Guide to the Valuation of Unregistered Lands

Guide to the Valuation of Unregistered Lands

Acronyms

AP Affected Party

ASEAN Association of South-East Asian Nations

FAO Food and Agricultural Organisation (UN)

FIG International Federation of Surveyors

GLTN The Global Land Tenure Network

IVSC International Valuation Standards Council

PDSA Plan, Do Study, Act

UN United Nations

UNFP United Nations Population Fund

VGGT Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security

Contents

Acronyms 1

Executive Summary 6

1 Introduction 6

1.1 Land valuation and the global agenda 8

1.1.1 What is a Valuation? 8

1.1.2 Types of Value 8

1.1.3 Social Value of Land 9

1.1.4 What is Market Value 11

1.1.5 A Theoretical Grounding for Market Valuations 12

1.1.6 What is the Global Agenda? 16

1.2 What are unregistered lands? 17

1.2.1 Context to other relevant policy documents 18

2 Purpose 19

2.1 Why do we need valuations? 19

2.2 The parties responsible for conducting, and parties using, the valuations of unregistered lands 19

2.3 The barriers and challenges related to the valuation of unregistered lands 20

2.3.1 Legal Framework 21

2.3.2 Availability / Transparency of Published Information 21

2.3.3 Property Market Volatility 22

2.3.4 Lack of Adequately Trained Professional Valuers 22

2.3.5 Outdated National Valuation Standards 22

2.3.6 External Pressure. 22

2.3.7 Excessive or Insufficient Government Interference 23

2.4 Remedies to Improve Real Estate Markets & Valuation 23

2.4.1 Legal Framework 23

2.4.2 Administrative Structures 24

2.4.3 Financial and Banking System 25

2.4.4 Skills and Standards 26

2.4.5 Cultural and Socio-Economic Framework 27

2.5 Conclusions 28

2.6 Target Users 29

2.7 Role of valuers in informal markets 29

2.7.1 Ethical standards 30

2.7.2 Fit-for-purpose valuations 31

2.7.3 Opportunities for updating, upgrading and improvement 32

3 Note on valuations for compulsory purchases / land acquisition 32

3.1 Difference between market value and compensation 33

3.1.1 Severance 33

3.1.2 Injurious Affection 33

3.1.3 Disturbance 33

3.1.4 Special Value to Owner 34

3.1.5 Solatium 34

3.2 Follow FIG guidelines on compulsory purchase 38

4 Market value and informal rights 38

4.1 Analysing Sales 41

5 Barriers and Issues 43

5.1 Legal and Tenure 43

5.2 Market Related 43

5.3 Valuation Related 44

5.4 Cultural and Socioeconomic 45

5.5 Other Barriers 46

5.5.1 Determining the real owner, and lack of ownership documents 47

5.6 Hostile land occupants 48

5.7 Due to lack of documents, it is not easy to determine the true boundaries and size of the lands 48

5.8 Inability to obtain appropriate comparables 48

6 Addressing the valuation of unregistered lands / best practices 51

6.1 Standard Valuation Procedures 51

6.1.1 IVS Framework 52

6.1.2 Valuation Methods – Macro vs. Micro 52

6.1.3 Valuation, Judgement, and Objectivity 53

6.1.4 Competence 53

6.1.5 Market / Activity / Participants 54

6.1.6 Market Activity 54

6.1.7 Market Participants 54

6.1.8 Basis of Value 55

6.1.9 Transaction Costs 55

6.1.10 IVS 101 Scope of Works 55

6.1.11 Identification and status of valuers 56

6.1.12 Identification of Client and any other intended users 56

6.1.13 Purpose of the valuation 56

6.1.14 Identification of property to be valued 56

6.1.15 Basis of Value 57

6.1.16 Valuation Date 57

6.1.17 Extent of Investigation 57

6.1.18 Nature and source of information to be relied upon 58

6.1.19 Assumptions and special assumptions 58

6.1.20 Restrictions on use, distribution, or publication 59

6.1.21 Confirmation valuation in accordance with IVS 59

6.1.22 Description of the Report 59

6.2 Valuation Research in the Valuation of Unregistered Land 59

6.2.1 Moots 59

6.2.2 Value Research Juries 60

6.2.3 Citizen Value Juries 61

6.2.4 Microcosm of the community 61

6.2.5 Democratic conversations 61

6.2.6 High quality information 61

6.2.7 Productive deliberation 61

6.2.8 Minimizing biases and outside manipulation 62

6.2.9 Sufficient time to study the matter 62

6.3 Comment on Supplemental Means. 62

7 Valuing Different Kinds of Unregistered Lands 62

7.1 State Land 63

7.2 National Reserves 63

7.3 Protected Areas 63

7.4 Communal Land 64

7.5 Rangelands (pasture) 64

7.6 Individual Parcels under Customary Tenure 64

7.7 Land under Group Rights 64

7.8 Family Lands (Caribbean situation) 64

7.9 Informal Settlements 64

7.10 Unregistered Easements 65

7.11 Cultural Heritage Sites 65

7.12 Trees (sacred trees – Cambodia) etc. 65

7.13 Natural Capital 67

7.14 The Valuation Process and its Issues 70

7.15 Methods (alternative methods) 71

7.16 Reporting 71

7.16.1 Adherence to standards 71

7.16.2 Acknowledgement of fit-to-purpose valuations 72

7.17 Co-operation with other organisations, consideration of alternative methods / recognition of alternative data sources 72

7.18 Acknowledging knowledge gap 72

8 Fit-For-Purpose Valuations 72

9 Capacity Building: Delivering Fit-For-Purpose Valuation Programs and Adopting the Fit-For-Purpose Valuation Approach 73

9.1 Valuers and their Professional Institutions 73

9.1.1 At the Global Scale 74

9.1.2 At the International Scale 75

9.1.3 At the National and Provincial Scales 75

9.1.4 At the Coal Face: The Local Valuation Scale 79

Appendix A. 80

Case Study: Example of a Fit-For-Purpose Valuation 80

Marshall Islands 80

Glossary 86

References 87

About the Authors 95

Executive Summary

Unless specifically instructed to the contrary, a market valuer has only one objective: to read a market in order to find out what amount an asset or liability would exchange for on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion. That is the International Valuation Standards definition of market value, and it is the guiding light for any valuer attempting the valuation of unregistered lands.

Such market value exchanges are likely to have occurred on unregistered lands for thousands of years, as were other exchanges that would not have met the requirements to satisfy that definition of market value.

The task of differentiating between market value at not market value transactions can be simple, complicated, complex, or wickedly difficult. All four kinds of tasks can be encountered by a valuer in any markets. However, the simple to complicated ones are more likely to be found in well-functioning formal markets, because they are by definition transparent and accountable markets in clearly defined, enforceable and transferable property rights. The task in differentiating between those two types of transactions in markets in unregistered lands is more likely to be complex to wickedly difficult, because those markets are more likely to be opaque and unaccountable ones in relatively undefined, less enforceable and less transferable property rights.

The first way for a valuer to achieve that one objective, no matter what the market, is to go out into it and investigate the circumstances of sales that are similar to the land being valued, to see how well those sales comply with the above IVS definition of market value. If they are comparable, and meet that market’s standards to be acceptable as market value, they may be used as evidence for the valuation. If there is no market evidence there, look in similar markets elsewhere. Once the valuer’s performance of due diligence has uncovered whatever such evidence there may be, the valuation can be performed, even if there are no comparable sales there at all: never before then.

Not everyone can achieve that task to a professional level of competency. This guide is intended to assist in that achievement in the context of unregistered lands, and to assist readers to discern when it has not been achieved.

1 Introduction

To apply a market value any unregistered land, valuers[1] must assume a market for that land. More correctly, as elaborated below, they must assume a market for the social imaginaries called “property rights” over that land. Land is not any society’s, but property rights over it are. This guidebook is about how to proceed from that assumption to market valuations in the many contexts appearing within the term “unregistered land”.

To understand the current problems of valuing unregistered lands, it is essential to start with defining unregistered land and distinguishing it from registered lands.

Registered lands are simply those lands which have been recorded as having rights over them. Usually, that is done by or with the authority of the government with authority over that land, and that is the sense in which we use the term here.

Usually (but not necessarily exclusively within this definition) there are lands under customary ownership which are unregistered. Lowry described the valuation of customary lands as being a special field of property appraisal that frustrates many of those who accept such assignments, and its anomalies mock the practitioners of the art of valuation (Lowry 1981, 1987).Commentators from Papua New Guinea note that customary or native land valuation is a sphere of valuation not often encountered by a mass of valuers, and there is a lack of published information or guidance on this subject area (Bannerman and Ogisi 1994). Both comments could be generalised to the valuation of most kinds of unregistered lands.

The guidebook was originally meant to be a manual for valuers, but its purpose was changed during the period of its development to also serve as an accessible document for policymakers. The several reasons for adoption of this change include sensitising policymakers that some bureaucrats believe valuation to be just a technical exercise. While valuation does have technical requirements, professional level expertise is required to read markets and consequently determine market values. Such misunderstandings of the very nature of markets, market value and market valuations can be particularly damaging when it comes to the assessment of values to be included as compensation for compulsory acquisition, and this guide therefore emphasises that context. However, many points raised therein apply to valuations in general.

This introduction is about the global roles of land valuation and unregistered lands, and how this guide fits into the contexts provided by other relevant policy-related documents. It then has eight further chapters. The second chapter addresses the purpose and need for the guide, and the third addresses the abovementioned core purpose: how to determine the market value of interests in unregistered land in cases of government expropriation. The fourth chapter then drills down into the market value of informal rights, and the fifth addresses likely barriers and challenges to be met. The sixth chapter recommends best practices in such contexts, and the seventh addresses the valuation of different types of unregistered land. The eighth chapter addresses what makes a valuation of unregistered land fir for purpose, and the final – ninth -chapter makes recommendations towards capacity building for fit-for-purpose valuation programs and adopting the fit-for-purpose valuation approach.

Finally, the guidebook provides appendices, a glossary, and a table of references.

Like any tool, this guidebook can be both used and abused. However, if it can facilitate more transactions conducted in the terms described by the market value definition, and less by the use of force, even violence, then it will have achieved its purpose.

For general guidance, not required for a manual for valuers but perhaps necessary for non-valuers, we now explain what a valuation actually is.

1.1 Land valuation and the global agenda

1.1.1 What is a Valuation?

Your values point you.[2]They help determine what you pick from the environment as relevant. The philosopher John Dewey considered that “all conduct that is not simply either blindly impulsive or mechanically routine seems to involve valuations” (Dewey 1981, p.3).A valuation is an estimate of worth of any existent – a quality, a thing, an identity, a process …

The term “value” is not confined to market valuations. It refers to “the criteria people use to select and justify actions and to evaluate people (including the self) and events … [they are]. criteria rather than … qualities inherent in objects (Schwartz 1992, p. 1).

One may value another existent above one’s own life. Under such circumstances, it may be that no other existents would provide an adequate exchange. At the other extreme, universally abundant existents that are essential for one’s very survival – air and water, for example – may be hardly valued at all, but simply taken for granted. Such valuations say nothing about the value of the existent, but a great deal about the valuation criteria held by the person concerned.

However, one may be prepared to exchange one’s property rights over some existents for others, in which case one may seek to determine what one may get for them in exchange. As distinct from, for example, air and water, some landed locations qualities possess qualities making them “rival goods”:

A rival good is a type of good that may only be possessed or consumed by a single user. Using a rival good prevents its use by other possible users (Investopedia, n.d.).

A market valuation, the type of valuation focussed upon in this guide, is an estimate of what one may get for property rights over such rival goods under circumstances which allow a market value transaction to occur.

A valuation report is a written estimate of the ‘worth’ or value of something. But the questions are, “value of what?” “value to whom?”,“value when?” and “what type of value?”.

1.1.2 Types of Value

Depending on your dictionary, there could be over ten definitions for value. Typical definitions will relate to money or worth in money, desirability or usefulness, a bargain, an estimate of value, the ability of a thing to serve a purpose or cause an effect, or morality.

In a rather simple way, these value definitions can be divided between social values and economic values. Real estate valuation theory is predicated on economic principles, thus it only considers social values to the extent that they affect economic values. However, many cultures have historically perceived land as a predominantly or exclusively a social and cultural possession. This contrasts western or developed countries mainly utilitarian perceptions of land as primarily an economic commodity.

1.1.3 Social Value of Land

Most writings on land within indigenous societies link land’s importance to the community. Some authors observe that many indigenous peoples have a spiritual or identity attachment to the land, unlike non-native westerners, and therefore, such values cannot be ignored when valuing customary lands for compensation purposes (Whipple 1997, Muir 1998). Often the issues of customary lands also apply to unregistered lands, but unregistered lands can also be state land or even private lands.

Richard U. Ratcliff, a major contributor to valuation theory, divided values into four types – Vp, (a predicted, pragmatic price),Vc, (cost price; the new price less any depreciation), V8, (subjective value), and Vi, (intrinsic value - spiritual or identity-relevant). Intrinsic value is predicated that there is some value inherent in a particular real estate ownership. Ratcliff goes on to describe intrinsic value, within the aspect of valuation theory, as a ‘mystical quality’ that is independent of market conditions, and because it does not appear in real life, it can only be estimated by imagining an idealised and unreal situation in which an unlikely transaction is presumed to take place.