Land prices across many African cities are soaring as urbanization accelerates and demand for land outstrips supply. As cities grow and public infrastructure investments increase, land values rise significantly. Studies have shown that converting rural land to urban use can boost its value by up to 400%. However, while land value increases can benefit property owners, city governments are increasingly seeking ways to capture this value to boost revenue and reinvest in public services.
Hong Kong serves as a prime example of effective land value management. Its system, often cited as a successful model, provides insights into how land-based financing can support urban infrastructure. Since 1997, when Hong Kong’s land was handed over to the People’s Republic of China, the city has utilized a land lease system to generate revenue. This system involves leasing land use rights for a fixed period, typically 50 years, through public tenders and auctions managed by the Hong Kong government’s Land Department.
Key Features of Hong Kong’s Land Lease System:
- Leasing and Bidding: Developers bid on land tracts based on factors such as location, permitted use, and zoned height. Successful bidders pay a one-off land premium and ground rent, calculated at 3% of the land’s rateable value.
- Development Requirements: Leased land usually comes with a building covenant, requiring a certain percentage of the agreed floor space to be constructed within a specific timeframe. Failure to comply can result in the government reclaiming the site without compensation.
- Revenue Allocation: Revenue from land premiums and ground rents is deposited into a Capital Works Reserve Fund, established in 1982, dedicated to financing public works and land development. The fund supports infrastructure projects like public transport, schools, and hospitals.
Historical Context and Lessons for Africa:
Hong Kong’s land lease system has its roots in British colonial policies aimed at developing the island’s harbor as a commercial hub. Unlike African colonies, which focused on resource extraction and often disregarded existing land management systems, Hong Kong’s approach was to attract commercial enterprises and generate revenue from land.
In contrast, African cities often grapple with multiple and overlapping land tenure systems inherited from colonial times, which can complicate land management and limit revenue generation. The pre-colonial and colonial experiences have resulted in divergent land markets and management practices.
Challenges and Considerations for African Cities:
- Transparent Administration: Effective land-based financing requires transparent land administration and a thriving real estate market. High construction and mortgage costs in African cities can limit developers’ ability to convert land into profitable projects.
- Revenue Volatility: Land revenue can be volatile and subject to macroeconomic cycles. For instance, Hong Kong experienced a significant shortfall in land revenue in 2022/23 due to reduced developer demand. This volatility means that while land revenue can support capital infrastructure costs, it may not be suitable for recurrent expenses like health and education.
- Affordable Housing: High land prices can exacerbate affordable housing shortages. African cities must implement supporting policies to prevent residents from being priced out of the market.
African cities should explore land-based financing models, drawing inspiration from Hong Kong but adapting systems to their unique local contexts. While replicating Hong Kong’s leasehold system might not be feasible, designing land-based financing strategies that address local challenges can help cities harness the value of land to fund public infrastructure and services.
As cities across Africa continue to grow, leveraging land value effectively will be crucial in supporting sustainable urban development and improving public services.