FAO 2003 Overview of Land Value Conditions

AGL/MISC/35/2003
OVERVIEW OF LAND VALUE

CONDITIONS
AGL/MISC/35/2003
OVERVIEW OF LAND VALUE

CONDITIONS
LAND AND WATER DEVELPMENT DIVIISION

LAND AND PLANT NUTRITION MANAGEMENT SERVICE
FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS
Rome, 2003
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FAO
2003
iii
Abstract
This paper examines the factors affecting the value and price of land. It highlights the issues
relevant to land value in a market situation of competing use options. However, a study of land
value is fraught with problems. The imprecise use of terms such as value, price and valuation
and inadequate data make comparisons difficult. Some countries have a functional land market,
some a centrally planned economy, while others are in transition or consider land a common
good which is not transferable.
The purpose of this document is to provide a summary of the context in which the demand for
land meets supply, and its effect on price formation. Drawn from a comparative analysis of a
number of national conditions and cases, it discusses the factors that affect the price of agricultural
land under different circumstances. This document aims to serve as a guide for planners and
decision makers who deal with agricultural land transactions under conditions of changing
public intervention, whereby potentially competing users accept an exchange value of land.
Subsequent methodology development is required to relate physical land quality indicators
with land value.
This discussion paper is based on the work of Prof. W. Verheye, Geography Department,
University of Gent, Belgium.
iv
List of boxes
1. LAND USE IN INDONESIA
2. Land restitution in Bulgaria
10
3. Planning problems in a traditional land tenure system
30
List of tables
1. Distribution of available land
2. Actual arable land per head of agricultural population, 1965 and 1995
3.Sales prices for land with different land use potential in France
21
4.Sales prices for residential and agricultural land in Belgium
22
5.Subsidies allocated to agriculture in industrialized countries
25
6.Percentage of rented land compared to total used agricultural land
34
Contents
Page
ABSTRACT
iii
LIST OF BOXES
iv
LIST OF TABLES
iv
1. INTRODUCTION
2. SCARCITY AND COMPETITION

Land scarcity
Population pressure
Land availability
Changing land use
3
3
3
4
5
3. MARKETS
Land markets
Market-driven allocations and prices
Government allocation and pricing
9
9
10
11
4. ACCESS
Access to land
Formal permanent access
Formal temporary access
Informal access, spontaneous occupation and squatting
13
13
13
14
15
5. VALUE AND PRICE

Land value and price
The value of land
Factors affecting the value and price of land
Productive land capability
Security of land
Agriculture policy
Land use options
Land taxation
Land policy and zoning
Land as a speculative asset
17
17
18
19
20
23
24
26
27
29
32
6. PRICES AND RENTS

Land prices in developed countries
Land tenure and ownership
Agricultural land prices
Agricultural rents
33
33
34
34
36
vi
Page
7. VALUATION
Land valuation
From theory to practice
Constraints
Factors to be ascertained
Calculations
Valuations derived from market values
Valuations in a limited/no market situation
39
39
40
40
41
41
42
42
REFERENCES
45
Overview of land value conditions
Chapter 1
Introduction
This paper examines the factors affecting the value and price of land. It highlights the issues
relevant to land value in a market situation of competing use options. However, a study of land
value is fraught with problems. The imprecise use of terms such as value, price and valuation
and inadequate data make comparisons difficult. Some countries have a functional land market
and some countries a centrally planned economy, while others are in transition or consider land
a common good, which is not transferable.
Land use planning and zoning is a major issue for government, in particular in densely
populated areas or in regions, which are under degradation and environmental threat. Urban
settlements are expanding worldwide and the risk for competition and social conflicts is real if
no adequate planning and (re) allocation of land for housing, infrastructure and social amenities
are made. In rural areas, value and price of farmland reflect agricultural policy reform, compatible
with a worldwide market-oriented agro-food sector. In particular public intervention determines
at what price the supply of land meets demand. Agriculture constitutes largest use of land
resources. Price is one of several tools, which can provide means of managing land resources.
The price of land is important in the context of agricultural policy reform and competitiveness
in a worldwide market-oriented agro-food sector. Indirectly, it also relates to governments
support to national agricultural production, and their obvious impact on the mobilization of
land resources, both with respect to changes in their use within the agricultural sector itself as
between sectors.
Cultivable land is finite in extent and inadequate management could endanger its quality.
There are twice as many people in the world as a generation ago, and in 50 years time agriculture
may well have to feed four times as many. In addition to arable land expansion, crop production
intensification and biotechnological progress will meet this growing demand for food. Central
to economic development, the management of natural resources is an increasingly important
issue as competition for cultivable land increases
In economic terms, the intersection of the demand for - and the supply of land generate a
market-clearing price that determines land use. Those who value land most highly acquire land
from those who provide it most cheaply. From the sellers point of view, price in such a perfect
market reflects the opportunity cost and for the buyer the willingness to pay for benefits foregone
of an alternative investment. Although this is a highly stylised representation of the economic
world, it does provide the rationale for economic land use.
In a traditional rural society, land often is a communal good. It enables people to satisfy
their primary needs for food and shelter and is hardly transferable. However, societies are
changing rapidly as growing numbers of people concentrate in and around cities. There, they
gradually loose the link with ancestral land as a common asset. In an urban society, especially
under free market conditions, individualism becomes more dominant and individual ownership
increases. In many communal areas in Africa where land is traditionally not alienated, communal
Chapter 1 Introduction
land that a family has used for a long period becomes de facto inherited. Informal land transfers
(sales) are taking place at an increasing rate, and the state often accepts this budding market
activity.
In recent decades, the concept of land as a strategic production factor has undergone important
changes. An open and free land market has never really existed. Governments willingness to
support food production from national land has long affected agricultural land values. Today,
many governments are less prepared to subsidize farm products, and in this new context, the
value of agricultural land becomes more dependent on its productive capacity determined by
markets.
There is a growing perception that land is an asset for which various potential users compete.
This in turn increases the need for a functional land market where demand meets supply.
Economic development is a major issue for government, in particular in densely populated
areas or in regions threatened by degradation and environmental problems. Urban settlements
are expanding worldwide requiring land for housing, infrastructure and social amenities. In
rural areas, the value of farmland is important in the context of farm credit and cost factor in
agricultural production.
The combinations of these factors highlight the need for objective, transparent and
understandable factors that relate to price formation. In particular, public intervention determines
at which price level the supply of land meets demand. The price of land is important in the
context of agriculture policy reform and competitiveness in a worldwide market-oriented agrifood sector. Indirectly, it also relates to government support for national agricultural production,
and the impact thereof on the mobilization of land resources, both with respect to changes in
use within the agriculture sector itself and between sectors.
The options open to governments, as the ultimate administrators of land resources, are: (i)
distinct, private rights and land markets; (ii) public management and administered prices; and
(iii) public management without prices. These alternatives present a range of opportunities for
government intervention in the demand and supply of land. As the demand for land grows, the
allocation of land resource becomes more crucial for society. Given that land is often ultimately
considered as publicly owned as well as scarce, the question is how society can obtain the
greatest benefit from its land resource while, at the same time, ensuring its conservation and
efficient use.
The purpose of this document is to provide a summary of the context in which the demand
for land meets supply, and its effect on price formation. This document aims to serve as a guide
for planners and decision makers who deal with land use planning under conditions of changing
public intervention, whereby potentially competing users accept an exchange value of land.
Subsequent methodology development is required to relate physical land quality indicators
with land value.
Chapter 2
Scarcity and competition
LAND
SCARCITY
Scarcity is a concept that has specific attributes in economics. A resource is not scarce if there
is sufficient supply to satisfy all demand at a zero opportunity cost. That is, the resource is so
plentiful relative to the demand that all demand is met. Resources are termed scarce when use
results in a lack of availability for another purpose. The value of the resource lies in this
opportunity cost, the value foregone in the allocation of that resource for a particular purpose.
Within this paradigm, land resource management has as a goal the short and long run
maximisation of the value of land resources to society. Land scarcity occurs in several ways. It
may be scarce in one location but not another; or scarce at one time of year or day, but not at
another; or scarce with respect to quality but not quantity. It may, and usually does, become
scarcer over time as alternative uses expand. The relative scarcity of land can be determined by
examining its opportunity cost: what must be given up when land is used in a specific way.
Investments are often made to redistribute land from a location and/or time of non-scarcity to a
location and/or time of scarcity. This, too, is recognition of relative scarcity, in that financial
resources (capital) and often other resources (environmental) are traded to relieve a spatial or
temporal shortage of land.
As the demand for land grows, allocation of the scarce resource becomes more crucial for
society. Competition and conflict among members and groups within society concerning land
quantity and quality take on a sharper nature. From an economic perspective, land management
is efficient when the real opportunity cost of the last hectare of land used is as low as possible.
This implies that demands for land with higher values are served so long as land is available,
and those with lower values are not. This opportunity cost must also consider future values of
use, particularly for land temporarily set aside.
POPULATION PRESSURE
From an estimated 427 million in 1500, world population increased to 1 650 million in 1900,
3 600 million in 1970 and 5 200 million in 1990. Recent projections point to a figure of around
10 000 million by 2050 (FAO, 1963-1996; UNFPA, 1992). This corresponds to a growth rate
of approximately 85 million per year.
Almost all of this population increase has occurred and will continue to occur in the
developing world (population levels elsewhere are expected to stagnate). For example, in
Indonesia, with a population of almost 200 million, the average population density increased
from 16 inhabitants/km in 1961 to 77 inhabitants/km in 1990. In India, with an assumed
annual demographic growth of 1.9 percent, the population will reach 1 000 million by 2000. A
recent study in West Africa (Ciparisse, 1997) has shown that the population in this subregion is
expected to rise from 87 million in 1960 to 430 million in 2020, an increase of 490 percent
over 60 years. In line with this evolution, urban populations increased from 14 percent in 1960
to 40 percent in 1990 and are expected to reach 62 percent in 2020.
Chapter 2 Scarcity and competition
A major factor in population trends is rapid urbanization, mainly in developing countries.

Of 298 world metropolis totalling a population of over 1 000 million, 175 are located in
developing countries, including 44 in Latin America and the Caribbean (UN, 1991; Baudoin
and Margiotta, 1997). In the early 1950s, Latin America had only six cities with more than a
million inhabitants, but by 1990 this number had tripled. Never in history has the urban population
of a continent grown so fast: an increase of 123 million between 1975 and 1990, and an annual
increase of 9 million between 1985 and 1995. By 2025, the urban population of Latin America
is expected to be 85 percent of the total population of the continent. Other continents exhibit
similar though less pronounced trends.
High population densities on a limited area increase the pressure on land for food, space,
and leisure, and should in principle lead to higher food prices and higher incomes for farmers.
Current demographic trends pose a dual land problem: scarcity and competition for land in the
urban and peri-urban areas, and abandonment and lack of maintenance of property in remote
rural areas with low carrying capacity and limited earnings from land use.
The former trend is reflected in European land markets. Current prices for arable land in the
European Union (EU) relate to population density and the percentage of people living in rural
areas. In Finland and Sweden, with population densities about 20 inhabitants/km, land prices
are Ecu 1 1002 700/ha. In Ireland (population density 52 inhabitants/km), they are two to
three times higher (Ecu 5 0005 500/ha), while in the Netherlands (population density
460 inhabitants/km) agricultural land prices exceed Ecu 18 000/ha (EC, 1997). A similar trend
applies to, for example, Argentina. Agricultural land prices in the Pampas of Buenos Aires
Province correspond to the earning capacity from maize cultivation and cattle raising and are
in the order of US$5 000-10 000/ha. Some 1 0002 000 km south in the almost completely
depopulated Patagonia region, land prices are below US$ 50/ha.
LAND AVAILABILITY
Land is finite in extension. Almost half TABLE 1
of the potentially available land in the Distribution of available land
Year
Available land (million ha)
world (3 030 million ha) is under
World
Europe
Africa Asia
S. America
cultivation. The balance is under forest,
1965
1 399
152
190
447
82
difficult to access, marginal in suitability,
1970
1 408
146
169
438
110
and/or occupied by cities, mines,
1980
1 427
140
175
449
101
infrastructures, etc. (FAO, 1991). The
1990
1 463
138
186
110
amount of effectively cultivated land in
1991
1 441
138
181
457
115
the world has almost stabilized (Table 1).
1992
1 443
136
182
459
113
1993
1 447
136
187
468
102
In Europe, the arable land surface has
1994
1
450
135
185
472
105
decreased, mainly because of a change
1995
1 476
134
192
516
120
in the EUs agriculture policy, and
Source: FAO, 1970-1996
because of an increasing conversion of
agricultural land to more remunerative
uses. Land reserves still exist in South America, partly due to difficult living conditions and the
migration of its former settlers.
Though a further extension of cultivable land to meet the needs of a growing population is
still possible, in the long-term, physical constraints (climate, access, etc.) and harsh living
conditions will restrict this potential. This situation is exacerbated by the fact that about
200 million ha (or approximately 15 percent) of arable land is under degradation. This is mainly
as a result of human interventions related to deforestation, improper agricultural practices,

erosion, overgrazing, desertification, pollution, and nutrient depletion (Oldeman et al., 1990).
The growing demand for land in the rural sector is evidenced by competition between: farmers,
peasants and landowners; farmers and herdsmen for grazing lands and watering points; farmers
and forest dwellers. Demand for land for urban and industrial expansion in the peri-urban
fringe, for environmental protection, wildlife preservation, etc. reduces the available arable
land or forestland. This competition is a dynamic phenomenon closely associated with changes
within society and in land use patterns.
Competition for available land in an open market system leads to an increase in land prices.
The current price for arable land in France is Ecu 3 000/ha while in Germany it is Ecu 15 000/
ha. The two countries are of approximately the same size but with different population densities:
106 inhabitants/km in France and 235 inhabitants/km in Germany.
Falling per caput available land surface and living conditions declining to subsistence level
in developing countries with a non-functional or only very thin market suggest increased land
scarcity. Per caput available land is very low in some sub-Saharan countries in Africa and in the
Far East though in Asia the low figure might to some extent be explained by the double cropping
in most rice growing areas (Table 2).
CHANGING LAND USE

Demographic pressure and competition for land have not only modified the rural/urban
equilibrium; they have also changed existing land use patterns. Despite migration to cities,
population pressure is still rising in many rural areas, in particular where good quality soils are
TABLE 2
Actual arable land per head of agricultural population, 1965 and 1995
1965
Actual
arable land
1995
Agricultural Arable land per

population
caput agric.
pop. (ha)
Actual
arable land
Agricultural
population
Arable land per

caput agric.
(1000 ha)
(thousands)
pop.(ha)
(1000 ha)
(thousands)
Africa
190 453
222 634
0.86
196 430
415 638
0.47
Europe
152 262
67 702
2.25
316 942
74 882
4.23
South
America
82 367
70 345
1.17
120 513
64 251
1.88
North &
256 508
51 839
4.95
277 253
51 245
5.41
447 134
1 241 110
0.36
472 433
1 943 525
0.24
World
1 393 772
1 775 600
0.78
1 508 824
2 538 044
0.59
Brazil
30 900
42 753
0.72
65 500
30 626
2.14
Indonesia
16 740
74 074
0.23
30 180
96 997
0.31
Nigeria
22 199
32 404
0.69
32 909
42 096
0.78
China
118 940
506 247
0.23
95 843
870 078
0.11
Pakistan
17 874
31 360
0.57
21 600
69 640
0.31
Senegal
2 215
2 848
0.78
2 265
6 169
0.37
Central
America
Asia
Source: FAO Production Yearbook 1976 and 1996
present. Rosegrant et al. (1997) estimated that in the developing countries alone some 14 million
ha would be converted into urban land between 1990 and 2000.
Arable land is expanding at the expense of forestland, whether under a legal and/or
government supported form (Indonesia, Brazil) or as illegal occupation and squatting. More
than 8 million km of virgin tropical rainforest, mainly in Central and South America, have
been converted to agricultural and pastoral uses GTZ, 1998).
Large agro-industrial complexes, often up to
50 000 ha or more, for the industrial production of
oil palm, coffee or rubber are replacing smallholder
settlements in tropical forest areas. Similar estates
for sugar cane, pineapple and other tropical export
products have been established in savannah regions.
In Guinea, Sierra Leone, Benin, Togo, Liberia, Cte
dIvoire and Nigeria, more than 80 percent of the
original forest canopy has disappeared. In Indonesia,
which still has extensive forest reserves,
deforestation is extremely important, especially in
the outer islands (Box 1).
BOX 1: LAND USE IN INDONESIA
The rate of deforestation between 1970 and

1990 is estimated at 9 000-12 000 km/
year.
Deforestation has affected Sumatra

(50 percent of original forest cover lost),
Malukku and Nusa Tenggara (56 percent
lost), Kalimantan (59 percent lost) and
Sulawesi (60 percent lost).
For the resettlement of people under the

Transmigration
Programme
an
approximate 1.4 million ha of forestland
were cleared between 1969 and 1989.
Source: Verheye, 1994
Arable farming is also competing with

traditional livestock raising areas. In the Senegal and Niger river floodplains, grazing areas
traditionally used by herdsmen have substantially decreased and access to water been seriously
hampered due to the continuous expansion of irrigation schemes and mechanized rainfed
cultivation. In areas where agriculturists and herdsmen traditionally share land and water rights,
the changes in the land use pattern may cause open or latent conflicts.
Changing land use patterns relate directly to, and are often at the origin of, higher benefit
perspectives. In a customary land tenure system, where land is a common property, this is
reflected in an increased annual rent for foreign leaseholders. Perceptions of benefit related
to the principles of a monetary economy are eroding the tradition of non-alienation of customary
land in many parts of Africa.
In a free market system, any change in land use has an effect on the value and price of land
as it influences the expected benefits from the land. In western economies, the highest values
are allocated to land for housing and residential development in general, followed by: industry
and infrastructure, horticulture, orchards, agricultural land, meadow and forestry land. Arable
land that is converted into forests receives a lower price because its income earning potential is
lower. Moreover, in order to return forested land into arable plots, deforestation costs have to
be accounted for.
The combination of increased population pressure and available land has the following
effects on land and land use:
An initial expansion of cultivable land to meet increasing food demands.
A reduction of the fallow period in traditional agriculture that, while it may have no direct
effect on land prices in the absence of a land market, increases the risk of soil nutrient
depletion and land degradation, so reducing the intrinsic value of the land.
Increased competition for land, so causing land prices to rise and indirectly fostering the
development of intensive production technologies.
When no more land is available for expansion, both phenomena lead to migration towards
either newly opened agricultural areas or cities.
A further aspect of changing land use is that there are few, if any, traditional societies that
consider land as a purely private good wherein title and full management authority rests with
private individuals. Land is generally recognized as being the property of the state, even in
societies that purport to be individualistic and market driven. Land is almost always designated
a public good, and often considered too important to be the preserve of individuals in one
form or another.
Chapter 3
Markets
LAND MARKETS
Three important characteristics give land a public character even in economies which are not
governed by a central planning policy. First, land is a natural resource and its use may have
aspects of common property (non-exclusive but competing uses) and/or external effects. Second,
land is an essential resource for habitat, and thus needs to be available in sufficient quantity
and quality to provide for the security and stability of the society as a whole. Finally, land
development and management is often expensive and frequently exhibits natural monopoly
characteristics (declining average cost over large ranges of investment sizes). Thus, some sort
of government intervention to correct these market problems appears warranted.
Given that land is often considered as publicly owned, as well as scarce, the question is
how the public owner can obtain the greatest benefit from its asset while, at the same time,
ensuring its conservation and efficient use. Randall (1987) defines a pure public good as one
which because of its very characteristics is both non-exclusive and non-rival. That is, there is
no capacity to control access to the land, and land use by one individual does not preclude
another from using the same unit of land. Non-rival resource use has a zero marginal cost,
though that definition is somewhat less than precise because it must include both zero incremental
cost of provision and zero opportunity cost, i.e. foregone benefits from a specific use. This
definition does not preclude a public good from being scarce, if there is a cost to furnishing it
(for example, land reclamation from the sea). Land use is hardly ever non-exclusive, although
the use of a hectare of land by one person means that this hectare is, at least in a relevant time
and at that specific location, not available to others.
A land market is a place where people acquire or transfer land and land use rights. A land
market consists of several segments, viz. agricultural versus non-agricultural uses, the type of
use (ownership versus lease), the type of agricultural production, and the level of taxation. For
a land market to be functional, land must be available and in demand. In a market economy,
agricultural land will earn its exchange value through its production potential. Production data
provide this value and serve as an initial basis for the sales price, or rent for its temporary use.
Current users can continue the right to use land in exchange for paying a fee for the use rights
to another producer. The marginal value product attributed to land will depend on the structure
of the output prices and on the production technology and managerial efficiency at the farm
level. All other factors being equal, land price formation and price elasticity in the market will
reflect the discounted net future income.
Two different types of economic approach determine land value. The first is to provide a
basis for market-driven allocations and prices. The second is pricing by a central authority to
recover costs of services. Market allocations require two specific initial conditions: secure
property rights and low transaction costs. First, land users must have some form of certain
rights to land. In many instances, these are usufruct rights. That is, although the state is the
10
Chapter 3 Markets
ultimate owner of the land, individuals or groups have the legal entitlement to use land. Secondly,
these usufruct rights must be tradable in some form for markets to develop. Whether or not the
state is able to recoup income from the rights is generally irrelevant to the efficient use of the
resource. Owners of the rights will trade provided the land use right brings higher returns by
sale than in use.
MARKET-DRIVEN ALLOCATIONS AND PRICES

Given the existence of secure property rights (in the sense that the individual has control over
their use), markets can develop where the cost of trading (transaction cost) is low. If transaction
costs exceed the gains from trade, no trades will occur and no market will exist. Developed
markets will ensure that the land is in its highest and best use. Those who value land more will
be willing to purchase from those who value it less. Provided trades are not restricted
administratively, land trade will occur until marginal value is equal among all users. These
trades will maximize the value of land resources. The market solution also permits flexibility.
Should the situation change relative to these values, trades will occur so that the new land
users who accord a higher value to land will obtain land.
Thus, the role of government in managing land by markets is: to provide secure property
rights to land, however defined; to ensure low transaction costs for trades; and to provide
competitive entry mechanisms which the market itself cannot achieve. In many countries, appeals
to both the administrative and judicial systems generally accomplish this last goal. This economic
approach can ensure efficient use of the resource and maximum economic surpluses. However,
governments infrequently identify land markets as appropriate.
A land market is gradually emerging in
BOX 2: LAND RESTITUTION IN BULGARIA
countries in transition in central and eastern
The Law for Agricultural Land Ownership and Land Use,
Europe. The effort to reform collectivized
February 1991, allows restitution of agricultural land to
agriculture sectors in the former Soviet
its former users. There are still uncertainties about the
Union (FSU) and much of eastern Europe
exact ownership of the land and, therefore, at the end
of 1997 only owners of 0.7 million ha of land possessed
includes a complex array of changes in
notary deeds.
property relations, land tenure, pricing,
Registration costs for notarized deeds are too expensive
marketing and financial arrangements
for many people and do not generally cover presentday benefits. New owners are cautious about renting
(Brooks, 1991). In the FSU and eastern
out land for which they have not yet received full
European countries that most closely
guarantees of ownership; hence, 15 percent of current
followed the soviet model, agricultural land
arable land is not cultivated.
was owned by the state and managed
In many regions, land ownership is very small and rental
is seasonal. For these owners, the transaction costs of
collectively without the payment of explicit
renting out outweigh rent benefits. Due to uncertainty
fees for land use. A market economy
of ownership, high registration and transaction costs,
requires that agricultural producers pay for
and low benefits the land market is almost non-existent.
Source: Gavira Montiel, 1998
land use. The current distorted pricing
system, the lack of proper valuation
methods, and the limited acceptance of the
concept of land being a free commodity complicate the rapid development of a functioning
land market. Pending uncertainties about land ownership (Box 2) are a further factor in slowing
the process.
Land markets are usually important in western economies. The number of sales per year
varies from a few thousand to almost 100 000 depending on the size and population of the
country. For example, in Belgium (31 000 km2; population 10 million) the market for agricultural
land in recent years has been approximately 20 000 sales per year.
11
Several aspects are critical to land markets. First, trading land beyond simple usufruct requires
control of the land in terms of both space and time. This control is often expensive and the
investments frequently have the characteristics of natural monopolies. Secondly, markets for
land may fail to account for external effects. Finally, governments tend not to want to relinquish
control over land resources in any form. Reallocating land over time, space and use appears to
be a significant policy instrument which is not easily (at least from a political standpoint)
transferred to private individuals. The power to use land for economic development or as an
avenue for redistributing income and wealth appears to be a significant political and social
instrument.
GOVERNMENT ALLOCATION AND PRICING

The government itself can sell land to users. This can take local (municipality), regional (district
or region) and national forms. Essentially, land pricing by governments generates revenue and
provides resources for the operation, maintenance and replacement of facilities for land
reclamation. However, governments seldom use more than cost-based pricing mechanisms,
though many government agencies use marginal cost pricing approaches. A broad range of
examples suggests that governments subsidize land provision, that is, they fail to recover even
the full costs of facilities, much less any stock value of the resource. Fixing maximum prices
and preventing trades of land in the name of equity have been frequent in government land
supply policies. One objective of these supply constraints is to prevent windfall gains from
public investment. However, in the face of rapidly changing land demand and values, these
restrictions have resulted in large losses to society, and might well exceed any windfall gain
that would have accrued to any original purchasers of the land.
A further complication arises with a purely government agency. There is a tendency in
government to try to avoid the kind of scarcity pricing which most markets represent. Thus,
governments tend to try to find ways to augment supplies, rather than allocate existing supplies.
Provided the costs do not exceed the benefits, augmentation is reasonable. However, in many
cases of supply augmentation, the costs significantly outweigh the benefits, and the provision
of new land is subsidized. Thus, scarce investment resources are misallocated to provide land
at less than cost. Many of these expansion schemes are intended to improve or stabilize economic
conditions in the nation, both by constructing facilities and by providing land to ultimate users.
Land development may well provide more employment, higher incomes and stability. However,
the appropriate question is what alternative investments would have generated.
Today, a general perception of land supply management is that governments would do better
not to intervene in day-to-day allocation and pricing questions, and only provide those public
services which are clearly public goods. Where natural monopolies exist, some regulation may
be necessary, although the provision of potential market entrants may be sufficient.
In communal areas with a traditional or customary land tenure system, land is available, but
there is no direct need or desire for private ownership. Thus, there is no functional land market.
Land under leasehold ownership in Africa is an exception and derives from privileges and
arrangements introduced in the past, and subsequently incorporated in current national
legislation. It corresponds to the so-called crown land in countries such as Sierra Leone, Nigeria
and Ghana.
Though in these areas land is in principle not transferable, some of the better (e.g. more
fertile) plots have been used for centuries by the same family and are therefore de facto inherited.
However, informal land transfers are taking place at an increasing rate. This happens mainly
12
Chapter 3 Markets
with the direct consent and under the responsibility of the village chief, who is the custodian of
tribal land and, in this function, has the right to allocate land temporarily to various users. As
the time of this temporary lease is not usually fixed under traditional law, this point allows
some flexibility and remains open to interpretation.
The first features of an emerging thin land market in communal areas in Africa appeared
immediately after independence. They are attributable to the declining acceptance of the ideology
of communal land and the increasing trend towards capitalist forms of behaviour. Individualism
is becoming increasingly widespread in Africa, though it might conflict with traditional
behaviour. The problems associated with individualism, the desire for private ownership, and
the development of a land market in traditional societies relate basically to the lack of an
adequate institutional framework and to the risk of potential adverse effects on the distribution
of wealth and income. Land markets under such conditions are still comparatively thin and are,
therefore, highly volatile.
Equity arguments provide much of the justification for government interventions in or denial
of land rights and land markets: to protect the poorest of the poor from losing their land; to
prevent windfall gains to the rich; to avoid accumulations of wealth for some at the
impoverishment of others. These, and more of similar ilk, provide the rationale for maintaining
government control of land (and other) resources. However, economic analysis suggests that
redistribution of income and wealth, rather than of resources, serves equity best. The road to
both efficient use of resources (maximizing the value of resources to society) and equity may
well be through individual rather than government choice. Government has a role in: market
regulation (to ensure competitiveness, including good information dissemination, and to address
public aspects of land such as pollution and flood control); the allocation of land rights (at least
given the general acknowledgement that land ultimately belongs to the state); and equity
considerations (redistribution of income or wealth).
Several other, mainly institutional, factors affect the development of a land market. Hence,
even where land is physically available and/or there is a desire for ownership, such land may
not be accessible to a part of the population for social, tenure, economic or political reasons.
Access to land and tenure regulations are potentially indirect factors of land scarcity.
13
Chapter 4
Access
ACCESS TO LAND
Access to land can be obtained through legal means, such as property acquisition, renting,
sharecropping, etc., or be forced through land reform and redistribution, resettlement and/or
spontaneous occupation and squatting. While in the past traditional land tenure systems often
governed access to land, nowadays titling and legal property documents frequently define such
access.
Societies have developed a large variety of legitimate and illegitimate forms of access to
land ranging from land cultivation to formalized rules of purchase. Independently of whether
individuals, family groups, communities or the state own the land, some fundamental institutions
for access to land exist worldwide. Most societies differentiate between access possibilities for
different groups of people. For example, the purchase of land by foreigners may be subject to
special laws. Women often only gain access to land through their social relationships with their
husbands (Arua & Okojori, 1997; GTZ, 1998).
Formal permanent access
In traditional agricultural societies, the first cultivation of fields and/or planting of trees, or the
digging of a well by those involved in animal husbandry are reasons for long-term rights to
resources, provided no competing person or group makes a claim. These rights are created, for
example, when immigration to a previously unsettled area occurs. In Africa, the land is generally
integrated into the common (tribal) property; in Latin America, it becomes almost exclusively
a private property (Kirk, 1998).
In societies which allow individual ownership, permanent access to land currently arises
through purchase, donation and/or inheritance. Purchase and sale in a functional land market is
the most common means of access in a free market economy, i.e. property rights are transferred
through a deal where one receives the land for a non-recurring service in return. This is primarily
monetary, but can also be in the form of labour.
Inheritance occurs not only in the case of private land property, but also in autochthonous
land tenure systems where land (and trees or wells) are passed on within a lineage or extended
family. Most inheritance is patrilineal in African and in many Asian countries. Inheritance
rules have an influence on the distribution of land, especially on the farm size structure. Generally,
the land is distributed amongst all of the sons/children. In addition, rules for the distribution
according to the number of wives and their sons exist (GTZ, 1998). Under Islamic law, wives
are entitled to a clearly defined percentage. However, in practice they usually pass it on to their
brothers. By continuously dividing up the land for inheritance purposes, the micro-landholders
are no longer in a position to survive economically (Herrera et al., 1997).
14
Chapter 4 Access
Though not exclusively associated to family links, donation is a particular form of inheritance.
Giving land as a donation while the testator is alive occurs, for example, when a son marries
and starts a family and thus requires land. In Africa, the eldest sons are sometimes compensated
(with the donation) as they have had to work harder than the younger sons to support the older
generations. Gifts are often considered a gesture to poor relatives or to those dependants for
whom one feels responsible.
A discussion concerning access to land as a result of large-scale land reform, redistribution
and resettlement is beyond the scope of this paper.
Formal temporary access
The two main means of acquiring legal temporary access to land are lending and leasing
arrangements. The lending of land takes place when families allow individuals or groups to use
the land they own for a period of time without expecting a fixed or quantitatively significant
return. The borrower usually has total freedom in deciding how to use the land. However,
limitations exist. Investments that would change the character of the land such that the borrower
could claim ownership are not allowed. This especially includes the prohibition of planting
trees, building houses or digging wells. With the resulting ban on tree planting, autochthonous
land tenure often fails to protect natural resources sufficiently. As a result, the lender of the
land often reserves the right to take it back without notice.
In the case of lease arrangements, the tenant receives the right to use the land. Both fixed
rent and sharecropping arrangements are possible. In the case of a fixed rent, the tenant has to
make a fixed payment (e.g. money, goods or labour on the owners other fields) as set out in the
contract. In the sharecropping situation, the payment is set as a percentage of the harvest (often
50 percent) and thus depends upon the harvest yield. In Asia, sharecropping arrangements are
usually for one year; they are normally extended, but only if the tenant behaves (GTZ, 1998).
Only when the lease duration is set in advance does the tenant have a clear long-term view
for making investment decisions. The degree of autonomy with respect to the structure of
cultivation, land use and management practices is dependent upon the type of lease and the
arrangements agreed upon.
Complicated tenancy and sub-tenancy systems have developed in Asia and Latin America.
Agrarian reform measures have only partly simplified or limited such systems (Kuhnen, 1996;
Mertins, 1996). For example, in Latin American countries occupational tenancy and
sharecropping arrangements supply haciendas with cheap labour. If the tenant lacks alternative
forms of income, then the owner can dictate the lease conditions. The lease relationships are,
on the one hand, cemented in lifelong, semi-feudal dependency structures as a result of a high
degree of indebtedness; and on the other hand, often characterized by legal insecurity due to
verbal, ambiguous and ad hoc amendable contracts (GTZ, 1998).
In recent years, lease relationships in Africa have been gaining importance. Sharecropping
is becoming established and is linked with a high degree of legal insecurity and the threat that
the owners will take back the land without notice (Kirk, 1998).
In some countries, leasing is either illegal or its duration and amount regulated. However,
freely agreed contracts enable the parties to come to a consensus on the amount of labour input,
other inputs (such as draft animals), and the calculation of local natural risks. Hence, uniform
regulations for the entire country may not always be to the benefit of the tenant. For example,
15
in Indonesia informal rent arrangements are dependent on the region and may lie above or
below the legal guideline (Lffler, 1996).
Informal access, spontaneous occupation and squatting
This type of land occupation often occurs at the edge of cities or along agrarian colonization
zones with a minimum of basic public infrastructure. A larger group living nearby, and having
either social or ethnic links, usually organizes the occupation of private estates (land invasion)
in areas suffering from a social crisis and failures of agrarian policy. The goal is to meet the
enormous demand for individual ownership of land or for more land and social facilities by the
lower social strata in the agricultural community.
The occupation of public land is usually tolerated. In some way, the squatters stake a claim
to the land which they have cultivated according to the motto the land should belong to the
person who cultivated it. The toleration of squatters also needs to be seen in the context of
colonization instead of agrarian reform in some countries. In this way, land without people
serves then as a valve for people without land (GTZ, 1998).
Illegal seizure and clearing of land has become a common practice in Latin America. The
number of people clearing rain forest areas as a lucrative business is rising in Guatemala,
Colombia, Brazil, Peru and Bolivia. By clearing a forest, the land is occupied and the plot is
declared as own property. In Brazil, the colonist is declared the owner after cultivating the land
for one year, provided no other governmental or private legal claim to the land can be proved.
Thus, an area of land traditionally used for crop cultivation becomes an object of speculation.
It is sold at a certain point in time for a profit to medium-sized or large landholders. In this
manner, squatting as an occupation contributes considerably to a rapidly advancing pioneer
frontier of forest clearing. The individual benefit is in no proportion to the resulting soil
degradation. Comparable processes are also found on the outskirts of cities (GTZ, 1998).
In the Brazilian Amazon and in the Amazon areas of the Andes, the percentage of illegal use
is 53 and 77 percent, respectively, of all cleared forest area. As compensation for agrarian
reforms that have not taken place, spontaneous colonization has been tolerated and even
supported by the subsequent legalization of the farmers activities and awarding of a title of
ownership. However, in the colonized areas of the Amazon, indebtedness or violent conflicts
have often constrained farmers to a forced sale of their land to financially sound groups (Mertins,
1996).
Illegal land occupation and squatting are often associated with violence. Spontaneous
occupation can secure de facto access to land in the case of squatters and land invasion of
private estates, although it is not considered legitimate in any legal system. With the loss of the
state monopoly on violence, the danger exists that local conflicts about the interpretation of
generally accepted access regulations will be resolved by violence. In this manner, large
landowners drive away smallholder squatters in the Brazilian Amazon region. These are usually
extensive cattle farmers who hire gunmen to advance their interests. The new owners can thus
be spared the difficult development phase of land clearing and construction of the technical
and social infrastructure (GTZ, 1998). The clearance of suburbs around major cities for
infrastructural development is another example of this.
16
Chapter 4 Access
17
Chapter 5
Value and price
LAND VALUE AND PRICE

Land is primarily a basis for crop and tree production, and water storage. It provides space for
living, construction and the development of various social activities. Thus, land has a production
value; it is a primary commodity and a commercial asset. On the other hand, large areas of land
are considered non-productive and are held in property because of tradition, customary rules,
prestige, or other non-economic reasons. Entire zones are reserved for wildlife and nature
protection and are not for sale. Although it is difficult to rate the productive value of this land,
it is not free but has, in addition to its direct income from tourism, another value. Between the
two extremes, there are cases where land, despite its low productive value, is relatively well
priced because it is considered a potential economic investment for the future. Poor agriculture
land with little or no production potential may suddenly become expensive as a result of a
zoning decision or its selection for urban expansion.
This indicates that there is a difference between the natural (productive) value of land and
its economic value (Tanner, 1968). The former deals with a value pertaining to the knowledge
of the natural physical properties of the soil and their impact on production. The latter also
emphasizes expected benefits, which are not necessarily linked to its present use and production
potential, as well as the stabilizing role of land in times of inflation.
Land value in its simplest form relates to the natural value of the land, e.g. without structural
improvements. However, in assessment for taxation purposes, the definition often allows for
the inclusion of site improvements. These may be invisible, e.g. the benefits of clearing, filling
and draining the land. In Australia, land value in this sense is also referred to as site value
(Fibbens, 1995).
Land value, or naked land value, stands in contrast to (improved) capital value (Australia
and most Commonwealth countries) or total value (Denmark), which corresponds to the full
market value of the property including land and buildings but excluding machinery, furniture
and animals. The best economic use is the basis for valuation, and, as is particularly the case in
Denmark, all public regulations relating to planning and environmental issues affecting the
value of that land are taken into consideration.
Property has value because it gives rise to a stream of future incomes. These consist of a
volume of goods, services and satisfactions that accrue to the owner. The material value of a
property depends upon the goods and services emanating from it. Hence, it is the stream of
income or earnings, both tangible and intangible, that can be converted into a fund that is the
value of the property. The size of the fund of value can be ascertained only when it enters the
objective situation of the market and is expressed as a price which buyers are willing to pay and
sellers will take at a given time.
Price is a parameter for expressing the value of an object or a property. Price, expressed in
money, is the generally accepted means for comparing values in a market. The price of land
18
Chapter 5 Value and price
corresponds to the value of ownership of stipulated rights in perpetuity, and is equal to the
estimated present value of the expected future appropriations of rents. However, uncertainties
about net rent, interest rates and inflation also affect the price of land. In other words, the value
of land also depends on the evolution of rents.
There is a fundamental difference between price and value. Market price designates what a
property might be sold for at a specific period in time; value designates a propertys actual
worth in relation to other similar properties (Ewert, 1979). This difference between price and
value stems from the premise that there are significant variations in intelligence, knowledge
and willingness that enter into the process of establishing price as compared to value. Moreover,
value has to be based on the consideration of much wider basic income or money returns than
enter into the day-to-day deliberations that establish market price.
However, for decision making about land, the relevant concept is not the price but the
opportunity cost. Land is non-reproducible and spatially specific. Although land may be
extraordinarily valuable in the centre of a city, it is impossible to produce more of it, and the
amount must be taken as given. Opportunity cost is defined as the stream of future outputs from
the land, gross of taxes but net contracted inputs, in its most likely (not most efficient) use
without the project (Walters, 1983). Opportunity cost is a residual value and thus particularly
subject to error. It involves forecasts of land use and of the associated outputs and inputs with
their planning values for many years ahead.
Under market conditions, one would expect the price of land to be such that, on average,
land earns a rate of return in the long run roughly equal to that of other assets of similar risks
and characteristics. However, the price of land is not determined by its production value alone,
but also by the services it incorporates at present or will incorporate in the future (extension of
cities over formerly rural areas for example). These are expressed in a price elasticity. Moreover,
the amount of serviced land is limited and even determined, not by the normal rules of profitability
of supply, but by the institutional, administrative and financial abilities of the authorities to
install desired services. Planning or zoning restrictions and various rationing or allocation
arrangements deemed in the public interest may further limit the supply of land. Such restrictive
mechanisms ensure that any urban land that is marketed generally commands a much higher
price than would occur in a free market based on production aspects alone.
Land pricing is best done by markets for land rights, with the exception of the environmental
issues. Even there, when quality can be a part of the market, the relative value to users will be
expressed. Land pricing should consider more than simply the repayment of costs. Where
natural monopolies exist, a combination of regulation and encouraging competitive entry will
yield efficient pricing. The governments responsibility could be to manage the institutional
system of rights, dispute resolution, and transfers of those rights, rather than attempting to
manage land rights and land transfers.
THE VALUE OF LAND

The concept of value in general economic theory is that of market value. All other uses of the
term value require careful definition to avoid confusion with the concept of market value. As
market forces determine market value at a particular point of time, there can only be one value
at one time. However, over a period, values will fluctuate above and below a normal level
determined by the income earning capacity of the property. Thus, value appraisal is an attempt
to approximate market price at a given moment over a period of time. In effect, it measures the
19
magnitude of the entire fund of value that exists for a given set of circumstances. On the other
hand, assessment is an attempt to establish a value on the basis of an estimate of the height of
the income fund, which best serves as a measure of the tax paying capability of any property
(Ewert, 1979).
Land marketing distinguishes between exchange value, real value and sales value. The
exchange value is commonly associated with a price and is expressed in money, because this is
the only generally accepted means for comparing values. The real value represents the
equilibrium between supply and demand. When supply exceeds demand, the value decreases;
in the opposite case, it increases. Value is thus a relative concept, which varies in time and as a
function of circumstances. While real value corresponds to a commonly accepted value for
everybody, the opportunity value involves also the personal appreciation of one or more
individuals. The sales value is highly influenced by personal appreciation and circumstances,
and is therefore rather variable in time and space. Defining the value of land based on average
sales prices of similar plots in the surroundings requires extreme care.
The valuation of land is complex because that same attribute can have very different uses,
and thus different values. Moreover, the initial use can change, e.g. land can be converted from
agricultural to urban uses, to industrial use, or become a wildlife reserve.
FACTORS AFFECTING THE VALUE AND PRICE OF LAND

Inherent production potential and destination (or option) of use, and a combination or derivation
of them, are the two main determinants of the value and price of land. In addition to these
underlying factors, supply and demand and the perception of future benefit also affect the price
formation of land in a functional market.
The inherent production potential is the primary factor of land value in a rural environment,
where food supply from arable land, timber production from forests, or cattle raising from
grassland are the main objectives. Optional land use in a changing land market is the main
component in urban and peri-urban areas. In such areas, social activities concentrate more on
the transformation of primary goods, the provision of services (secondary and tertiary activities
of the economy) and residential use of space.
The price paid for land is also time dependent and largely dominated by the perception of
desired and present or future benefits which can be derived from it at the moment of the deal.
These are influenced by socio-economic, legal and political decisions, including the modern
perception of land value as a protection against the loss of purchasing power. Major fluctuations
in land prices occur when significant changes in the use occur as a result of zoning or land use
planning, e.g. from agricultural to residual or to urban/industrial expansion.
With the worldwide transition from a predominantly rural to a more urban society, the
importance of land as an almost exclusive production factor for food and primary goods has
decreased. The more modern concept of land sees it as a commodity and source for benefit, at
the same level as labour and capital. This evolution is at the origin of more or less important
price elasticity in functional land markets.
The variables that determine the value and price of land can be grouped into seven categories:
productive land capability;
security of land;
agriculture policy;
20
land use options;

land taxation;
land policy and zoning;
Land speculation
Productive land capability

Land has intrinsic physical properties which largely determine its use potential and natural
carrying capacity. Deep, fertile and well-drained loams located in a suitable climate will generally
produce good crops and high yields. Too sandy or too clayey soils make the land unsuitable for
most crops, though some may prefer them (e.g. groundnuts or cashew trees on well-drained
sands; rice on poorly drained, impermeable clays). Poor drainage is a major constraint on most
agricultural activities, though here again crops react differently depending on their edaphological
growth requirements. The climate may be too hot, cold, dry or rainy for economic crop
production, for the growth of some trees or grasses, etc.
The impact of natural physical land factors is most prominent in rural areas. In these areas,
agriculture is the dominant land use, and the suitability of the land to produce a good crop yield
is the primary asset for expected earnings from the land, and subsequently for its market value.
Different methods exist for evaluating the land use potential for arable cropping, grazing,
forestry and other land use types. These range from simple correlation formulas, e.g. the IRHO
(1977) formula linking production potential for oil palm to the rainfall deficit, to parametric
formulas such as the Storie index (1954) or more sophisticated approaches. The USDA Land
Capability Classification (Klingebiel and Montgommery, 1996) is a qualitative evaluation
system. It considers 11 land factors and their impact on the suitability of land for 8 major land
use and management types, including agricultural and non-agricultural uses.
FAOs Framework for Land Evaluation (FAO, 1976) represented a breakthrough in semiquantitative crop-specific evaluations of land. It introduced the principle of matching land
attributes against the natural growth requirements of crops in terms of agroclimatic, soil chemical
and physical needs, as well as for soil workability/ease of management. Where these attributes
correspond with the optimal growth conditions, then the land is considered highly suitable, and
a maximal yield can be expected, ranking that land in the highest value class. The more its
properties deviate from the optimal growth requirements, the less suitable the land is and the
lower the production and yield expected. Alternatively, depending on the type and degree of
the constraints, the land can be reclaimed (at extra costs and, thus, at lower benefits) in order to
achieve the expected yields.
Current systems for physical land suitability evaluation based on the FAO principles enable
the development of semi-quantitative or quantitative rating scales, which can subsequently be
converted into land productivity levels.
In France, lands with the highest yields, e.g. the deep loamy soils of the Paris basin which
produce up to 9 t/ha of wheat, are the highest priced on the land market. Less fertile, coarsertextured soils, or erosion-prone sloping lands are priced 30-50 percent lower, except where
alternative more beneficial land uses become possible, as is the case for vineyards (Table 3).
The same principles of natural land capability apply in current land valuation methods for
the land consolidation schemes in Belgium and the Netherlands, the German Bodenschatzung
(1934) and the Russian Bonitet system (Stolbovoi, 1997). They occur also in a somewhat
modified form in the Canadian system for land valuation (Ewert, 1979).
21
TABLE 3
Sales prices for land with different land use potential in France
Area description
Arable land:
Fertile soils of the Paris basin, good arable land, wheat production mainly:
Dpartement Oise
Dpartement Eure-et-Loire
Stony and/or shallow soils with lower production potential (arable land +
meadows):
Dpartement Morbihan
Dpartement Ille-et-Villaine
Steep sloping land with low production potential:
Dpartement Alpes-Haute Provence
Dpartement Hautes Alpes
Price of land in 000 FF/ha

1995
1996
26.9
28.3
28.2
28.2
15.9
18.9
16.0
18.8
18.0
19.1
16.1
16.5
Vineyards:
White wines with increasing quality label:
Cte dAnjou (Marne-et-Loire)
Vouvray (Indre-et-Loire)
Sancerre (Cher)
Pouilly Fum (Nivre)
Chablis (Yonne)
Champagne (Marne)
Red wines with increasing quality label:
Cte du Rousillon (Pyrnnes Orientales)
Cteaux de Languedoc (Gard)
Ctes du Rhone (Gard)
Gigondas (Vaucluse)
Moulin Vent (Saone et Loire)
Chateauneuf du Pape (Vaucluse)
40
70
50 180
350 600
400 700
350 800
800 3 250
30 50
40 70
110 140
300 350
350 600
550 700
40
70
50 180
300 600
400 700
350 900
1 000 3 400
40
40
110
300
350
600
60
75
140
400
600
700
Source: NN/SAFER, 1997
These are all numerical methods that take into account the physical conditions for crop
growth in terms of soil, climate, topography, etc. In the German system optimal land in a pilot
zone has a rating of 100 points. The lands to be valued receive a points rating as a function of
their intrinsic properties and is considered a reference value for other ratings. The end product
of the exercise is a final rating for each specific land use type, e.g. Ackerzahl, Grundlandzahl,
etc. in the German system.
The effective point value in terms of yield is derived from statistical harvest figures. The
multiplication of the final land value by that point-related yield value gives the theoretical
yield level of the plot concerned. In the Russian Bonitet system for example, for the 1990s the
point rate values for very low, medium and high cereal yields were 2530, 4550 and 65
75 kg/point respectively (Stolbovoi, 1997).
Land capability and carrying capacity for extensive grazing depend less on intrinsic soil
factors and more on moisture status, as expressed by rainfall amount and distribution, in
combination with soil depth, drainage and soil water retention capacity. Vegetation is particularly
important as both its quality and quantity determine biomass uptake and potential carrying
capacity. In southern Africa this veld quality is normally assessed according to species
composition, the vigour of palatable species, basal cover and surface condition; and these are
highly dependent on climate.
22
TABLE 4
Sales prices for residential and agricultural land in Belgium
Residential use (m2)
Surface
<360
361-720
Location
721-1 500
Agricultural use (ha)

>1 500
<0.5
(US$/m)
0.5-1
1-3
>3
(US$/ha)
Urban areas:
Antwerp region
Halle-Vilvoorde region
110
107
101
84
75
68
54
35
15
15
15
14
Semi-urban areas
Mechelen region
Gent-Eeklo region
76
90
71
70
60
62
31
39
17
17
16
16
17
17
11
10
9
8
6
4
4
4
4
4
4
5
4
Rural areas
Bastogne
Neufchateau
Source: ASLK Bank, 1998
In the semi-arid areas of Namibia and South Africa, additional local factors also influence
the value and price of grazing land. These factors include: depth and quality of the groundwater
table; the presence of poisonous plants during some part of the year; and bush encroachment.
Most factors known to influence the sales price of land at both overall and local level have
a different impact depending on local conditions. These factors include: presence or absence of
buildings; road access; arable land or meadow; irrigated or non-irrigated; and vacant possession
or occupied on lease. Others refer more particularly to situations that do not affect the physical
production as such but which increase the operational costs of farming, so ultimately eroding
the return from the land. These include slope, bush cover, shape and size of plots, and special
surface features.
Shape and size of land have a variable impact. Except in large-scale extensive farming
where small plots may hinder effective land management, there is generally no clear effect of
size of arable land in relation to price. Specific site conditions, such as access from the main
road or to feeder roads, often determine price variations.
For plots reserved for housing, the law of supply and demand operates (Table 4). In principle,
the number of potential buyers should be highest for the small (less than 360 m) and mediumsized plots (361720 m). Similarly, for the same reason, prices drop quickly above 1 500 m.
The phenomenon is more evident for sales in urban areas as compared to those for agricultural
land.
Slope affects management costs in terms of machine power needed for land preparation and
harvesting, and in extra costs for erosion control. Under Canadian conditions, slopes up to 5,
10 and 15 percent induce a depreciation in land values of 2, 7 and 10 percent respectively
(Ewert, 1979).
The presence of surface stones is a typical example of a site-specific land characteristic. It
often tends to retard progress in bringing land into production and creates serious obstructions
to mechanized farming operations. The presence of stones interferes with cultivation by
increasing the costs of operation through wear and tear on the machinery and through the extra
costs for stone removal. Ewert (1979) refers to a study in Canada which concluded that a value
adjustment of US$2025 per acre occurs for each cubic yard of stones removed on a yearly
basis.
23
Bush cover is generally considered a negative factor in the valuation and price of agricultural
land. This is because of its direct effect on clearing costs before the land can be cultivated;
costs which almost never cover the value of the timber removed. Moreover, it has a series of
indirect effects grouped under the term: edge effect. In Belgian land consolidation schemes,
the edge effect is taken into consideration up to 40 m from the forest borderline. It depreciates
the value of that borderland as a result of: nutrient and moisture depletion of the soil; the
presence of shallow roots hampering mechanization; and reduced direct sunshine available to
crops and adverse effects from bush animals.
The impact of bush encroachment in extensive grazing areas, as rated by the Agribank in
Namibia for example, is ignored up to 30 percent land cover. However, it is considered to
reduce the land value for cattle grazing by 60 percent at an encroachment level of 75 percent or
more (Verheye, 1997a).
Security of land
Security of land is a firm basis for incentives to optimize land use and land management, and to
maintain values. People will not make land improvements if they are not sure of later benefiting
from them. Insecurity leads to less care, deterioration of resources and poor management. These
factors all have an adverse effect on the market value.
In a western system, land property and rights are generally registered through a cadastre.
This is a technical term for a set of records showing the extent, value and ownership (or any
other basis for use or occupancy) of land. Strictly speaking, a cadastre is a record of areas and
values of land and landholders originally compiled for taxation purposes. However, in many
countries there is no longer any land tax and in practice the cadastre serves two other equally
important purposes. It provides a ready means of precise description and identification of
particular pieces of land, and it acts as a continuous record of land rights (Binns and Dale,
1995).
The fact that the land is properly mapped and the rights clearly registered is of benefit to the
owner. It is of particular benefit to the private landholder as it enables transactions to be effected
safely and minimizes the possibility of disputes and litigation. In addition, land prices for
registered areas are generally higher than those for non-registered areas. In countries where
cadastral survey information does not provide clear ownership delineation, land rights conditions
can range from uncertain to chaotic, with corresponding instances of litigation, community
embroilment, administrative corruption, and obstacles to development (Sein Lin, 1990).
Overall, one can distinguish three major types of property rights: private, state and common.
In the case of clearly defined ownership rights and user rights, private property guarantees the
owners the yield of their investment. However, it also assigns them responsibilities in terms of
encumbrances or servitudes, and imposes duties and liabilities when such responsibilities are
disregarded. The document of title gives the owner the right to: use the land within the limits of
the law (land use plans, environmental protection restrictions); exclude others from resulting
revenues; sell, bequeath, give away or lease; pass secondary rights (e.g. hunting or gathering)
on to third parties; or mortgage the land.
Where land becomes state property, it is usually to enable the government to implement its
ideas on its functions with respect to distribution and social objectives or allocation efficiency
and modernization. State property can result from: conquest; formal nationalization of private
lands or prior crown lands; purchase; gifts; and expropriation with or without compensation or
24
by land take-over where there is no clear title. In many societies, public land is often acquired
for environmental protection and nature preservation.
Common (communal) property is the most common form of ownership in traditional societies.
It has served as a social buffer in securing the livelihood of groups of farmers, livestock keepers,
hunters and fishers for centuries. It enables the sustainable use of spatially isolated resources
and secures their long-term preservation through social control and sanctions. In a traditional
system, land rights refer more to a mere conditional right of access and use at certain times and
for certain purposes, and not to the cardinal right of alienation. This tradition often has a religious
origin based on the idea that land is a gift from God which cannot be alienated. Thus, security
of property has different meanings in western and traditional systems. Moreover, several groups
of people can use land simultaneously in different ways. The right to cultivate land, to harvest
fruits growing on its trees, to trespass through it with animals, to bury dead on it, or to gather or
hunt on it can vary widely (GTZ, 1998). Water or mineral rights also exist and may be held
separately or on a different basis from the rights to the land on or under which the water or
minerals are found. A complete register of rights should take account of all these rights. However,
in practice few such complete registers exist. Indeed, when speaking of the registration of land
rights, most people are thinking only of the registration of title, that is of rights of ownership or
perhaps more broadly of primary tenure (Binns and Dale, 1995).
Agriculture policy
Natural land capability and production potential provide an underlying basis for agricultural
land price formation under the condition that high yields can translate into corresponding high
benefits. This possibility depends on the proper marketing of goods.
Access to markets and distance from towns affects land values both directly and indirectly.
Farmland nearer markets tends to fetch higher prices because the transportation of products is
easier and cheaper. In addition, factors unrelated to agricultural value may influence the land
price. These include: access to schooling or sources of employment for farmers children; and
access to off-farm employment or to any other urban amenities in general. Although these
factors are often important, their effective impact in the price setting process can only be taken
into consideration at local level.
It is world market prices, and the degree to which governments align their consumer price
policies to these, that determine the major price component and related benefit. Price setting
mechanisms at national level include, inter alia, taxation and price support in favour of farmers,
or keeping food prices low to protect the consumer market.
If crop prices are high, profits from the land will be high, and the value of land as a production
factor will accordingly be high. However, governments may interfere in the price setting of
basic food supplies for political reasons. In a number of West African countries, the consumer
price of rice, the staple food, is generally kept low. In Sierra Leone, a former rice exporting
country, this has resulted in inland farmers producing rice only for their own consumption.
This is because, despite a much higher potential, their produce cannot compete with the market
prices of imported rice(Verheye, 1997b). Similarly, the development of an extensive rice
production scheme in the Niger Delta south of Niamey, Niger, had to be abandoned because
production costs could not compete with subsidized imported rice from Thailand and Viet
Nam.
25
Although agriculture in South Africa received good support from government in the past,
the new policy is expected to lean more towards consumers and thus try to keep food prices
low. For example, the government may attempt to hold maize prices down, so affecting the
value of land in some summer rainfall areas. It is also unlikely that farmers will continue to
receive the same assistance in the form of drought aid, credit subsidies, etc. Fruit may be an
exception, as fruit exports are highly profitable, and foreign currency generation by exports is
viewed in a favourable light Niewoudt, s.d.).
Food production and food self-sufficiency have often been national strategic objectives. In
a number of countries, such as India and Indonesia, they are major components in long-term
development planning. The EUs Common Agricultural Policy (CAP) was a strategic decision
to support its own agriculture and farmers in an effort to preserve food self-sufficiency. This
system guaranteed farmers a basic income and a fixed sales price for their product, irrespective
of yield, provided they cultivated strategic goods such as cereals, oil crops and dairy products.
However, with the disappearance of international political tension, and in view of the high
costs of the operation, the EU has gradually abandoned its subsidy policy and adopted a free
market system aligned to world prices. The concern that the former policy would not be
sustainable in an EU expanding eastwards may have accelerated this evolution.
Compared with a subsidy rate of over 80 percent in the 1960s and 1970s, the EU now
subsidizes 43 percent of the total value of its agricultural production, equivalent to a total of
US$81 000 million OECD, 1997). Future policy options intend to further decrease the assistance
to crop production.
However, agriculture subsidies and
protection of agricultural markets are not
the exclusive preserve of the EU (Table 5).
Overall, the OECD estimates that for 1997
some 34 percent of total agricultural
production in the industrial world was
subsidized.
TABLE 5
Subsidies allocated to agriculture in industrialized
countries
Amount of subsidy
Country/region
EU
% of total
agricultural
production
43
000 million
(US$)
81
26
Under these conditions, farmland values
37
are only partially determined by the natural
5
physical and managerial capability of the
3
land. The history of agricultural land values
0.8
in the past 30-40 years has been more about
0.1
the extent to which governments were
Source: OECD, 1997
prepared to support the prices of
commodities. Hence, a true farmland
market has not been the norm for much of this century; neither in the western so-called freemarket system nor in the centrally planned economies of central and eastern Europe. Therefore,
proposed changes to the EUs CAP will probably make underlying farmland prices much more
sensitive to the market values of the commodities they produce.
USA
Japan
Switzerland
Canada
Hungary
New Zealand
16
69
76
20
16
3
A true market does not exist in the United States where, until fairly recently, subsidies
have played a significant role. However, with the United States unwinding its agriculture
subsidies and the EU contemplating a scaling down of the CAP, there is the prospect of a more
truly commercial market in farmland values.
Moreover, a nascent agricultural land market is emerging in eastern and central Europe.
However, in most countries in these regions there are restrictions on foreign ownership of land.
26
Such restrictions may depress land prices and deter investors (Cohen, 1998). For example, in
Hungary, foreigners may lease land but not own it, and significant stretches remain in state
hands. In Poland, foreigners may acquire land only through a company in which foreign
ownership does not exceed 49 percent. In the Czech Republic, foreigners may own, lease and
buy land but, as in most other eastern European countries, there are still serious restitution
problems, with the state facing many claims from pre-communist-era owners.
If these countries seek EU membership, questions may arise about whether they will bring
their production into line with that agreed within the EU. Another question concerns the effect
of such developments on grain prices (and on the land on which it is grown) in the EU generally.
The thrust of the CAP has been to help support the prices farmers earn for goods sold in their
domestic markets and to allow the use of export subsidies to depress the prices of commodities
sold abroad, so maintaining competitiveness.
The effect of changes to the CAP, combined with bumper harvests in 1995 and 1996, led to
a precipitous decline in wheat prices in the United Kingdom in late 1996 and in 1997, with a
trough around mid-1998. At the same time, the market value of arable land in the United Kingdom
mirrored the fortunes of wheat, but far less dramatically than wheat prices would have suggested
(Cohen, 1998). Agricultural land specialists in other countries report the same findings around
much of the world.
In the early 1980s, farm incomes in the United States dropped sharply when global recession
reduced export crop demand. Real interest rates also rose markedly as the Federal Reserve
slowed monetary growth to reduce inflation and as agricultural financial markets were
deregulated. Combined with lower expected earnings growth, farmland values in the United
States fell by about one-third between 1982 and 1986. The drop was most severe in prime
agricultural regions in the Corn Belt, where land values fell 55 percent.
South Africa exhibited a similar trend with farmland values tending to adjust slowly to
changes in farm returns, lagging by about one to two years. Aggregate data for South Africa
over the period 1960-1991 showed a close, positive relationship between nominal returns to
land and farmland values. Falling real interest rates from 1960 to 1975 saw real land values
rise. When real interest rates rose in 1976 and 1977, higher land values probably reflected the
impact of higher real farm returns due to crop prices (Darroch, s.d.).
The question about the future of agricultural values may thus be a question of political will.
Are governments prepared to reduce their efforts to cushion farmers from the cyclical gyrations
of world markets, or will the next crisis spur new efforts to prop up grain prices and the land
upon which it is grown?
Economic elements can substantially modify farmland values from their intrinsic production
potential. Higher expected real returns to farmland would normally cause current land values
to rise; lower prices would have an opposite effect. Positive or negative expected real growth
in returns to farmland would cause the same developments. Price interventions, either to lower
the market price of consumer goods or to stimulate exports, might distort land values in any
direction.
Land use options
The use of natural physical production potential as a basis for land price formation is further
seriously challenged in areas where other land use options exist and where these compete with
agriculture. Such challenges are an indirect result of pricing and marketing policies, which
27
may make alternative land uses more beneficial. Where such alternatives exist, the land price
will increase (or decrease) as a function of the desirability and willingness of one or more
individuals or groups to exploit them. The expectations of higher earnings will then determine
the market price, independently of the natural land use potential. In the Copper Belt in Zambia,
the bauxite area in Jamaica, the diamond regions in South Africa and Botswana, or the oil
producing Arabian Plateau, the economic expectations of higher benefits from mining activities
override all other land use considerations.
Where agricultural land use is competing with grazing and forestry, it is normally the economy
of exploitation (including the cost of exploitation, access and distance to markets) which
determines the land use and related land value. In recent years, environmental considerations
have been gradually affecting the exploitation techniques of natural resources, and in particular
of forest exploitation. This development probably throws another light on profitability concepts
(e.g. exploitation of the Big Deer Forest area in Canada).
The challenge of alternative land uses to agriculture is greatest in the immediate
neighbourhood of cities, or in areas where the expectation for future urbanization exists. Land
prices rise by a factor of three to five and exceptionally ten when a conversion to residential use
is envisaged. Almost universally, viz. independently of location and degree of urbanization,
sales prices for land destined for dwellings are three to four times higher than those for the
neighbouring agricultural areas. It is difficult to compare nominal price levels from country to
country, as these are affected by local conditions, which are not always clearly defined. However,
within the same country, the urbanization level is clearly reflected in the land price, not only
for residential use but also for other uses (Table 4).
In the Gauteng province around Johannesburg and Pretoria in South Africa, farmers are
capitalizing more non-farm factors than the effective land use potential should allow. This is
mainly because of the expectation that farmland in this region will sooner or later be bought for
non-farm uses, such as dwelling, industry, transport, recreational and other purposes (Franzsen
and van Schalkwyck, 1996). Therefore, the gap between the market and agricultural values is
expected to be larger in this province than in any other part of South Africa.
Other countries exhibit a similar tendency. In the United States, farmland values on city
peripheries in the Corn Belt have commanded high premiums when resold for residential
development (Cohen, 1998). Naperville, an area outside Chicago and home to a number of
high-technology companies, has farms selling for US$25 000-75 000 an acre, compared to
one-tenth of that 30 miles away. Moreover, real estate agents exploit the components of a tax
rule that allows exchanges. Here, the non-farm purchasers buy an area of much cheaper land
which allows them to effect the purchase of the expensive land as an exchange rather than as a
purchase. Under these terms, the farmer-seller incurs no capital gains liability, and is free to
use the proceeds to buy a much larger farm in the Corn Belt heartland. In turn, these farmerbuyers are helping to support agricultural land values in the United States heartland.
Land taxation
A land tax is a form of taxation on a component of wealth, at least to the point that the tax is
only levied on land surfaces that go beyond the basic subsistence level. In this sense, land
taxation is a conversion of private to public income. One or more levels of government may
levy the tax, though in practice local authorities generally implement the tax to cover local
services.
28
The land tax is frequently, though not always, based on the capital value of the land. Hence,
the successful introduction of the tax depends primarily on a satisfactory valuation of the land.
For this reason, most land valuation methods have originated from organizations dealing with
land taxation.
This is also the major reason for confusion in the terminologies about taxation and valuation
of land, especially because the tax base differs from country to country. OECD countries typically
levy property taxes on both urban and rural areas according to the same principles. This is not
the case in many developing countries where rural properties are often taxed much less or not
all. Even in the OECD context, there are exceptions. For example, agriculture is exempt from
property tax in the United Kingdom and the Netherlands. In the Netherlands, this is because
when the land property tax was introduced in the mid-1970s, agriculture was in an economic
crisis and, hence, granted exemption (Muller, 1997).
Many countries levy the tax on the naked or unimproved value of the land, with a minimum
threshold value or size below which no tax is due; moreover, exemptions apply. Sometimes, the
threshold is also considered a property tax relief for owners or users of low value properties.
This is the case for most communal rural land in Africa. For example, in the Gambia, customary
land with no buildings or other material improvements is considered as having no capital value
and thus no taxable basis. In Indonesia, the application of a minimum value keeps small rural
landholdings, most buildings in rural areas, and low-value urban properties out of the property
taxation. Chile applies the same principle (Muller, 1997). Similarly, in Denmark properties
valued below US$15 000 and not occupied by the owner are not taxed.
Tax exemptions generally apply to land owned by government, religious organizations,
charities and other non-profit organizations. In the Gambia, non-profit organizations are taxed
at a flat symbolic rate of US$0.05 equivalent per year for the property as a whole.
A number of countries base their land tax on improved property value, such as where an
assessed or market rental value of the entire property is capitalized as the basis for the tax
(Fiedler, 1997). This situation applies mainly in urban and peri-urban areas, where the land is
one of the components in a broader profit-making system. Countries such as India, Pakistan,
and Nigeria use rental values, whilst Indonesia, Chile, the Republic of Korea, Nepal, Bangladesh,
Costa Rica, Brazil, Mexico, Peru, the Philippines and Liberia use capital values (Muller, 1997).
In some cases, the property tax is based on other than market values. In California in the
United States, the property tax is based on acquisition value and on an indexation of the
acquisition values or last assessed market value for properties that have not been transferred.
One advantage of basing the property tax on value is that the tax rate can then remain more or
less constant. This is because regular revaluations will ensure that inflation does not erode the
tax revenue. In most cases, legislation will prescribe revaluations every five years, with threeyearly or annual revaluations also being possible. However, these rules are not always observed.
In Germany the last revaluation was in 1964, in France it was in 1970, and Ireland has not had
a revaluation since 1854 (Muller, 1997).
Tax rates vary substantially between countries. In most African countries, the land tax under
non-traditional tenure, e.g. on leasehold or freehold land, is based on plot size. In the Gambia,
annual rates vary from US$0.05 equivalent for agricultural land to US$0.30 and 0.90 per 100 ft2
(94 m2) for commercial/industrial and residential property respectively.
When based on value, rates are generally between 0.5 and 5 percent of asset values and up
to 16 percent of rental values. There are also various definitions of value being used. India,
29
Ireland (at state level), Malaysia, the Philippines (at municipality level), South Africa and the
United States use one of market value or fair market value or assessed marker value. Other
values used are: taxable value based on 1955 values in Austria; deemed values in Canada,
Spain and the United Kingdom; notional rental value (or similar) in Hong Kong and Irelands
counties; 140 percent of the 1964 market value in Germany; market value of annual rental
value, if built in Singapore; computed tax value in Switzerland; and objective value in
Greece. All of these values are re-evaluated more or less periodically (Fiedler, 1997).
A number of countries also apply one single property tax on the value of the property including
both land and buildings (the United States, Canada, the Netherlands, the United Kingdom,
Sweden, Chile and Indonesia). Other countries have a separate land tax plus one or more other
taxes based on the value of the whole property or on the value of the buildings (Australia,
Denmark, France, Japan and the Republic of Korea). In Australia, the various states levy a land
tax on the unimproved land value (excluding the value of any land improvements). Some states
apply a progressive rate structure. All states use a minimum land value which is not taxed at all.
Hence, in Australia alone, and depending on the particular state law, local government rates
may be based on: (i) unimproved land value; (ii) rental value of land and buildings; (iii) value
of land and buildings; and (iv) land or site value (land value including historic land
improvements). In several of the states, local governments can choose one base or a combination
of them (Fiedler, 1997).
In conclusion, the taxation base is extremely complex and not recommended for a valuation
approach to land. There appear to be four different assessment options which do not allow an
objective comparison: (i) based on land size and geographical location only; (ii) based on the
annual rental income value of the land; (iii) based on the capital value of the land, as calculated
by capitalizing the stream of income or rentals that accrue from the land and the improvements
on such land; and (iv) based on unimproved land (site) value.
In relation to land values and prices, taxation can mainly be considered a negative factor
eroding profitability and income generation, and thus as a source for lower land value and
price. Additionally, it can be a tool for modifying unwanted land tenure systems. Hence, a
policy of taxation rates increasing with farm size may force larger farms with absentee landlords
and/or low agricultural output to reduce their size and, subsequently, to open land markets.
This could improve farm incomes and increase corresponding land values.
Land policy and zoning
The combination of a growing population, land scarcity and the need for increased food
production and living space places increasing pressure on natural resources, and strengthens
the need for a rational and sustainable use of space. Massive migration to cities and the trend in
modern societies to move away from primary agricultural production to the transformation of
goods and to services create a need for urban development and the improvement of public
amenities.
Where not properly planned, this situation leads to the uncontrolled expansion of urban and
industrial centres. This eventually results in competition for land, speculative land markets,
illegal occupation and land grabbing, and environmental degradation. In order to control such
adverse impacts, governments have introduced physical planning to regulate land use, and
zoning for specific activities fixed by law.
30
Land zoning is a political instrument to prevent the uncontrolled occupation of land. It was
originally introduced to stop the unlimited invasion of cultivable land from cities or other
human activities. However, zoning and related land policies have a direct effect on the land
market through their impact in three major fields: urban planning; the optimization of agricultural
production; and environmental protection. Zoning often has a stabilizing effect on land prices
because it removes the speculative element of future land use changes.
Urban planning is a direct answer to the uncontrolled expansion of cities. Urban extension
over the past 40 years has multiplied the surface area of cities such as Mexico City, Lima and
Jakarta by a factor of 40, and that of Bogota and Sao Paulo by a factor of 50 and 70 respectively
(Baudoin and Margiotta, 1997). Deforestation on the hills surrounding Sao Paolo in Brazil and
around Freetown in Sierra Leone has created serious soil erosion and landsliding problems.
These affect not only the location itself but are at the origin of mudstreams and flooding
downtown.
Cities such as Hamburg, Stockholm and Copenhagen have strict physical plans which prohibit
urban expansion beyond certain limits. Industrial plants have had to relocate from residential
areas to specially demarcated industrial zones, with strict exploitation rules. Land for specific
uses in the different zones is made available in a controlled land market.
Zoning is also implemented in peri-urban areas, as well as in more rural inland centres. The
delineation of zones with a special designation prohibits uncontrolled expansion of land use
types, and avoids conflicts between users. In Quebec Province, Canada, a 1978 decree to protect
rural areas and stop rural migration has helped re-stimulate agricultural activities over
approximately 30 percent of formerly abandoned land in the immediate neighbourhood of
Montreal (Mekouar, 1997). In France, decrees from 1985 and 1986 prohibit urban developments
outside existing settlements in mountainous and coastal areas respectively.
Zoning and town planning are also
applied at rural growth centres which,
despite the absence of urban amenities,
are facing a growing migration from
surrounding areas. In these still
predominantly rural settlements, an
unadapted land tenure system often
exacerbates traditional planning
problems (Box 3).
The optimization of agricultural
production is a prerequisite for the
rational utilization of natural resources
in meeting food requirements for a
growing world population. In this
respect, FAO has been instrumental in
developing techniques for the
inventory, evaluation and planning of
land resources, both at the global level
and through its field programmes in
regions and individual countries.
BOX 3: PLANNING PROBLEMS IN A TRADITIONAL LAND TENURE

SYSTEM
Basse (12 340 inhabitants) is a fast growing regional

centre in inland Gambia.
The total proposed extension, given the population

perspectives, is 194 ha, including 104 ha reserved for
residential use. Considering that an average compound
holds 7-10 persons and that a household plot has a
multipurpose use, family plots should be 750-1 000 m.
The 90 ha reserved for public amenities will benefit from

regreening, improvement of the drainage system of an
important secondary streambed, and the reforestation of
a hillslope.
Land in Basse comes under traditional tenure. This means

that the alkalo (village chief) has an undisputed right in
the allocation of land, and often exercises this right without
any advice from or consultation with planners, or without
respecting the boundaries delineating the zones.
Consequently, unsystematic and unguided development
in the growth centres is preventing proper planning.
The traditional allocation of land needs to be regulated

before zoning in regional centres under traditional land
law can be successful.
Source: MLGL-GTZ, 1985
Zoning for rural land use planning can separate areas with similar sets of potentials and
constraints for specific uses. Agro-ecological zoning (AEZ) as developed by FAO (1976, 1996)
31
defines zones based on a combination of soil, landform and climatic characteristics. The
parameters focus on the climatic and edaphic requirements of crops and on the management
systems under which they are grown. Each zone has a similar combination of constraints and
potentials for land use and serves as a focus for the targeting of recommendations to improve
the existing land use situation, either through increasing production or by limiting land
degradation.
AEZ focuses on the physical production potential of land. In optimizing this production, it
can target the optimal sustainable returns from the land, while preserving it against degradation.
In this sense, AEZ has a positive effect in increasing the benefits and, thus, the intrinsic value
of the land.
In an application in Kenya (FAO, 1996), the AEZ approach has made it possible to assess,
either per separate soil or climatic zone, or per agro-ecological zone as a whole: expected yield
levels for 28 crops, whether cultivated as a single crop or in a sequential/intercropping system
or rotation; pasture and biomass production for a variety of herd performances; and fuelwood
yield potentials.
Zoning is scale independent and can apply to regions, districts or villages, or to a nation as
a whole. Senegal was one of the first countries in the developing world to define and organize
the destination of future land use on its national territory by introducing the Zoning Law on the
National Domain in 1964. The on-going land reform in Zimbabwe and in a number of
neighbouring countries is a form of zoning imposed by government degree.
The forts classs in Cte dIvoire, Mali and Burkina Faso were a first attempt at preserving
nature by restricting woodcutting and hunting. At the same time, they created state-owned land
reserves for the development of large-scale agro-industries such as oilpalm or rubber plantations.
The many nature reserves in the world, most located in developing countries, are the result of
government decisions and have often entailed the removal of the native population. However
precious these nature parks may be, their land has no market value and thus no price. Farmland
in the immediate neighbourhood of these reserves has lost much of its value due to wild animals
causing frequent crop damage and danger to local farmers.
Perhaps only zoning could ensure the protection of nature and of the environment in many
countries. Zoning enables government to acquire valuable nature protection reserves in direct
ownership and management through national decree, or to impose strict exploitation rules in
existing rural areas. Recent stringent environmental rules imposed by the EU in a number of
agricultural areas restrict the use of mineral fertilizers, and the transfer of stable waste products
to the field during part of the year. They also prevent the continuation of farming once the
former owners have ceased operating. In many of these cases, zoning is taking agricultural land
out of exploitation and allocating it an exclusive aesthetic value and a zero market value and
price.
Residential areas in the direct vicinity of nature reserves generally show a rise in the land
price because of the guarantee that no polluting industry will locate in the area.
The enforcement of legislation is a major problem in land zoning. There are numerous
reports from industrialized countries of dwellings or other infrastructural works being established
illegally in nature-protected zones, and where almost 20 years later court cases on their illegality
are still pending. Such users have benefited from a land price which is far below the standard
price for residential land use.
32
Similarly, physical planning regulations in many circumstances have not been properly
implemented. For example, in the Congo Democratic Republic, a 1980 decree made provision
for the maintenance of several park zones in the urban centres. However, these sites have been
converted into residential areas or, as is the case in Brazzaville, abandoned and degraded before
final conversion into housing blocks (Mekouar, 1997).
Land as a speculative asset
With land becoming a scarce commodity, real estate has emerged as a means for speculation at
the same level of bonds, shares or precious minerals. In this context, land is bought and sold in
the expectation that, independently of the benefits from direct potential production, it will keep
or even increase its intrinsic value in an inflationary market.
Since the 1950s, the erosion of the purchasing power of money has been significant. Inflation
now appears to be a permanent feature of the economy. Inflation does not bite equally on all
investment incomes; some are relatively inflation-prone and others inflation-proof. Land belongs
mainly to the latter group.
Other things being equal, a freehold currently valued at US$10 000 will, on the assumption
of inflation at 10 percent per year, realize some US$1.2 million in 50 years time. However,
undated government stock of the same current value will realize only its original US$10 000 at
that date, and a current 50-year leasehold interest will then have no value. Thus, a freehold
currently yielding 5 percent per year will yield 600 percent per year on its original cost in
50 years, whereas the undated stock will still yield 5 percent, and the 50-year leasehold will
produce no yield.
Speculation creates short-term variations in market prices, and may distort land markets.
Inflation and money erosion will attract more buyers to the land market and thus increase
prices.
33
Chapter 6
Prices and rents
Worldwide, the determinants of the value and price of land are land tenure, inherent production
potential, expected earnings, and supply and demand as a result of the competition for land by
different users. Under customary land tenure, land is (almost) not alienable and has therefore
no exchange value. However, with the gradual disappearance of the entire subsistence economy
and the growing demand for land, a small and often still unofficial land market is developing in
some countries. This contrasts with most industrialized and densely populated states, where an
open functional market has operated for many years, and where supply and demand mainly
determine land prices. Countries in transition take an intermediate position, as it takes time for
a land market to form during the changeover from a centrally planned economy to a free market
system. This is because of pending issues on land tenure and ownership. Because of fundamental
differences, the three systems warrant separate discussion. In this publication only the westerntype free market system will be discussed. for the other systems effective data are often not
available.
If land rights are to be recognized and allocated to individuals or to groups of individuals be
they private (e.g. land user associations) or public (municipalities), then the institutional security
of these rights needs to be assured in ways that minimize costs to owners. These rights should
be clearly tradable on markets, with restrictions that ensure the recognition of external, or third
party, effects. The governments role in maintaining land quality and avoiding exclusivity failures
is crucial.
Governments should also ensure that markets are as competitive as possible. They can do
this by providing for legal avenues to contest land allocation or by regulating prices charged
for land by natural monopolies granted franchises as sole providers. The result will be a system
of land prices that reflect both costs of provision and opportunity costs, including the time
value of land availability.
Experience gained with land resource allocation as a method of providing equity is
inconclusive. Markets will ensure that the resources are used to produce the maximum output.
Income or wealth redistribution, rather than intervention in land resource allocations, are more
effective ways of achieving equity goals. Maximizing the gain from the land resources available
to a society through market allocations is easier to accomplish than dividing the limited available
land.
LAND PRICES IN DEVELOPED COUNTRIES

The major characteristic of the land market in developed countries is the importance of the
number of transactions and the relative transparency of prices. The following information refers
to the situation in western European countries, which can be considered representative for this
market. Data are derived from the EU-Eurostat document Agricultural land prices and rents in
the European Union for the period 1974-1995 (EU, 1997).
34
Chapter 6 Prices and rents
The nature and availability of information regarding land varies widely across countries.
Therefore, comparison of data requires extreme care. In Belgium, there are figures on both
land prices and rents for arable and meadow land. Land price figures are weighted averages of
public and private sales. Agricultural land price data in Denmark refer to holdings in the size
range 10-100 ha with buildings. In Germany, there are figures for agricultural land prices and
for both current and new rents, the latter gathered in bi-annual surveys.
Price data in Greece are collected for both irrigated and non-irrigated land. Rents are available
for arable land, most of which is irrigated. In Spain, there are price figures for both irrigated
and non-irrigated land, but not rents. Agricultural land price data in France are presented for
arable land and natural meadow, but rents are only available for arable land. The series is based
on surveys in 1969, 1980 and 1992 and is updated using a rent index for wheat production.
In Ireland and Italy, there are data for the price of land but no average rent figures. Luxembourg
has both land price and rent figures. In the Netherlands, prices are available for arable land and
meadow, land with vacant possession in each case. Rents are also available for arable and
meadow land.
The situation in the United Kingdom varies across the four parts of that country. Prices and
rent data are collected in England and Wales, and prices cover sales of all agricultural land (i.e.
with and without buildings) with vacant possession of more than 5 ha. Prices in Scotland refer
to farms, that is land and buildings, of more than 5 ha, and rents are also available. In Northern
Ireland, there are prices for sales of all agricultural land of more than 2 ha. Rent data are only
available for conacre rents.
Some rent data but no land prices are available for Austria. However, both are available for
Sweden, which organized a sample survey in 1994 to estimate the level of rents. For Finland,
the National Land Survey of the Ministry of Agriculture calculates the median price for sales
of agricultural land over 2 ha. Sales of whole farms, i.e. land with buildings, are excluded. The
farm accounts data network provides information on agricultural rents.
LAND TENURE AND OWNERSHIP

The proportion of land that is either owner occupied
or rented varies substantially between countries, and
changes over time. In addition to private individuals,
public and semi-public bodies, religious institutions
(e.g. churches), companies or trusts may also own
agricultural land.
Table 6 depicts the status of rented land as compared
to total utilized agricultural area, and its evolution
between 1975 and 1993.
Agricultural land prices
Not all countries collect data on agricultural land prices
in the same way. In some cases, the average sales price
is published; in others, the market value of (unsold)
land is also included. Hence, a proper analysis of data
Table 6
Percentage of rented land compared to
total used agricultural land
Country
Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Portugal
Finland
United Kingdom
1975
72.9
14.1
29.0
46.7
3.6
17.3
41.5
43.7
43.6
1993
66.3
21.1
59.0
24.0
20.9
60.3
11.9
21.7
51.6
34.0
24.5
(18.2)
37.1
Source: Farm Structure Surveys, Eurostat F-1, EU,

1997
35
needs to take into account the data collection method. Therefore, comparison between national
figures in absolute terms is often difficult.
Even when sales of land for non-agricultural uses and sales between relatives are excluded,
land prices are highly variable due to the range of factors discussed above and to the different
impact these factors have on local conditions. For agricultural land and meadow in Europe, the
inherent production value is to some extent also affected by the CAP (subsidies for cropland
sown, milk quotas and financial regulations linked to the set-aside policy).
Agricultural land in Europe is always liable to land use change, in particular conversion to
urbanization. Even when known sources of variation are taken into account, including the
regulating effects of zoning, there remains considerable variation in the price of agricultural
land.
In recent years, three major phenomena have affected the rural land market. First, large
tracts of land have been taken out of production due to the combined effect of the CAP (including
the set-aside policy) and the conversion of agricultural land for residential use or for nature
conservation. Second, much agricultural land is coming onto the market as owners retire or die;
previously most of that land would have remained within the family. Third, land is increasingly
becoming a store of value, which might be in additional demand in times of high inflation or
economic uncertainty. Overall, the percentage of people in agriculture is decreasing rapidly.
The farming community is still large in Portugal (64 percent of the total population), Ireland
(42 percent) and Finland (37 percent). However, it makes up 10 percent of the population in
the United Kingdom and the Netherlands and 3 percent in Belgium.
A relative comparison of nominal prices, under the restrictions referred to above, illustrates
that within the EU land prices are highest in the Netherlands (Ecu 18 000-21 000/ha) and
Germany (Ecu 17 000/ha). This contrasts with the current price levels of Ecu 3 000-5 000/ha in
the United Kingdom, France and Ireland.
In nominal values not corrected for deflation, the price evolution in the period 1974-1995
was most marked in the Netherlands with an increase of 450 percent for arable land and
540 percent for meadow. In most other countries, the price approximately doubled; in Germany,
there was a threefold increase.
In France and Belgium, the price of meadow is approximately 75-80 percent of that of
arable land and has changed little over the years. However, the price of meadow in the
Netherlands is now some 20 percent higher than arable land, apparently due to the introduction
of the milk quota since the mid-1980s.
The price for irrigated land is now almost at the same level in both Spain and Greece,
apparently having stabilized after a downward movement from peaks in 1989 (Spain Ecu 15 800/
ha) and 1986 (Greece, Ecu 15 124/ha). The price contrast between irrigated and non-irrigated
land is most marked in Spain. This is probably because of the harsher climatic conditions in
central Spain where crop production under rainfed conditions is almost impossible. In Greece,
most dryland is still able to produce a profitable olive crop.
The deflated price indices, using the national consumer price index and expressed relative
to 1990 = 100 (Denmark, 1992 = 100), show an overall downward trend over the 22 years from
1974 to 1995. Within this trend, most countries displayed a similar pattern. The index rose
from about 130 in 1974 to 153 in 1979, before falling steeply to 102 in 1985, and falling more
slowly to 82 in 1995. In real value, average land prices within the EU thus dropped by almost
20 percent from 1990, and by 50 percent compared with 1974.
36
Individual countries deviated from this pattern. In Belgium, the index reached a peak of 181
for arable land in 1979 and 203 for meadow in 1978. In Denmark, the index rose to a peak of
210 in 1978. In Germany, the index was 83 in 1974, but rose to a peak of 142 in 1981, later than
in most other European countries, before falling again to 82 in 1995. In Spain, land prices
recovered to 114 in 1987 for irrigated land and 109 in 1989 for non-irrigated land before falling
to 78 in both cases in 1995. In Ireland, the index reached a peak of 258 in 1979. In Italy, the
index was 114 in 1974 and rose to 168 in 1981. After falling to 97 in 1986, land prices changed
little until 1991 before falling to 89 in 1995.
In the Netherlands, the index for 1973 was 63 for arable land and 48 for meadow, but
increased rapidly to a peak in 1978-1980 before dropping in the early 1980s. From 1985, the
index was stable for arable land, while values for meadow rose gradually to a peak in 1990. The
land price index in Finland, which had been 50 in 1981 and 79 in 1985, fell from 100 in 1990
to 51 in 1995. In England, the indexed price of agricultural land was 193 in 1974, and this
remained high in the 1980s. However, in 1993 the index fell to a record low of 73. Wales,
Scotland and Northern Ireland exhibited a similar tendency.
A comparison of land prices with net interest rates shows that land prices decreased with
increasing interest rates in most EU countries. As credit for the finance of land purchases
becomes more expensive, demand for land and hence land price would be expected to decline.
Land price changes correlated negatively with the inflation rate. A rise in the inflation rate was
thus associated with a fall in real land price.
Explanations for the aspects of the pattern in land prices have been put forward for certain
countries. In the period 1970-1991, agricultural producer prices and incomes reportedly strongly
influenced agricultural land prices in Ireland. From 1979 to 1984, real land prices fell in Spain.
The decline may have been due to land losing some of its character as a tax shelter at that time.
The price of agricultural land in France fell in the period 1983-88 due to the low profitability of
real estate. In the Netherlands, the real price of grassland fell from 1990 to 1991; probably the
result of fewer transfers of land holding a milk quota. Transfers of milk quotas in the Netherlands
have increasingly been the result of lease contracts. In 1992, increased fiscal pressure and the
prospect of diminished producer prices and incomes led to a reduction in the demand for
agricultural land in Italy and thus a fall in prices. The brake on inflation and the slowing of
economic growth in that country ended the role of land as a refuge good.
Agricultural rents
Data on agricultural rents within Europe come mainly from special surveys. The level of
agricultural rents is an indicator of the monetized return of land. Renting, which takes place in
a different framework in each country, permits a flexible and thus a more productive use of
land. Agricultural land prices and rents might be expected to change in parallel, though there
are often exceptions. In all western European countries, rent prices showed a less volatile
pattern in real terms than did sales prices. Changes in land rent prices during the 1970s lagged
considerably behind land sales prices. However, during the 1990s rent prices have followed
land sales price fluctuations more closely.
Nominal values for average annual rent data for agricultural land and meadow for the period
1974-1995 indicate a similar pattern of a rather constant and gradual increase throughout Europe
as a whole. However, the intensity of this evolution differed from country to country. In Belgium
and Greece, rental prices increased by a factor of two to three and did not cover money erosion.
37
In the former country, this was mainly due to more and more farmers leaving the sector. In
Greece, rents were already high in 1974. In France and Germany, the rental prices increased by
a factor of three, and in the Netherlands, Denmark and the United Kingdom by a factor of four.
In the United Kingdom, an alignment with European price levels occurred. Rental prices are
highest in Greece, followed at a certain distance by Denmark and the Netherlands. They remain
lowest in the United Kingdom.
The deflated index for agricultural rents showed a less marked pattern in the period 19741995 than did the land price index. This index was about 100 in 1974 and 1979, before falling
to 94 in 1995.
France and Belgium showed a clear, progressive decline in real rents over the period as a
whole. The index for these countries exceeded 120 in 1974. It fell to about 90 for Belgium and
98 for France in 1995. In Greece, the real rent index was 116 in 1976 before rising to 144 in
1978. Thereafter, it fell to 81 in 1995. In England, Wales and Scotland real rent indices were
relatively low: 86 in 1974, 92 in 1979, and 98 in 1994. However, conacre rents in Northern
Ireland varied from 132 in 1984 to 100 in 1990 and reached 89 in 1992. The peaks in 1979 in
the EU for land prices were not associated with a clear peak in rents that year, except in the
Netherlands and Greece.
The agricultural rent series for the United Kingdom are much smoother than the series for
agricultural land prices. This is partly because rents are reviewed every three years in that
country, and partly because the rental market may be less affected by non-agricultural reasons
for holding land than in other countries. In France, where the level in contracts of several years
is often indexed to the price of agricultural produce, falling real producer prices have been the
main reason for lower real rents.
38
39
Chapter 7
Valuation
LAND VALUATION
International literature on land valuation is relatively scarce, in particular when compared to
issues such as land taxation, land tenure or land reform, which all relate in one way or another
to the value of land (Keith, 1993). However, assessment and value appraisal are not the same.
Assessment always involves a component of taxation. The objective of assessment is to determine
an equitable tax base on which to apply rate levies to cover the cost of (local) services. Taxation
becomes an expression of the individuals obligations to the state and is determined in accordance
with specific and generally accepted principles. Therefore, the scale of the tax base must
correspond closely to the prevailing property value. To serve for such a purpose, assessment
implies something very different from what is commonly known as valuation or value appraising.
In order to clarify the two concepts, assessment should therefore be confined to tax base
determination, recognizing the fact that a tax base does not necessarily need to be rooted in any
specific value base. However, the above does not mean that it is desirable to keep a degree of
relationship between the two (Ewert, 1979).
The valuation of land is of major concern for land allocations. The objective of management
is to maximize the value generated by land in the society. This does not necessarily mean that
maximizing the calculated net returns per hectare is the objective function. Land is only one
input to many production processes (agriculture, municipal, industrial, recreational, aesthetic,
etc.), and only if the land represented the sole residual input, would this variable be the focus of
management. One example is Egypt, where rice production per cubic metre yields net farm
returns of about US$0.05, while cotton yields about US$0.15/m3. The problem with this approach
is that it fails to recognize land as another limiting residual resource. It is societys total benefit
from all inputs that should be the objective of public activities. Moreover, the environmental
value of land is problematic. Non-market values of land are often high relative to market values,
yet these values are often ignored in making allocations, even in markets.
The development of land facilities is a thorny issue. Local investments are not usually a
problem. However, the large land development facilities involving central government are usually
beyond the reach of private or local public resources. The question is under what circumstances
these developments should take place. Though cost-benefit analysis is a major testing tool for
large-scale public investment, its history in land use is not altogether convincing. The addition
of environmental impact studies to the list of required analyses for public investment in the
United States (and in other countries) is a clear indication of the weaknesses in cost-benefit
analysis. In developing countries, where capital resources are scarce, land developments should
be viewed even more critically with respect to the opportunity cost of allocating that scarce
capital. Indeed, most developing countries have high interest rates because capital is scarce.
Cost-benefit analyses for land development that ignore these rates may imperil development.
For economic efficiency, the opportunity costs of land allocation and land development
must be considered. Too often, the costs governments consider relative to land development
40
Chapter 7 Valuation
are simply the investment and operation and maintenance costs of these investments both from
planning and pricing viewpoints. In practice, cost-benefit analyses seldom examine the alternative
allocations of land, or the other resources involved. Where land is truly scarce, the issue of the
benefits foregone from alternative uses needs to be addressed.
FROM THEORY TO PRACTICE

Land valuation is an applied discipline and the development of valuation theory is a way of
providing valuers with a logical rationale for approaching the valuation of a particular property
for a particular purpose at a particular time.
The nature of property is that there is usually a complex array of factors to consider before
a proper valuation can be made. By contrast, it is easy to discover the latest dealing price on a
stock exchange for an equity share.
Valuers may talk of the property market, with perhaps an unspoken qualification when
talking about a particular property, such as for agricultural land with vacant possession.
However, in fact the valuer has to determine the special market that may exist for each individual
property; that is, the number of and level of interest from likely potential purchasers and their
financial position (e.g. the cost of borrowing) and the availability of alternative properties.
The purpose of the valuation or the circumstances that appertain may well affect the level
of accuracy required by the client and provided by the valuer. For example, for the clients
purposes an approximate value may be all that is required. In certain market conditions and/or
for certain properties, the valuer may have a greater or lesser confidence in the final valuation
figure.
Valuation theory applied in practice will result in the valuers opinion. However, it is an
opinion that may be tested in the real world when the subject property is actually exposed to the
market and an actual sale price established. A valuation can be tested in negotiations between
not only buyer and seller, but property owner and banker for finance arrangements. A valuation
can be tested in court before a tribunal, where a valuer appearing as an expert witness will have
to justify the opinions given and show how the valuation was arrived at from the available
property market data.
CONSTRAINTS
In practice all markets suffer from certain artificial constraints that valuers have to take into
account. National and local laws relating to forms of tenure, methods of disposal or letting,
planning constraints on development and change of use of land can all affect the value of
property in the market. Fiscal measures relating to, inter alia, land taxation and sales tax have
to be taken into account. The local customs in the market have to be considered and the valuer
has to reflect market conventions even though they may be illogical. Thus, valuers, like buyers
or sellers, have to take the market as they find it.
As even relatively unrestricted markets have to operate under certain constraints, valuers
can apply their experience to highly artificial situations where, for example, taxation legislation
lays down hypothetical assumptions that still result in valuations derived ultimately from market
data.
41
Similarly, there may be mandatory or advisable professional guidelines or valuation standards

for the valuer to adhere to when formulating the valuation. These aim to avoid misunderstandings
by those relying on the valuation.
FACTORS TO BE ASCERTAINED
The valuer needs to know precisely the nature and extent of the property interest to be valued
and this may require information from the clients legal advisers.
First, the valuer ascertains the property interest and identifies the boundaries in legal terms.
Then, the valuer will usually inspect the property to measure its dimensions and the physical
nature of the property: aspect; soil quality, drainage and other factors relevant to its productive
capacity; the infrastructure; the buildings (age, construction and condition); and the immediate
locality. The type of property and the level of likely value will determine the detail required of
the inspection.
The nature of the interest to be valued will determine whether the property (in whole or
part) is to be considered as having vacant possession (i.e. presuming it could be let or sold with
the right to immediate occupation being given to the new tenant or owner), or as tenanted land,
where any new owner would gain the right to receive rent from tenants but not have immediate
occupation.
If the property is tenanted, then the terms of the tenancy, any legislation affecting such
tenancies, and the risks of the tenants defaulting on rent have to be taken into account.
The local market conditions are then assessed, with the valuer investigating any relevant
comparable transactions and obtaining the necessary data regarding the transactions to enable
an accurate analysis of them.
The wider market conditions will be considered in so far as the particular sub-market is
influenced by the overall property market and the economies in which it is found: the national
and perhaps the world economy.
Depending upon the availability of data in aggregated and disaggregated form, the valuer
will estimate the levels of supply and demand in the market for property of the type in question,
taking into account any alternative uses of the property.
CALCULATIONS
From the data collection stage, the valuer proceeds to analyse the data, deconstructing the
market information to suggest how component parts of a property are valued in the market. The
valuer then applies the unit values from the comparables, suitably adjusted to reflect the actual
nature of the subject property, to build up the valuation.
The final valuation has to reflect the actual property. It may be that in some cases the total
value is greater than the sum of the parts (i.e. a purchaser would pay more for the property as a
whole). In other circumstances, the size of the property might be likely to flood the market
and depress prices and values.
42
Chapter 7 Valuation
In certain circumstances it is possible for a property to have no value at all, i.e. an owner
could not sell it even at a nominal price. Indeed, where there may be liabilities attached to
owning a property interest (e.g. a liability to carry out remedial environmental damage works),
a property could have a negative value.
As a valuer may look at a valuation from more than one angle, several draft valuations may
be drawn up before the valuer has to decide which valuation or valuations are appropriate. The
finalized valuation will probably be taken from an appropriate draft valuation which produces
the highest result.
Depending upon local custom, the valuer and the clients instructions, the reported valuation
may be a single estimate or a range of values. The valuer may well state a number of qualifications
as to the valuation as there may be a number of circumstances that will affect value and the
valuer will wish to set out important assumptions in order to avoid misunderstandings.
VALUATIONS DERIVED FROM MARKET VALUES

Valuations may be made under constraints imposed by legislation, and in certain cases valuations
made for the purpose of assessing property occupation or ownership tax may be considerably
constrained by hypothetical assumptions. As a consequence, artificial values may be produced
(albeit derived from actual market values).
The object of the constraints may be practical (to reduce the need and cost of producing
frequent valuations or producing valuations more precise than the level of tax necessitates) or
to achieve government policies, e.g. how the burden of property taxation should fall.
The official process for agreeing tax valuations, including determination of appeals by
tribunals, may well introduce further sophistications which increase the artificial nature of the
valuation. However, it is important for the acceptance of the assessment process that where
valuations have to be made at several removes from underlying market values, there be clear
rules from which the valuers can produce the requisite valuations.
VALUATIONS IN A LIMITED/NO MARKET SITUATION

The situation where no market or only a limited market exists may be permanent or temporary.
For example, where the state owns all the land and no interests in land exist to be bought or
sold, there is no market and this is a permanent situation (unless the country starts to privatize
or return state property). Similarly, where there are very stringent controls upon property
ownership, e.g. where potential owners are restricted to a small class, then there will be a
limited market on a permanent basis.
On the other hand, circumstances can arise whereby for a time there is only a limited market,
or in extreme cases no market at all. This can affect a normally active and well-developed
market. There are several reasons why this situation might arise.
Buyers and/or sellers can withdraw from the market en masse for, inter alia: economic
reasons (expectation of a significant drop or rise in prices due to changes in demand and supply);
financial reasons (e.g. the cost of borrowing rises sharply); or because of increasing risk levels
(uncertainty over political events, such as major government elections, concern over
environmental scares). The result is that very few or no transactions take place and although
43
the situation may only be seen as a temporary one, at the time anyone wishing to sell would be
proceeding on a forced sale basis. In this case, the price associated with a forced or distressed
sale, called forced sale value, is not a representation of market value. It is generally not easily
predictable by a valuer because of the nature and extent of subjective and conjectural assumptions
that must be made in formulating such an opinion.
Nevertheless, in the situation of a limited or inexistent market (whether temporary or
permanent), valuations may still be required and the valuer has to attempt a valuation or a
proxy for a valuation. For the valuer, the problem is seen in terms of having no market evidence
or only limited market data on which to base an opinion.
Here, the purpose of the valuation is highly relevant. For example, for property taxation
where no market exists, a monetary valuation may not be necessary, provided there is a relative
valuation of each property interest, so as to produce an equitable distribution of the tax burden.
It may be acceptable for the client to accept valuations as at the last date when a normal
market could be said to have existed. It may be appropriate for a valuer to base the valuation on
transactional data drawn from a market geographically far removed from the subject property.
Other approaches suggested for dealing with the limited/no market problem include the use
of probabilities assigned by the valuer to a range of unit values, or a more crude method attaching
relative weights.
Valuers may well append caveats to their valuations and explain how they have attempted
to place a sensible value on the subject property where faced with a limited/no market. The
degree of accuracy and the level of confidence the valuer has in the valuation may well not be
high, and there may well be no straightforward answer to this problem.
44
Chapter 7 Valuation
45
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AGL MISCELLANEOUS PAPERS

1.
Exploitation de Rsultats dEssais Agronomiques: Fixation Symbiotique de lAzote. Analyse de la variance.

G. Caraux, 1985 (F)*
2.
A Review of Small-scale Irrigation Schemes in Kenya. J.H. Van Doorne. 1985 (E)*
3.
Exploiting Agronomic Test Results. Symbiotic Nitrogen Fixation Users Manual: Analysis of variance on
Apple II computer. G. Caraux. 1985 (E)*
4.
Water for Animals. Ph. Pallas. 1985 (E)*
5.
Landscape-guided Climatic Inventory Using Remote-sensing Imagery. F. van der Laan. 1985 (E)*
6.
Biogas in Africa: Current Status and Strategies to Enhance its Diffusion. D.C. Stuckey. 1985 (E)*
7.
Status Report on Plant Nutrition in Fertilizer Programme Countries in Asia and the Pacific Region. 1986 (E)*
8.
Hydraulique pastorale. Ph. Pallas. 1986 (E)
9.
Levels of Fertilizer Use in the Asia and Pacific Region. 1986 (E)*
10. Status Report on Plant Nutrition in Fertilizer Programme Countries in Africa. 1986 (E)*
11. Irrigation and Water Resources Potential for Africa. 1987 (E)
12. Effects of Agricultural Development on Vector-borne Diseases. 1987 (E)
13. . Irrigated Areas in Africa. E/F. 1987 (E)
14. Manpower Planning for Irrigation. R. Carter, D. Mason and M. Kay. AGL/ESH. 1988 (E, F)*
15. NGO Casebook on Small-scale Irrigation in Africa. R. Carter. 1989 (E)
16. Water, Soil and Crop Management Relating to the Use of Saline Water. 1990 (E)
17. Water Harvesting. 1991.
18. Improved Irrigation System Performance for Sustainable Agriculture. 1991 (E)
19. Fertigation/Chemigation. 1991 (E)
20. Secondary Nutrients. 1992 (E)
21. Le travail du sol pour une agriculture durable. 1997 (F)
22. Planning Sustainable Management of Land Resources: The Sri Lankan example. 1999 (E)
23. Integrated Soil Management for Sustainable Agriculture and Food Security in Southern and East Africa.
1999 (E)
24. Soil Physical Constraints to Plant Growth and Crop Production. 1999 (E)
25. New Dimensions in Water Security. 2000 (E)
26. Guidelines for On-farm Plant Nutrition and Soil Management Trials and Demonstrations. 2000 (E, S)
27. Guidelines and Reference Material on Integrated Soil and Nutrient Management and Conservation for
Farmer Field Schools. 2000 (E)
28. Simple Soil, Water and Plant Testing Techniques for Soil Resource Management. 2000 (E)
29. Water and Agriculture in the Nile Basin. 2000 (E)
30. Guidelines for Participatory Diagnosis of Constraints and Opportunities for Soil and Plant Nutrient
Management. 2000 (E)
31. Soil and nutrient management in sub-Saharan Africa in support of the soil fertility initiative. 2001 (E)
32. Small dams and weirs in earth and gabion materials. 2001 (E)
33. Guidelines for the qualitative assessment of land resources and degradation. 2001 (E)
34. Preliminary review of the impact of irrigation on poverty with special emphasis on Asia. 2003 (E)
35. Overview of land value conditions. 2003 (E)
Availability: March 2003
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English
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AGL/MISC/35/2003

OVERVIEW OF LAND VALUE

OVERVIEW OF LAND VALUE

LAND AND WATER DEVELPMENT DIVIISION

The designations employed and the presentation of material

All rights reserved. Reproduction and dissemination of material in this

1. LAND USE IN INDONESIA

2. Land restitution in Bulgaria

3. Planning problems in a traditional land tenure system

1. Distribution of available land

4.Sales prices for residential and agricultural land in Belgium

5.Subsidies allocated to agriculture in industrialized countries

6.Percentage of rented land compared to total used agricultural land

2. SCARCITY AND COMPETITION

5. VALUE AND PRICE

6. PRICES AND RENTS

Overview of land value conditions

Overview of land value conditions

Chapter 2 Scarcity and competition

A major factor in population trends is rapid urbanization, mainly in developing countries.

Overview of land value conditions

as a result of human interventions related to deforestation, improper agricultural practices,

CHANGING LAND USE

Agricultural Arable land per

Arable land per

Source: FAO Production Yearbook 1976 and 1996

Chapter 2 Scarcity and competition

BOX 1: LAND USE IN INDONESIA

The rate of deforestation between 1970 and

Deforestation has affected Sumatra

For the resettlement of people under the

Source: Verheye, 1994

Arable farming is also competing with

Overview of land value conditions

Chapter 2 Scarcity and competition

Overview of land value conditions

MARKET-DRIVEN ALLOCATIONS AND PRICES

Overview of land value conditions

GOVERNMENT ALLOCATION AND PRICING

Overview of land value conditions

Overview of land value conditions

Overview of land value conditions

LAND VALUE AND PRICE

Chapter 5 Value and price

THE VALUE OF LAND

Overview of land value conditions

FACTORS AFFECTING THE VALUE AND PRICE OF LAND

Chapter 5 Value and price

land use options;

Productive land capability

Overview of land value conditions

Price of land in 000 FF/ha

Source: NN/SAFER, 1997

Chapter 5 Value and price

Agricultural use (ha)

Overview of land value conditions

Chapter 5 Value and price

Overview of land value conditions

Chapter 5 Value and price

Overview of land value conditions

Chapter 5 Value and price

Overview of land value conditions

Chapter 5 Value and price

BOX 3: PLANNING PROBLEMS IN A TRADITIONAL LAND TENURE