There is a widely-discussed notion that title registration and formalisation are essential prerequisites for valuing unregistered land.
In a report published by RICS, we examine, for the first time, how informal land markets in developing countries operate. The report called Valuing unregistered land, aims to provide a wealth of background information to anyone working in, or who has an interest in this important sector.
The study is particularly important because governments, the valuation industry and professional bodies need to ensure they are informed about, and equipped to respond to future scenarios for the expansion of informal land markets.
Land valuation is a primary component of International Land Measurement Standards (ILMS) – the first globally-agreed set of benchmarks currently in development. ILMS aims to provide a new ways of classifying, defining, measuring and reporting land information. Its goal is to improve the level of security of land tenure across the world and enable fair compensation during large-scale land acquisition.The standard is currently in consultation.
In addressing the research problem, the Valuing unregistered land report focuses on three case studies – one from Africa, Asia and South America – where the issue of unregistered land is currently debated. The paper draws on interviews with registered valuers, officers of the land sector agencies responsible for registration and valuation, as well as academics who specialise in valuation. It also draws on the insights of architects, anthropologists and urban planners who work with occupants of unregistered land.
In Ghana, the customary land tenure system, accounts for nearly four-fifths of all land in the country that is usually unregistered. While the expectation may be that the lack of registration would be problematic for obtaining a mortgage or settling a legal dispute, for example, in practice, banks are willing to lend on unregistered land and courts prefer the principle of equity to the western principles of registration conferring indefeasibility of title.
However, undervaluation is a major challenge in Ghana and can lead to inequities through inadequate compensation, for example, where land owned is required for public infrastructure projects. In Ghana, the replacement cost method is widely used by professional valuers to value unregistered land. This involves estimating the gross replacement cost, ascertaining depreciation, e.g. to reflect any property defects, and then calculating the net replacement value. Where valuers have little local knowledge, do not consult with local residents and fail to understand the impact on livelihoods, significant undervaluation can occur, as highlighted by a number of state-led valuation processes covered in the Valuing unregistered land report.
In Indonesia, registration is not only encouraged, but also assisted. However, relatively few parcels of land are registered, with much of the land held under the Adat system, which is based on the customary law. This raises the question of what happens when land is publicly acquired.
For land held under the Adat system the usual methods of valuation are used, namely the cost approach, market comparison, the income capitalisation approach, the residual approach and the profits method. A key difference in valuation compared with registered land is a 10 per cent reduction in prices on the basis that the cost of registration is 10% of the land value.
Contrary to what proponents of registration contend, no automatic indefeasibility privilege is given, as courts prefer to adjudicate on a case-by-case basis. Although undervaluation is common in Indonesia, this is less related to the lack of registration and more to do with the capacity of valuers to carry out systematic research.
In Peru, informality is widespread. In 1996, Peru built on previous land reform to confer registration to informal properties and established the Commission for the Regularizations of the Informal Property (COFOPRI). A COFOPRI registration can in some instances increase the land value by around 50% over the original unregistered land. The Commission is now looking beyond land towards providing standards for housing and services to address structural concerns over self-built homes, which families often build floor by floor as their financial circumstances improve. Because land is still held informally, Peruvian regulations governing valuation practices make it clear that registration is not necessary for the valuation of land. Despite this provision for valuing unregistered land, professional valuers are not usually involved in the valuation process or in disputes concerning unregistered land and operate mostly within the formal system.
James Kavanagh MRICS
Director RICS Land Group
James is the Director of RICS Land Group, which encompasses the environment, geomatics (land and hydrographic survey), minerals and waste management, rural, telecoms and planning and development areas of practice. This is a global and diverse grouping of over 26,000 members, with strong links to policy, economics and practice issues.