Land: property rights

Innovative solutions

7 June 2013

The valuation profession can help communities in informal settlements to realise the value of their land. By Frances Plimmer and William J McCluskey

A well-functioning property market provides a range of opportunities and services. If you are reading this article, it is probable that your 'local' property market provides you with vital career opportunities or, at least, an important working environment.

Apart from offering access to a secure source of real estate for personal and commercial occupation, and being an investment medium, the property market is also a vital contributor to the economy for commercial activities providing employment, leisure, shelter and a host of other opportunities. Because real estate is a tangible, visible source of 'wealth', and a high-value asset, it is often used as security to raise capital. Traditionally, mortgages or financial loans are secured on the recognised market value of the real estate involved. Together with the protection offered by the registration of title to real estate, the property market provides the essentials necessary to acquire, use, improve, develop and sell real estate for personal benefits, generally resulting in an improved physical and social environment for individuals, with commensurate benefits to the community.

Underdeveloped markets

A key problem with real estate markets in developing countries is how to make them work to alleviate urban poverty. This stems from the lack of market maturity and the inability of those with land to exchange it and leverage the accumulated real estate wealth. Where property markets are underdeveloped, no records are kept of transactions. Thus, there is no body of transactional data that can be used to predict future sale prices. Valuers are therefore unable to provide a reliable, evidence-based value of real estate to contribute to the development of such markets, or to provide property owners with the professional advice that can improve both values and benefits from owning and occupying property, or merely from community living.

Even in underdeveloped markets, properties change hands. But often, the exchange between willing buyers and sellers does not involve the legal procedures necessary to ensure that, for example, the seller has the right to dispose of it, that the purchaser takes over the rights, restrictions and responsibilities attached to the property, and/or that the level of consideration paid reflects market value. Property rights protection levels in such circumstances are therefore minimal or non-existent.

A key problem with real estate markets in developing countries is how to make them work to alleviate urban property

There is nothing intrinsically wrong with such an informal method of disposing and acquiring rights to land and buildings. But, in such a situation, there is no objective 'value' that can be attached to real estate. So, there is no opportunity for owners and occupiers to use their rights to real estate as collateral to raise loans, because of the traditional way of relying on the principle that any foreclosure and resale of the property will at least recover the debt (plus, presumably, interest and costs), which has become paramount for lenders. Where there is no formal (state)registration or recognition of property ownership rights, there is no opportunity to establish a formal database of transactions because there is no requirement to inform authorities of real-estate sales or purchases.

Registration of land or title

Many see the absence of land or title registration as a major issue preventing economic and social development, and there is growing evidence investigating the benefits of land titling programmes to alleviate poverty. These issues were examined in The formalisation of urban land tenure in developing countries (Durand-Lasserve and Selod [2007] and Social and economic impacts of land titling programmes in urban and peri-urban areas: A review of the literature (Payne, Durand-Lasserve, and Rakodi [2007]), papers presented to the World Bank urban research and knowledge symposium in Washington last year.

According to Manya Mooya in his 2011 paper Making real estate markets work for the poor: theory, policy and practice (Cities), the gains from secure property rights are conventionally seen as arising from three aspects. Secure property rights create conditions that encourage investment and there is some consensus that there is a positive relationship between the two. Thus, it is generally agreed that a registered title promotes land investment and increases land values (Durand-Lasserve and Selod, 2007).

It is also believed that secure property rights makes commerce easier, expanding opportunities and increasing trade gains, and evidence shows that in certain contexts, formal property titles have a positive effect on transaction volumes.

Finally, it is considered that property rights make possible the functioning of credit markets, and the use of real estate as collateral. The evidence regarding the effect of land title on access to credit markets is not positive. It is unclear how good property title can be translated into a mechanism for poverty alleviation.

'Wealth' generation

In underdeveloped markets, and particularly where there is no registration of title or record of transactional data, land owners cannot benefit from the 'wealth' represented by their real estate to generate capital. Nor can those living in such conditions benefit from the financial opportunities generated by property assets, and a vicious cycle of poor living conditions and a lack of economic prospects are perpetuated.

This situation often exists in 'informal settlements'. Their very nature implies a lack of both the legality regarding title to the land and structures thereon, as well as casualness towards the social, physical and economic organisation within them. Yet, informality itself does not mean chaos or neglect, or a lack of social structure and economic opportunities.

In June 2008, FIG, UN-HABITAT and the Global Land Tools Network held a seminar, Improving Slum Conditions through Innovative Financing. The Stockholm event brought together people with knowledge of developing systems to share their experiences of how those living in informal settlements can raise finance to construct homes, and resulted in a major FIG publication.

"It is critical to demonstrate that the poor have the ability to repay and to save, in order for banks to have a better understanding of their capacity… Building trust [is] paramount", (FIG 2008).

It is well-recognised (e.g. Mutter, cited in FIG 2008) that there is 'wealth' in informal settlements that can support the development of 'slum' dwellers and improve the physical conditions and amenities of the settlements. Of the assets at the disposal of the urban poor, land or real estate is often the most significant (Reducing global poverty: The case for asset accumulation, Moser, 1998).

Basically, if this wealth can be harnessed in the same way that those with the benefits of a fully functioning property market can (purchase homes using mortgages or raise funds using real estate title as collateral), then there is huge potential for those in informal settlements to improve their individual and family prospects, and at the same time help economic, social and environmental development in their communities.

New ways of lending

However, the traditional way of lending and reducing the lenders' risk obstructs the raising of capital in locations without an open, active, reliable property market. This is seen as a major problem for those in informal settlements, and where markets are underdeveloped. New ways of reducing risk that do not rely on formal land holdings should be developed in conjunction with communities to encourage the kind of social and physical environments that reflect their needs and to which they aspire.

How is this possible without legal title to their properties? Would financial institutions risk their capital without the traditional security of the right to foreclose and sell properties to recover debts? The answer is, yes – and it is already happening, in an innovative 'pro-poor' way that does not risk the real estate holdings of the communities involved, while protecting the lender institutions from risk. What really matters is not that the loan is secured on the value of the real estate – it is that the borrower is capable and committed to repaying the loan. Financial institutions have become used to taking real estate as security, but lending does not have to operate like this.

"People need to be able to access credit without having to risk their land asset" (FIG, 2008).

This requires a rethink of traditional lending theory.

Mutter (FIG, 2008) describes what he called the 'slum investment deficit', which is

"the contrast between what poor people can do and put up with in an environment where they are not formally accommodated or sometimes even acknowledged, even though they provide the city with its base resources, namely the labour and entrepreneurial skills that support the city economy… The slum dwellers have incredible resources, and the slums have tremendous unrealized value..."

By providing opportunities for 'slum dwellers' to use their 'unrealised value' to generate investment and therefore productivity, the lop-sided slum investment deficit will be redressed to increase the prospects of achieving more balanced, sustainable communities.

Mutter continued to identify three basic requirements for slum upgrading and prevention: land availability and security (which means protection from eviction), municipal responsibility for basic affordable services, and access to formal, affordable lines of credit specifically for slum dwellers' own projects.

Land is a fundamental source of wealth. Indeed, it can be argued that it is the only fundamental source of all economic activities

There is evidence that savings schemes and cooperative structures contribute to financial lending institutions' understanding as to the containment of risk, and many of these are presented in the FIG publication. But the slum dwellers must be part of the solution, so that the process reflects their needs and views.

The costs and commitments involved must be clear and transparent, so that risk is shared between stakeholders, with all parties involved in risk analysis, planned risk mitigation and management. Subsidies must be targeted effectively. Projects with revenue-generating elements maximise financial viability as well as contribute to local economic vitality.


"Without access to affordable finance, poor people are caught in a vicious cycle in which affordable housing is inadequate, but adequate housing is unaffordable" (FIG 2008: 8).

The failure of traditional financing processes to reflect the needs of the poor in informal and slum settlements deprive communities of the opportunity to help themselves out of poverty. While valuers play a part in the traditional lending procedure, it is only by providing a specific service to lending institutions – they are not involved in the underlying lending process and therefore have limited influence for change. It seems that informal property markets, and the systems supporting them, fail to provide adequate access to land and accommodation for communities, and may represent the 'bottleneck' that destabilises secure long-term urban development.

Land is a fundamental source of wealth. Indeed, it can be argued that it is the only fundamental source of all economic activities. Secure access to land and to the finance necessary to generate wealth from land can help those in city slums improve their lives. By providing improvements within a community, land value in that community increases, in turn increasing opportunities to access further capital. The World Bank believes that real estate markets can play an important role in fighting poverty, but the difficulty is in mobilising the markets to 'work for the poor'. This ultimately means leveraging the exchange process so that it becomes a tool for capital accumulation (Mooya, 2011).

The valuation profession has the skills to support communities to make the most of their land and buildings, to provide value-adding services and to allow them to realise that value in a way that supports their needs and aspirations. The profession can contribute to a long-term solution by working with stakeholders, to ensure that communities are best placed to benefit from funding that supports their aspirations; and by helping to develop vibrant property markets in which real estate can be exchanged formally.

We must support such progress to achieve thriving communities – nothing else can be socially sustainable, and the world cannot afford anything less.

Dr Frances Plimmer FRICS is a Chartered Valuation Surveyor and chairs FIG’s Commission 9 (Valuation and Real Estate Management). Dr William J McCluskey FRICS is a Chartered Valuation Surveyor and Reader in Real Estate and Valuation at the University of Ulster. He is also the vice-chair of FIG’s Commission 9

Further information

  • This article is based on the authors’ paper presented to the FIG Regional Conference in Montevideo in Uruguay in November 2012. Improving Slum Conditions through Innovative Financing.
  • The latest RICS research focuses on unregistered land in Kenya and East Africa and resulting problems with valuation caused by uncertainty of title.
  • Related competencies include: T001, T056, T072