessary but not sufficient.

James Kavanagh is director, RICS Land Group  jkavanagh@rics.org Steven Matz is global research assistant, RICS External Affairs  smatz@rics.org

Related competencies include: Cadastre and land administration, Legal/regulatory compliance, Valuation

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