1.0 INTRODUCTION. 1.1 Background to the study

Transcription

1 1.0 INTRODUCTION 1.1 Background to the study The cost of buying land or a house in Kenyan urban centers has escalated to alarming levels. Market players blame it on a variety of reasons, including the growth of the middle class, investor speculation and (until recently) the Somali pirates. Take the case of Mr. Okoth and his colleague. The two took out bank loans in 2007, planning to buy pieces of land. However, Okoth saw a car on sale at a low price, and opted to buy it instead. His colleague went ahead to buy a plot at Mlolongo for Sh 400,000. Fast forward five years. Two months ago, Okoth finished paying his bank loan, took out another and went back to Mlolongo to look for the same plot. To his chagrin, the value of the plot had shot up; it would now cost him Sh1.6 million. Disappointed, he ended up buying land in Isinya town in Kajiado district. An eighth of an acre in a place like Ruai in Nairobi, for example, cost Sh40,000- Sh50,000 four years ago. The same size of land now goes for not less than Sh400,000. A plot in Mlolongo in Nairobi used to cost Sh 400,000 five years ago. The same now costs Sh1.6 million, a four-fold increase in five years. A plot in Kahawa West has increased in price from Sh1.6 million four years ago to Sh2 million today. In Kilimani, an acre costs Sh80 million while plots in Ruaka have increased in price from Sh4 million in 2009 to Sh6 million today. In Parklands, an acre goes for Sh55 million while a similar size would cost Sh25 million in Eastleigh. The demand for land in Nairobi is now putting pressure on land prices in neighbouring districts with Kajiado and Machakos feeling it the most. Property agents and real estate sector players are a happy lot. They say the current boom in prices, caused by Kenyans rush to own property, has been long in coming. Skeptics, though, wonder how long the boom will last. 1

2 A three bedroom flat in Kilimani, sold for Sh3.5 million four years ago, now costs up to Sh8.5 million. An acre of serviced land in the same area has risen from Sh18 million four years ago to Sh40 million today. In Nairobi s South B and South C, houses that cost Sh4 million in 2004 now cost Sh7.5 million. An acre in the city centre now costs Sh300 million. Four or five years ago, it sold at Sh160 million. Land prices have increased by an average of 30 to 40 per cent in two years. Mr Laboso, the S&L sales manager, believes the rise in property prices is because demand by far outstrips supply. Mr Ojijo, the executive chairman of Mentor Group of Companies, says the government was borrowing less from the private sector, giving Kenyans more opportunity to borrow. Commercial banks have relaxed their lending rules, and more cash is available for the public to borrow. Mortgage companies now offer lower interest rates, says Mr Ojijo. Some go for as low as per cent with the highest being 14 per cent, a drop from the exorbitantly high of 30 per cent, says Ojijo. The promise of good infrastructure outside Nairobi, says Mr Munene, is also encouraging more people to move out of the city.(developers last Thika Road, Nairobi-Namanga road and infrastructure development in places like Kiserian, Ngong and the bypasses have encouraged people to put up homes on the outskirts of the city, places where no one used to live before, said Mr Munene. Mr Laboso believes the property bubble is not about to bust as the middle and low income Kenyans have not yet been tapped. The prices will increase for a few more years before they stabilise, said Mr Laboso. However, predicting the market s long-term viability is difficult as external factors, including politics, could easily affect prices. Political stability, however, seems to have convinced Kenyans abroad to begin investing in property in their motherland. 2

3 The acting Foreign Affairs permanent secretary, Mr Wamoto, says a large part of remittances from abroad was going into the property market. They know that the sector has fewer risks and could easily be managed on their behalf, and that the investment is permanent, maintains Mr Wamoto. However, Mr Owuor, a trade economist for Advisory Centre for Trade and Investment Policy, wonders how property prices could be so high for a low income country like Kenya. Is it that Nairobi now has better infrastructure, has population growth been so high to warrant increase in demand for houses or has Kenya suddenly regained international status resulting in mass migrations into the country? What could be the cause? asks Mr Owuor in his blog. He warns that what is happening is dangerous speculation where private investors were rushing into the property market with money borrowed from banks. He gave the example of Dubai, which was praised for a few years as the world s fastest growing city before the real estate sector went bust and left the city littered with incomplete projects. The Dubai government has stopped further construction in the city, mortgage prices fell and no buyers are willing to buy these ghost projects, says Mr Owuor, adding that the property market in the US before 9/11 was booming, but the bubble bust, leading to a full economic recession that claimed famed firms such as Lehman Brothers and Merill Lynch. Piracy-accrued cash Mr Owuor warns the Central Bank of Kenya that the sector is facing a bubble bust. There are also fears that some of the money pouring into the local property sector could be accruing from the lucrative piracy off the coast of Somalia. In a Daily Nation report last year, Mr Kaniu, the investment manager of Stanbic Investment Management Services, claimed that cash from Somali pirates had found a 3

4 safe home in Kenya as some Somalis viewed Kenya as a second home and wanted to invest their money here. That some of these investors do not care about the value of the property they are interested in is interfering with property prices, he said. There is no reason why the price of land should suddenly go up by 500 per cent. Although the precise amount of ransom cash invested in Kenya s property market is unknown, Mr Kaniu said conversations with property management agents indicates immense levels of investment. Making it even more difficult to track these transactions is the fact that the money does not go through the banking system. The transactions are mainly cash-based. 4

5 1.2 Problem statement Kenya ranks third in the East African Community in attracting Foreign Direct Investment (FDIs) after Tanzania and Uganda. According to Standbic Investment East Africa, Kenya has been overtaken by the two countries due to lack of natural resources and also the high cost of doing business. Kenya needs to increase its savings or investment levels from 15 percent of GDP in 2011 to in excess of 30 percent to achieve the 10 percent targeted annual growth rate necessary for attracting FDIs. One key sector that can contribute to expansion of investment is the real estate. Critical resource central to this sector is land. Land impacts not only the real estate but also infrastructure development as a whole. Urban centers in Kenya have expanded tremendously in the last decade. Real estate analysts attribute this to urbanization growing middle-class, stable legal environment, significant credit expansion, and increased spending on infrastructure by government. However, serious difficulties are emerging due to high inflation, a weak shilling, cases of fraud and high cost of land. Increased cases of fraud in land and property purchases have been in the headlines lately. In November 2011, the government demolished real estate projects worth millions of shillings in Syokimau in Nairobi City, saying the homes stand on fraudulently acquired public land. If there were no gullible investors stuck on the premise that house prices only know one direction (up, up and up), then there would be no room for fraud. You rarely hear of fraud in pyrethrum markets or cassava markets. The rising cases of fraud in real estate are a pointer that a bubble could be forming. The shortfall in housing is fueling the fire. According to Hass consult there is an estimated shortage of two million housing units, primarily in the country's urban areas, affecting both the poor and middle class. The annual demand is 250,000 units per year against a supply of 60,000 units. Yet the Ministry of Housing, Strategic Plan: says Investment in housing sector has been minimal and sporadic. This is 5

6 as a result of lack of an enabling environment for private sector participation in housing delivery process particularly for lower middle and low-income groups; low government funding; high cost of finance; lack of serviced land; high cost of building and construction materials; inappropriate building and construction technologies; limited research on low cost building materials and construction technologies; stringent planning regulations and standards, and high cost of infrastructure (land). An analogy of the cost of land in similar estates to the case study of countries with comparable economies and population in urban centers confirms the fears that land in Kenyan urban centers is over priced and driven by other forces other than demand and supply. Kileleshwa is a leafy suburb 4 Kilometers West of Nairobi's City Centre. Hass consult estimate the price of an acre to be approximately Sh70 million under Property Values / Trends in the area. Surveys of the current available pieces of land by three property agents (including Hass consult) confirm this estimate. Villa care have advertised - Located in the prestigious leafy Kileleshwa suburb. The land is on lease hold with only 44 years remaining. The property is located in a prime location with well served roads and communication infrastructure such as telephone and fibre optic cable. It is a prime property to invest in. Asking price (Ksh) 50,000,000 Real estate investor website - 1/2 acre in the rare corner of the city. It has a 3 bedroom bungalow which is all en suite with inbuilt wardrobes, lounge, study room, separate airy dining and ample parking. Price: USD 379,260 Euro 295,680 (Ksh 33,120,776) Hass consult-in one of the best and most sought out areas of Kitisuru and in the vicinity of an ever developing area are these 3 prime plots measuring 0.47 acres each right off the main Ngecha Road. This completely flat plot commands an impressive development site, with an option to buy separately available. Option to buy as one large plot. Title: Freehold Price: Kshs 21m per plot- 6

7 In South Africa, Port Elizabeth, cost of land ranges from USD 204,548 (Ksh 17,863,150) per acre in Blue water estate to USD 202,841 (Ksh 17,714,105) per acre in Sunday river. In Theescombe near Walmer park an acre goes for USD 234,767 (Ksh 20,502,202), compared to USD 240,206 (Ksh 20,977,190) Gamtoos all in Port Elizabeth. In Gaborone, Botswana an acre ranges from BWP 2,422,366, Botswana Pula (Ksh 26,410,137), per acre in Tlokweng to BWP 2,032,602 (Ksh 22,160,688) per acre in Phakalane. In Gaborone north an acre costs BWP 1,953,577 (Ksh 21,299,108) In Brazil prices of fully serviced land range from 120,000 (Ksh 16,397,430) per acre in Caponga beach, Fortaleza to 256,000 (Ksh 34,981,184) in Paraiba state (Jacuma town, north east Brazil).In Rio hills, Rio de Janeiro (Brazil capital city) an acre goes for 295,980 (Ksh 40,444,261). Cost per acre in the leafy suburbs of Belgrano in Buenos Aires (capital city of Argentina) is USD 550,957 (Ksh 48,114,987) This indicates land in Kileleshwa is 2 to 4 times as expensive compared with similar estates in the above countries. Is this sustainable? The ABC s of Affordable Housing in Kenya by Aden Van Noppen says Land is so expensive in urban Kenya that it alone can make affordable housing unviable. Additionally, banks in Kenya are reluctant to finance the purchase of land. Therefore creative methods often need to be used to secure land in a way that makes sense for the project During the Mombasa homes expo, Home and Away (A Standard Magazine) established that on average, depending on the location of the plot, a quarter of an acre sells for about sh 4million up from sh 1 million three years ago, while 50 by 100 feet plot goes for about sh 2.5 million up from 1 million- The Standard 29 th Nov, The demand for housing and therefore land has led to speculation. Speculation is the taking of above-average financial risk in anticipation of high returns in a short period of time. It involves buying something on the basis of its future potential selling price 7

8 rather than on the basis of its actual value. This often pushes prices to rise above the underlying value of an asset through creation of artificial shortages. This causes fear of further price rises leading to panic buying and an upward price spiral that can cause serious economic repercussions if left unchecked. How and whether the growth can be sustained are now major worries for investors and Kenya s government. The real estate sector received a large portion of the credit that was released in the last few years, as lenders saw it as a safe and profitable investment. A lot of this credit was disbursed on the premise that higher property and land prices (often posted as collateral) ensure that borrowers are always in positive equity and can therefore borrow more money, which ends up being a perpetual cycle. The government has developed roads and other public infrastructure in order to make more land available for housing in the hope that with more land available for development, prices will go down, and this benefit passed on to the end buyers in the form of cheaper houses. But this has not been the case in this country. Statistics show that this benefit has not trickled down to the intended beneficiaries. Instead, land prices have been rising even faster than construction cost due to speculative buying and hoarding of land. In real estate, the purchase and holding of large chunks of land is politely called land banking. Capital gains tax is charged on the profit realised on sale of a capital asset purchased at a lower price and appreciated in value without the owner's participation in creating added value. The net gain from land appreciation is taxed when it is sold. Kenya however does not have this form of tax unlike fellow East African country Rwanda where 30 per cent applies. Yet such can be used as a strategy to manage speculation and reduce excessive property price rallies. Other methods that can tame this menace include high taxes on vacant land and excessively large parcels not fully utilised. Ordinary Kenyans are being shut out of home ownership by those who see capital gain from land as an easy way to make money. This investment strategy is bad for the nation because it withdraws capital from productive economic activities and transfers to unproductive assets. It is not good for commerce because it increases the cost of doing business through high rents as a result of expensive properties. It distorts property pricing causing uncertainty in the market and posing enormous challenges to valuers serving an 8

9 anxious clientele who frequently question the accuracy and reliability of valuation reports. It reduces agricultural production as land is bought, fenced and kept fallow. It marginalizes rural communities and sets the stage for future social conflict when land is bought cheaply and monopolized by wealthy, well informed outsiders. To reduce the widening wealth gap among Kenyans and avoid recurrent social conflict, a legislative provision that will curb land speculation and guarantee equitable benefit for all from government investments should be added to the land reform bills for approval by parliament. 1.3 Research Objectives This study seeks to accomplish the following objectives: a) The value for a piece of land in Kileleshwa b) Impact of the land value on the construction industry c) To determine issues addressed by the recently promulgated constitution and how it impacts on the land value d) Determine the ownership of land in the different interest groups i.e. gender and age 1.4 Research Questions a) What is the true value of land in Kileleshwa? Is it sustainable? b) How does the value of land impact the construction industry? c) What issues were addressed in the promulgated constitution? How do they impact on the land value? d) Who are the majority land owners in kileleshwa in age and gender 9

10 1.5 Statement of Hypothesis Land prices have been increasing at an alarming rate in Kenyan urban centers. Potential home owners (whether buying a constructed house or a plot to construct) have been out priced and forced to seek shelters outside the city. The hypotheses are therefore stated as follows H0: The price of a piece of land in Kileleshwa is inflated and unsustainable H1: The price of a piece of land in Kileleshwa is not inflated and is sustainable 1.6 Significance of the study Many Kenyans and Investors in there endeavour to build a house to shelter them or as an investment have to grapple with over the roof interest rates, poor or non-existent infrastructure, and government frustrating bureaucracies in plan approvals and always rising building material costs. The least they need in this already difficult task is out of reach land costs. The state of affairs is therefore undesirable which is why this study is necessary. The study aims at adding value in the construction industry that relies on land as key ingredient. By lowering the initial cost, affordable housing will be possible ceteris paribus in Kileleshwa and indeed other parts of the urban centres. The findings therefore shall provide guidelines for the government and other stakeholders on how to keep the cost of land affordable, point out the factors that have led to the current state of affairs in as far as land cost, availability, population pressure and distribution is concerned. Thereby giving possible solutions to the various stake holders to consider as a way forward. 10

11 1.7 Research Methodology The researcher is interested in finding information on the present value of land in Kenya urban centers. The researcher seeks to review relevant literature on the subject matter and engage the different stakeholders involved in land transactions to shade more light in the area under consideration. The data sources for analysis in this research project are categorized into Primary and Secondary sources. Secondary sources involve the examinations of publications on the cost of land in urban centers in newspapers magazines and journals. Under the primary sources, interviews and questionnaires would be used to collect data. The interviews and questionnaires would be administered to Land owners, Valuers who take part in land transactions, Contractors and Property Developers in the area of the case study. Land owners are the landlords in the area of study, Valuers will be contacted through their professional body, Contractors and Developers will be as found in the locality of study or those who have recently completed projects in their under in the locality of study. Kileleshwa just 4 Kilometers West of Nairobi's City Centre was chosen because of the areas proximity and familiarity to the researcher, the robust construction activities ongoing and frequent advertisement of land/houses for sale in the area. The researcher will therefore be able to locate the Land owners, Contractors and Developers for ongoing or recently concluded projects. Valuers involved in particular projects will be contracted from their professional body. Questionnaires would be administered to these parties and interviews conducted for some of them for clarifications. The data thus derived from the survey would be subjected to analysis and findings presented in the most appropriate manner to relay the information relevant to the study. At this point, the hypothesis will be tested using statistical methods. This will form the basis for conclusions and recommendations. 11

12 2.0 LITERATURE REVIEW 2.1 Introduction This chapter provides a review of various publications on issues impacting urban land pricing and effect of these prices in the construction industry in Kenya and beyond. It aims at comparing and contrasting the different authors views on the aforementioned, relating this research study to conclusions drawn, highlighting any gaps and summarizing on the specific gap that this research study hopes to contribute to. 2.2 Attributes of urban land pricing The economic value of any commodities and services is determined by its capacity to generate income. A crucial factor in the ability of land in a given location within urban area to generate income is transportation cost. In all industries, transportation cost is a significant part of production factor, so that lower transportation cost reflects higher net income to the industries. In this sense, location would play a major role since location determines the transportation cost of industries. For example, an office-based industry may minimize transportation cost by locating in the CBD (Forkenbrock and Schweitzer, 2001). The per-square-meter price of land in Chennai (located on the southeastern coast of India on the Bay of Bengal. The Metropolitan Area is comprised of Chennai City Corporation, 16 municipalities, 20 Special Grade Village Panchayats and 214 villages. The total land area is 1,189 square kilometers. The urbanized area extends approximately 50 kilometers, north to south, and 30 kilometers east to west. The City Corporation area is much smaller, about 20 kilometers, north to south, and about 12 kilometers east to west) varies considerably by location, level of infrastructure and surrounding land use 12

13 The most expensive land is that purchased in serviced residential plots in the city center, and the cheapest is in unserviced residential parcels in the outskirts of the city. Industrial land falls somewhere in between. The other significant factors that influence land price are access to infrastructure, development approval and some elements of the zone in which land is located its jurisdiction, the level of urbanization and the recent growth in urbanization. Below, comparison on the effect of different attributes on the price of land is made. The mean price of land in a residential plot in the Chennai Metropolitan Area in 2003 was about 8,200 rupees (Ksh. 12,956) per square meter, and in 2004 it increased to 9,250 rupees (Ksh 17,113) per square meter. Unfortunately, we do not have historical data and a comparison of two years does not lead to much discussion of trends because land prices often fluctuate significantly. However, we can draw several conclusions from the land price dataset that we have generated. One relates to the effects of distance from the city center on land prices. The other set considers the effects of infrastructure and development regulations on land values Distance Decreasing land value over distance from the city center is the most widely accepted and proven insight of the monocentric city model. In the Chennai Metropolitan Area in 2003, a simple regression of distance on the log of the price of land in residential plots tells us that, for each kilometer of distance between the center of the zone 30 the lot is located in and the center of the city, the price falls by 12% (Table 1). We use the log form of price because, as with population density, price falls at a negative exponential rate from the center of the city. The price decrease of 12.4% per kilometer is equivalent to a price gradient of The density gradient of the city in 2001 was

14 Although these gradients are not from the same year, it is interesting to note that the population density seems to fall at a greater rate than the land price for residential land. This difference is probably the result of two factors; first, nonresidential uses outcompete with residential uses (therefore dominating land use) at certain distances and, second, population and housing density are very sensitive to land prices, leading households to trade-off space for proximity to the central city. TABLE 1. Price Gradient Regression Results for Residential Plots Regression Intercept Gradient R 2 Distance (2003) 19, (-28.9) Distance (2004) 20, * The intercept is given in rupees per square meter (-28.14) ** The gradient is given in log form Source: Yudo Anggoro The land price gradient regression model presented in Table 1 only considers the effect of distance. However, there are many additional factors that shape residential land prices, including the age and quality of the housing stock, quality of urban services and environmental conditions. Figure 1 provides a more detailed look at land prices for residential plots and indicates that residential land prices in the city center (0 5 kilometers) are lower than in the next ring. This runs contrary to the general notion that land is most valuable in the center of a city, and is probably due to the poor environmental quality and the poor conditions of the housing stock in the old city. The rapid decline of land price beyond 10 kilometers may reflect that being located in the CBD is a positive factor associated with higher 14

15 quality urban services. Additionally, it could reflect the higher market potential for plots inside the central 10 kilometers of the region. FIGURE 1. Mean Price of Land in Residential Plots by Distance from City Center *Horizontal axis Distance from city center (Km) **Vertical axis Rupees per square meter Source: Yudo Anggoro Similarly, it seems residential parcels tend to decline in value with distance. Data was not available on the price of residential parcels within the CBD. This most likely result from a lack of parcel-sized pieces of land in the central 10 kilometers of the CBD. Additionally, complete data were not available on all zones outside of the CBD, probably for the same reason. Nevertheless, the average cost of land in residential parcels for the area outside of the CBD in 2003 was about 1,000 rupees per square meter and 1,250 in 2004, a marginal increase of 25%. 15

16 FIGURE 2. Mean Price of Land in Residential Parcels by Distance from City Center Horizontal axis Distance from city center (Km) Vertical axis Rupees per square meter Source: Yudo Anggoro Figure 2 shows how the parcel prices decrease with distance. Although this seems drastically different from the figure describing the price of land in residential plots by distance, it should be noted that this is only for land outside of the central 10 kilometers. With that in mind, it is very similar to Figure 1. Both residential plots and parcels seem to fit into three price ranges by distance: the first is land directly outside the CBD (between 11 and 15 kilometers), the second is between 16 and 20 kilometers, and the last is beyond that. 16

17 2.2.2 Infrastructure and Development regulations In addition to the distance of land from the city center, the potential to develop land is an important factor in determining its price. In the developed world, a common indication of the potential for development is how the land is zoned. Generally in the developing world, the potential for development of a piece of land is indicated by its having a clear property title and whether it is connected to infrastructure. Many empirical studies have documented a premium on having a formal title to a lot. In the case of Chennai, approval for development and connection to infrastructure seem to be almost inseparable, indicated by the minimal variation in price between lots that have development approval, infrastructure or both (Figure3). However, Figure 3 also indicates a very large premium on having development approval, infrastructure or both versus not having any formal recognition of development potential. This is likely due to tendencies in the consolidation of irregular housing. Once a neighborhood is able to obtain approval for development, it becomes much easier to get infrastructure installed, and vice versa. 17

18 FIGURE 3. Mean Price of Land in Residential Plots by Infrastructure and Development Approval Vertical axis Rupees per square meter Source: Yudo Anggoro The premium on land with development and infrastructure is different for land sold in parcels. While in the case of residential plots, it seems that having either infrastructure or development approval has about the same premium as having both, in the case of parcels, having one roughly doubles the price of land, while having both more than quadruples the price. This relationship makes sense; the combination of services has a multiplicative effect on their individual premiums. Additionally, the relatively smaller premium on infrastructure and development approval for parcels as compared to plots makes sense because they are both cheaper to obtain for parcels than plots due to the economies of scale and scope. 18

19 FIGURE 4. Mean Price of Land in Residential Parcels by Infrastructure and Development Approval Horizontal axis Distance from city center (Km) Vertical axis Rupees per square meter Source: Yudo Anggoro While the data on land prices in residential parcels is consistent with expectations, we will not include it in the following section that explores a more nuanced understanding of land prices because our dataset is not complete enough Regression Analysis of Residential Plots. A simple regression of dummy variables for infrastructure and development approval indicates that having development approval increases the price of land in residential plots by 138% and having infrastructure increases the price of land by 141%. However, this is an oversimplification. The problem with the above story lies in the separation of the different factors and their influence. The number of lots with infrastructure and development approval almost definitely increases closer to the center of the city, thus some of the apparent effect infrastructure or development approval has on the price of 19

20 land is actually due to its distance from the city center. A regression with multiple independent variables allows us to untangle the effects of the different attributes of land. In this case, we use a stepwise regression process, which allows for observation of the interaction between the influences of different variables. As mentioned above, distance became a less important predictor of price when the dummy variable for CCC was added. Similarly, the final regressions below show that distance explains less of the variation in price when you incorporate the other influences. We conducted a stepwise regression for 2003 and 2004 land price data (Tables 2 and 3), adding data on factors that might influence land prices and taking them out if they did not. An important caveat is that you can never really know causality, and we do not include many variables (for lack of data) that urban economists agree to be important influences on the price of land, such as disaggregated household income data. Nevertheless, we have a robust regression that explains 66% percent of the variation in land prices for the city of Chennai. 20

21 TABLE 2. Stepwise Regression Results for the Price of Land in Residential Plots, 2003 Coefficients Distance (-28.9).074 (9.1) (-7.55) -.06 (-6.78) (-4.02) (-4.95) (-5.30) CCC (7.08) (6.08) (7.86) Municipality (4.71).943 (5.78).715 (4.39) (1.89) Town.773 (6.20) Infrastructure.508 (4.61).463 (4.30).484 (4.01).439 (4.34).55 (4.59).445 (4.46).49 (4.19).426 (4.40) Development Approval Percent urban 2001 Urban change Percent Industry (4.30).44 (4.06).421 (4.12) 1.51 (8.31).422 (4.18) 1.18 (6.00).734 (4.26).404 (4.12) 1.49 (7.56).874 (5.18) (-5.98) Number of Observations Adjusted R 2 Root MSE Source: Yudo Anggoro 21

22 TABLE 3. Stepwise Regression Results for the Price of Land in Residential Plots, 2004 Coefficients Coefficients Distance (-28.14) (-8.87) (-7.29) (-6.59) (-3.64) (-4.82) (-5.17) CCC.965 (6.88).901 (5.83) 1.22 (7.55) Municipality.496* (1.67) Town.759 (6.15) Infrastructure (5.18) (4.19).657 (4.22).458 (3.86).462 (4.97).89 (5.55).534 (4.56).502 (5.19).652 (4.12).475 (4.17).485 (5.16) Development Approval Percent urban 2001 Urban change Percent Industry (4.84).495 (4.64).469 (4.69) 1.59 (8.93).473 (4.83) 1.20 (6.27).859 (5.12).455 (4.79) 1.51 (7.86).997 (6.07) (-6.09) Number of Observations Adjusted R 2 Root MSE Significant only at the.1 level Source: Yudo Anggoro 22

23 The price gradient flattened slightly from 2003 to 2004, dropping from to A flattening of the price gradient in the city is consistent with the expansion of the city and the flattening density gradient observed in before. Similar to the density trends, the flattening of the price gradient does not stem from a decrease in central city prices, rather an increase in overall prices between 2003 and 2004 and a slight increase in the relative price of land further from the center in the same years. Overall, the results indicate that the independent variables all have the expected signs and are consistent with urban land economic theory. Despite the fact that the FSI is constant at 1:1.5 across the CMDA region, actual observed construction and land prices seem to follow the patterns found in less regulated cities. So this again raises the importance to distinguish between de jure and de facto land use controls. 23

24 2.3 Characteristics of efficient land markets A well-functioning land market could be defined as one which is: i. Efficient -The system governing the land market encourages quick development and transaction of land. ii. iii. iv. Equitable - The system governing the land market provides reasonable access to all income groups. Environmentally sound - The system governing the land market protects its sustainable use for the good of both current and future users Compatible - The system governing the land markets is integrated with other laws and regulations governing land, such as, planning, taxation and provision of public infrastructure and services. A poorly functioning land market leads to several ills including, land speculation, creation of slums and squatter settlements, environmental deterioration, and an inefficient urban development pattern which increases the cost of doing business in the city and adversely affects the urban economy Land speculation Land speculation can drive land prices beyond the productive value of the land, causing a "bubble" land and property market. When the "bubble" breaks, financial institutes which lent money to land and property speculators find themselves unable to recover their loans, causing a crises in the financial markets. Land speculation occurs when the demand for land, at the present time or in the near future, outstrips the supply of land. This can be caused by several factors both on the demand side and on the supply side. On the demand side land speculation can be triggered by excess liquidity in the financial markets caused either by rapid economic growth or by a lack of opportunities 24

25 for investors in other sectors of the economy, in slow growing economies. In either scenario investors invest, on a short term to medium term basis, in the land market, waiting for prices to increase and sell their tenure at a profit. Rampant land speculation can drive land prices beyond the productive value of the land, causing a "bubble" land and property market, where prices of land and property are overpriced. This can spiral into loans taken on value of land and property at inflated prices from the financial markets. When the "bubble" breaks either by internal or external factors, financial institutes which lent money to land and property speculators find themselves unable to recover their loans, ending up with bad debts, triggering a collapse of the financial markets. Land and property speculators have been blamed for triggering the financial market crises in South-East Asia. In stagnant or slow growing economies with fewer options for investment, investors speculate in land creating a "bubble land market". When investment opportunities increase, investors diversify their assets and land prices plummet. The impact on financial markets of land market collapse although not as severe as in bubble markets of rapidly growing economies can still be devastating. On the supply side land speculation is caused by bottlenecks in the availability of serviced land (land with access to basic infrastructure such as roads, water, electricity etc.). These bottlenecks can be caused by several factors either in the land development phase or in the transaction phase. Slow provision of infrastructure and services can cause the bottlenecks in supply of serviced land. This is often the case where government agencies are in charge of providing infrastructure as is the case in many South Asian countries and countries with transition economies. Some studies have shown that the average time lag between the announcement of a land development scheme and actual delivery of severed plots can take as long as five years. 25

26 Bottlenecks in the supply of serviced land are caused by slow provision of infrastructure and services, poor city planning, poor land records, and cumbersome procedures to buy and sell land. Another cause of slow land development is poor city planning. The Government often provides arterial infrastructure, leaving the provision of secondary and tertiary infrastructure to individuals or private sector developers. Because of the inability of the private sector or individuals to assemble raw land, only land closest to the arterial infrastructure is developed, causing ribbon or corridor development. Such development is often found on the periphery of Asian cities. Land farther away from the arterial infrastructure is often left unserviced and thereby unusable for urban purposes. Thus one gets city development patterns with large pockets of vacant, undeveloped land in the city. This type of development causes increased costs of doing business in the city as it increases the costs of transport and provision of infrastructure. Bottlenecks can also occur in the transaction phase of land development. Due to poor cadastral land records, slow bureaucratic procedures, it can take a long time to buy and sell land in the market and to register such transactions with government institutions. In addition to high economic costs land speculation has high environmental and social costs. The environmental costs of land speculation can be high. Rather than develop existing vacant land within a city land developers find it more profitable to develop new land along transport arteries in the periphery, often by converting agricultural land or land earmarked as green areas. This type of ribbon development puts greater pressure on natural resources, particularly water as it increases the amount of leakage. It also increases the costs of disposing urban waste water and solid wastes. Because of greater commuting distances and lack of an adequate transport infrastructure it also increases air pollution. Social costs of land speculation can also be very high. As stated earlier it can drive the urban poor out of the formal urban land market, pushing them into squatter 26

27 settlements, illegal subdivisions and slums. Poor housing and infrastructure conditions not only increase the cost of living but also cause poor health and entrench the cycle of poverty. In some countries, speculation in the land markets has made housing unaffordable even for the middle classes. Surveys have shown that some lower middle class families are forced to find shelter in illegal land subdivisions. 2.4 Land policy formulation and implementation The process of formulating and implementing land policies is not only politically and technically difficult, it can also be costly. However, the costs of not formulating and implementing them are much higher. The key to formulating effective policies is understanding the existing realities and processes on the ground and reducing their negative impacts and maximizing their positive impacts Objectives of an urban land policy Participatory approaches to policy formulation and implementation often result in building a constituency for reform and can serve as an important tool for creating political will. Urban policies are often prepared on a piece-meal basis in reaction to specific demands from interest groups. This type of ad hoc policy formulation often creates more distortions in the urban economy. Governments need to formulate clear objectives for any urban land policy. While specific objectives would vary from country to country the overall objective of any urban land policy should be to ensure that land markets are efficient, equitable and environmentally sound and sustainable. 27

28 2.4.2 Process of formulating and implementing urban land policies Before formulating and implementing urban land policies the following questions need to be answered. These can be lumped into two categories: understanding the workings of the urban land markets, evaluation of policy tools. i. Understanding the workings of the urban land markets The key to formulating effective policies is to first understand the existing realities and processes on the ground and then to determine ways and means of reducing the negative impacts of these processes and maximizing their positive impacts. The questions that need to be asked in this regard are: a) What are the inefficiencies, in the urban land markets? b) What are the impacts of the current urban land markets on the environment? c) What distortions and inequities exist in the urban land market? d) What are the factors causing the distortions? e) What is the cost of the distortions to the urban economy? f) Who is benefiting from the distortions and inequities? g) Who is suffering from them? h) How much political power does each of these groups have to resist or promote reform? These questions can be addressed through a detailed land market analysis. Special care should be given to who undertakes the analysis. Rather than a government agency, it would be preferable that an independent institution, such as a research centre or a consultancy firm be entrusted with the task. The T.O.R should be clear and comprehensive so that the institution undertaking the study understands exactly what is expected of it. It is important that such an analysis is not only technically sound but it also needs to take the politics of land into account. The analysis should then be subjected to 28

29 consultations both through public hearings or urban forums and through informal consultations with the various actors in the land market. This process would complement the analysis and enhance the overall understanding of the urban land market. Care should be taken to make the process of consultation and hearings as inclusive as possible. Such a process often results in the actors themselves suggesting solutions to the problems identified in the land market analysis. ii. Evaluation of policy tools Once the issues and actors have been identified the following questions need to be asked: a) Which policy tools most effectively address the inefficiencies, inequities and unsustainabilities identified by the land market analysis? b) Which level of government should implement these tools? c) What extent of technical and institutional capacity is required, at what level of government, to implement them? d) Does such capacity already exist? If not, what measures need to be taken to build the capacity? How much time, human resources and monetary resources, would be needed to build these capacities? e) What legislation is required, at what level (national, sub-national or local), to implement these tools? f) Is there political will to pass the legislation and implement the policies? If not, how can the political will be created? g) What would be the time-frame for implementing the policy? h) What criteria or parameters and mechanisms would be used to measure success or failure of the policy? A participatory approach, similar to the one used in understanding the urban land market, should be used in policy formulation and implementation. Participatory approaches often result in building a constituency for reform and can serve as an 29

30 important tool for creating political will. While participatory processes are more effective than one-sided government policy initiatives, they do consume more time and can at times be frustrating to both elected and appointed officials who are more used to unilateral actions. However, their benefits far outweigh their costs. 2.5 Impact of urban land pricing in construction In active markets, builders and developers appear to earn more profits well above those of more standard competitive industries. Though the price markup on land is smaller than expected, land is the key factor in explaining variations in builders profitability. Per unit, builder profit is more sensitive to changes in land cost than to changes in structure cost. While the profit rate elasticities for land and structure vary by market, they are almost always greater in absolute value for land than for structure. The effect of market conditions on profits rates also works through the markup on land. Changes in house prices have much large effect to contribution of land to profits than they do for structure. Much research has examined the relationship between land and structure in housing production. The density gradient studies by Mills (1972) and Muth (1969) reflect the substitution of land for structure in the provision of housing services as location rents rise. Initial research done by Muth (1971) and Smith (1976), reviewed by McDonald (1981) focuses on the correct specification of the production function. Recent work by Stover has extended the analysis to include more inputs in the production function. Draw back to the work by Muth, Smith and McDonald is the estimate for land and structure value. A detailed breakdown of the contribution of land and structure to profits indicates that the variation per unit builder profit is most sensitive to land costs. This suggests that unexpected variations in structure cost either are small or can be passed on directly to consumers in the form of higher prices. In contrast higher land prices directly reduce profit margins. Changes in housing prices affect profits through land. The contribution of structure to per unit profits is not correlated with the movement in house prices, while that of land is.structure costs matter because unexpected variation in structure 30

31 costs is much more readily passed on to consumer than is the case for land costs. In contrast builder behavior would be expected to be much more sensitive to land costs because it more directly affects the builder s bottom line. 2.6 Conclusion The researcher in this paper will use actual expenditure on land and structure construction in exploring the impact of the former in construction. The researcher will also address the question of sustainability as another gap in previous studies The case study area was rezoned to accommodate multi storey housing structures. The effect of rezoning on land prices and hence house prices has not been addressed. The exact percentage increase in land price as a result of rezoning will be revealed as well as the marginal profit increase (if any) in house sales which directly impacts construction. The likely future trends will be explored in addressing the issue of sustainability. 31

32 3.0 RESEARCH METHODOLOGY 3.1 Research Design The research design is the conceptual structure within which research is conducted. It consists of the blueprint for the collection, measurement and analysis of data. As such the design includes an outline of the framework of study, availability of various data, and observations. It means the exact nature of the research work in a systematic manner (Kothari, 2004). The researcher adopted case study design for ease of data collection, analysis and comparison given the diversity of the general study area (urban center).this way, the researcher would be able to test the hypothesis which goes to the core of the study. The narrowing down to a case study area gives the researcher an opportunity to capture the entire aspects of the area geographically, generate a questionnaire whose response from the target population will be a true reflection of the case study area given its homogeneity and time constrains. 3.2 Case study area The case study area selected for this paper is Kileleshwa in Nairobi. Nairobi is the most populous city in East Africa, with a current estimated population of about 3 million. According to the 2009 Census, in the administrative area of Nairobi, 3,138,295 inhabitants lived within 696 km 2 (269 sq mi). Nairobi is currently the 12 th largest city in Africa, including the population of its suburbs. Located four Kilometers West of Nairobi's city centre, Kileleshwa is a quiet, uppermiddle income, leafy suburb. The landscape is a mixture of aging, colonial houses built in the 1950 s and 1960 s and modern apartments and townhouses. The Government holds quite a significant part of Kileleshwa. Most senior civil servants have been housed in Kileleshwa in spacious bungalows and maisonettes, with Kileleshwa differing from neighboring Kilimani, Hurlingham, or Lavington in the land size per house. Until quite recently, Kileleshwa houses occupied three-quarters to an acre of land. The suburb is 32

33 also quieter and greener than Kilimani and Hurlingham. At the border of Kileleshwa and Kilimani lies State House, the official residence of the President. High-end apartments increasingly dominate Kileleshwa, replacing old single-unit houses built in the 1960 s. Kileleshwa is a residential area, so there are few commercial buildings. There are also estate-type maisonettes, set in gated communities with one common entrance. Housing units in this setting are per estate. This environment favours families with younger children who find a secure and social place to grow up. The area is zoned as residential. The owners of the few commercial buildings in existence in the area had to seek permission for a change of land use permit from the City Council before commencement of construction. 3.3 Target Population The target population for this research study included Property developers, Valuers and home owners/buyers that have been involved in actual land transactions or property development. A list representing each of all the above parties who are involved in projects in the case study area was made and questionnaires to suit each party formulated. 3.4 Data Collection Given the sample size (case study area), a survey method was best in order to obtain a representative response. The survey instrument of collecting primary data used for this study was a structured questionnaire. The questions were designed to elicit data in accordance with the research objectives. Drop and pick later method of data collection was applied. However, depending on the nature of the respondent, face to face interviews were also conducted. This was done for the category of respondents that were difficult to trace and the questions they were to respond to were few that could be answered on the spot wherever the respondents could be found in the study area. 33