Development and change: Urban land market in Colombo City

H.M. Premathilaka Senior Lecturer, Department of Estate Management and Valuation, University of Sri Jayawardhanapura

Land is a form of accumulating and transferring wealth from generation to generations. It is the foundation of all forms of human activity.

Land which is a scarce natural resource plays a key role in development. Optimum allocation of land is important to ensure human welfare.

There are two kinds of mechanisms for distributing land resources within a society, land markets and governments. The main mechanism of distributing land resources within the City of Colombo is the land market. The Sri Lankan economy and society is vastly different to what it was in early 1960s.

This study examines the impact of economic, social, legal and policy changes that have occurred during this period on land market. It is assumed that the effects of above facts on land market are reflected through land values and frequency of land transactions.

In order to examine the above 420 land prices from past land sales were collected from five municipal wards and were categorised on the basis of two types of economic and political regimes, viz liberal regimes and dirigisme regimes and analysed.

This study shows that the land market development and changes are associated with different regimes.

Liberal regimes achieved higher economic growth and land market development and changes than the dirigisme regimes.

Introduction

Sri Lanka is committed to an open market economy, which implies development through perfectly competitive market. Land which is a scarce natural resource place a key role in development.

Land is the foundation of all forms of human activity. It is the means of life without which human beings could never have existed an on which their continued existence and progress depend.

Hence optimum allocation of the limited supply of this unique resource within local, regional, national and international levels is an importance aspect to ensure human welfare.

There are two kinds of mechanisms for distributing land resources within a society, land markets and governments. The main mechanism of distributing land resources within the city of Colombo is the land market.

Based on extensive literature review of the factors affecting property values in urban areas, some of the important components of property values can be listed as follows.

(a) Physical factors external to the property. The geographic location, the environment, (class of residents, and the type of residences in the immediate neighborhood and proximity to places of importance) public transport and infrastructural services such as electricity, water, sewerage drainage and telephone services.

(b) Factors integral to the property, the physical factors of the property (lie of the land, soil, shape and size) accessibility and economic and legal attributes and/or liabilities.

(c) The national and local economic conditions which determine the level of property values. Land values are also influenced by the social, cultural factors and life pattern of the people in the particular area.

Land values change when the above described factors that influence value change. This study examines the impact of economic, social, legal and policy changes that have occurred during this period on land market and it is mainly focused on pre liberalisation era and post liberalisation era.

If land markets function effectively, price signals can provide the information needed for efficient land allocation, where markets are defective, price signals work at less than full efficiency. (Harvey, 1996).

Effective functioning of land market depends on the national and local economic conditions which determine the level of property values, pattern of land ownership and distribution, land titling and registration, availability of a survey plan to identify the property with the boundaries, reduced transaction costs, transparency in transaction, balance knowledge of buyers and sellers, ability to obtain financial facilities and easy access to other relevant information. (Premathilaka, 1998).

Development

Over time the demand for land resources changes, brought about by changes in the size, income and tastes of the population, the rate of growth of economic activity, methods of transport, techniques of production and distribution.

On the supply side, existing buildings wear out or become less suitable to present uses, and the cost of constructing new buildings or adapting old buildings changes. Development is the response to such changes.

The fifty-eight years since the independence have witnessed significant structural changes and qualitative transformations in the economy. The predominantly agricultural economy of the 1950's has transformed into a diversified one.

This diversification, which was very gradual till the late 1970's, gained momentum in the last two and a half decades. The most notable feature of this transformation is the structural change where manufacturing and services make a higher contribution to Gross Domestic Product (GDP) than agriculture.

By 2004 industry contributed 26.5 per cent of GDP, while agriculture, forestry and fishing together contributed 17.9 per cent of GDP.

This is in sharp contrast to the structure of the economy in 1950, when agriculture's contribution was 41 per cent and manufacturing (consisting mainly of processing tea, rubber and coconut) accounted for only 16 per cent of GDP.

This contribution of services rose from 41 per cent in 1950 to 55.7 per cent of GDP by 2004. (Central Bank Annual Reports 1951 - 2004).

Though, there is a tendency to think of the period before 1977 as one of little change. In fact, there were significant economic and social transformations that occurred between 1950 and 1977. This period also witnessed profound changes in the ownership and management of economic enterprises.

Bus transport was nationalised in 1958. In 1961 the Bank of Ceylon was nationalised and the People's Bank and the Insurance Corporation were established as State enterprises. From 1970 to 1977 the country moved into an import-substitution industrial strategy.

The plantations were taken over by the State in 1972-74 and several State industrial enterprises were also established. In short, the commanding heights of the economy were vested in the State.

The Post liberalisation era

The economic reforms introduced in November 1977 marked a watershed in the country's economy. They reversed the policies pursued from 1970 to 1977.

The economic reforms included the liberalisation of trade and exchange controls, and the introduction of an economic strategy dependent on private investment and market forces. Foreign investment was encouraged and a greater reliance was placed on export.

To support these policies, the Government adopted a unified exchange rate, devalued the Sri Lankan Rupee and adopted a floating exchange rate.

These policy reforms relied on large-scale support from international agencies, notably the IMF and World Bank and donor countries.

These reforms of 1977 were a sharp break from past economic regimes. The new policies transformed a closed tightly-controlled inward looking economy into a market-oriented outward-looking one.

It was the beginning of a process that laid greater emphasis on private enterprise and lesser reliance on State owned and controlled economic enterprises.

Foreign assistance was aggressively sought and successfully obtained. The multi-lateral agencies supported the liberalised measure. The IMF provided balance of payments support, while the World Bank gave long-term credit for development programmes and arranged donor assistance through the annual Aid Club meetings. The fiscal policy orientation changed drastically.

Fiscal policies were used to support the market orientation and private sector emphasis on economic growth and to create a climate conducive to private investment and private economic enterprises.

The reduction in taxes and the use of a wide range of tax incentives encouraged investment. Direct taxation became an instrument for resource allocation rather than to mobilise resources for public investment or for income distribution.

The emphasis in government expenditure shifted to investment, particularly in infrastructure and large-scale projects like the Accelerated Mahaweli Scheme, rather than on consumption, welfare and social development expenditure. (Jayasundara 1986: 56-57).

The economic policies pursued included an urban renewal programme, the development of economic infrastructure, the establishment of a Free Trade Zone and the implementation of an Accelerated Mahaweli Development Programme, which was to increase agricultural production and enhance energy by the generation of hydro electricity.

The economic reforms and enhanced foreign funds led to a high rate of economic growth till 1983, when ethnic violence resulted in a setback. The subsequent period of terrorism undermined business confidence, foreign investment and tourism, besides dislocating agriculture, fisheries and a few industries in the North.

The economic growth rate fell from 4.3 per cent in 1986 to 1.5 per cent in 1987. The insurgency in the South from 1987 to 1989 dislocated work and seriously impaired economic activity. In 1988-89 growth averaged only 2.5 per cent.

The weak economic performance in the late 1980s led the government to adopt further structural reforms to strengthen budgetary management, reducing inflation and improving the balance of payments and external reserve position that had weakened considerably.

The economy was liberalised further after 1989.

The process of privatisation gained momentum and by end 1993, 42 State enterprises had been privatised.

Further, most of the State owned plantations were handed over to 22 companies for management.

The two State banks were re-structured to meet the capital adequacy requirements by the infusion of Rs. 24 billion and restrictions on foreign investment in the Colombo Stock Market were removed.

The change of government in 1994 was very significant. For the first time since independence, despite a change of government, a continuity of economic policies was assured. The government announced its commitment to continue market friendly open economic policies.

It too gave private enterprise the lead role in economic activity and pledged to support private enterprise and characterized its strategy as "Open Economic Polices With a Human Face".

The government liberalised trade further by decreasing tariffs, reduced corporate and personal taxation to a maximum of 30 per cent. The corporate tax rate was reduced to 15 per cent for enterprises in agriculture, fisheries, livestock and tourism. It gave further incentives for foreign investment and embarked on a far-reaching programme of privatisation.

The government privatised, inter alia, the plantations, telecommunications, the National Development Bank and AirLanka. It introduced a new safety net for the poor, Samurdhi, which was similar to the earlier Janasaviya programme.

The government also gave incentives for garment industries to be established in the regions and introduced a number of measures to assist agriculture.

Economic growth has varied significantly within this period. In the 1950's the economy grew by an annual average of 3 per cent; in the 1960's by 4.7 per cent: and in the 1970's by 3.9 per cent.

Economic growth has been somewhat higher in the last two decades. In the 1980's we achieved an economic growth of 4.3 per cent, and in the 1990's it was still higher at 5.2 per cent per year. In the last five years (2000-2004) the economy grew by only 4 per cent.

The periods of very low growth have been due to external shocks, internal disruptions or both. In the 1970 - 74 period the annual economic growth was only 2.9 per cent.

During this period, adverse terms of trade caused by sharp oil price hikes and international food grin shortages, created enormous strains on foreign exchange resources and fiscal operations.

The insurgency of 1971 disrupted nearly all economic activities and increased government expenditures on defence from less than 1 per cent of GDP to 4 per cent of GDP in 1972 - 75. In 1971 the growth rate dropped to as low as 0.2 per cent.

A severe drought, coinciding with the escalation of international prices of food, fertiliser and oil, led to severe hardships and constraints on economic growth.

Again in 1987 - 89 the annual average economic growth was only 2.2 per cent. The insurgency, which disrupted nearly all economic activities, was mainly responsible for this severe dip in economic growth from an annual average of 4.8 per cent in the previous three years to only 2.2 per cent per year in the next three years (1987-89).

Once again there was a slowing down in the economy prior to 1987, partly due to the North-East war and partly owing to a slowing down of foreign investment and budgetary difficulties (Atukorala and Jayasuriya 1994).

Several other years of low growth were associated with internal shock. In 1983-84 economic growth slipped to 5 per cent from the average of 6.2 per cent for the 1978-82 period owing to the ethnic violence in July 1983.

Economic growth fell to as low as 3.8 per cent in 1996, when drought conditions, not only affected domestic agricultural production, but created an energy crisis, which disrupted industrial production. In contrast, periods of high growth did not suffer such external and internal shocks.

Alternating economic policies were a significant factor in retarding the country's economic growth.

The discontinuity of economic policies was an important factor for slowing economic growth.

Fundamentally different economic regimes alternated giving rise to considerable uncertainty, reversal of economic polices and an unsatisfactory climate for foreign and domestic investment.

These alternating policy regimes provide useful perspectives on economic growth as differing economic growth rates are associated with different regimes. Periods of economic liberalisation, free trade, lesser controls and lesser State management achieved higher rates of economic growth than periods of State control of the economy.

The administrative area coming under the purview of Colombo Municipal Council is relatively small in extent 37.29 sq.km. which accommodates les than one million inhabitants. The city experienced a slow population growth rate, i.e., annual growth rate during the period 1981 - 2001 was 0.4%.

The current city population (as per population census of 2001) was 642,020 people, which is only an increase of 79,570 people (12%) during the last 30 year period since 1971.

Method

It is assumed that the levels of values in the property market is influenced by the economic growth levels political stability and government policy of the country.

In order to examine the impact of economic, legal and policy changes 420 land prices from past land sales of last forty years were collected from Municipal Wards of Kommpagngnaweediya, Wekanda, Hunupitiya and Cinnamon Garden of Colombo City and analysed according to the two types of economic and political regions.

Physical development (change of skyline), opening of new roads, infrastructure facilities, service sector improvements (opening of branch of various banks) were observed and identified as the indicators of development and change influencing level of property values in the study area.

It is observed that the property values reached its peak in 1969 and gradually falls down up to 1977 and again starts increasing since 1977. Further confirms the Chief Valuer's statement on property market in his administration report for the year 1978.

This study clearly shows that there is a positive relationship between economic growth and level of land values.

Reasons for the cause of downward trend in the level of property values during 1970 - 1977 were examined and found that the State has acquired some private properties in the study area during this period discouraging private sector investment in the property market.

Some of the legislative enactments passed by the parliament during this period are the reasons for it.

(i) Protection of Tenancy Special Provision Act, No. 28 of 1970.

(ii) Direct intervention on private property rights by the government. Land Reform Law, No. 1 of 1972 to reduce the concentration of ownership of land in a few hands, ceiling limit to ownership of property (maximum 50 acres)

(iii) Ceiling on Housing Property Law No. 1 of 1973.

(iv) Rent Act, No. 7 of 1972 (direct price control)

(v) Land Reform Amendment Act No. 39 of 1975 (Acquisition of Tea Estates owned by foreign companies). It is observed during this period some of the tea companies sold their offices and tea stores in the study area.

(vi) Business Undertakings (Acquisition) Act, No. 35 of 1971

Urban Development Authority Law, No. 41 of 1978 was enacted and the Urban Development Authority was established in 1978 with the objective to promote integrated planning and implementation of economic social and physical development of certain areas as may be declared by the Minister and the Colombo Municipal area was declared as a development area on September 30, 1978.

It is observed by 1977/78 property values started rising. By this time there were several important features that influence the property development activates as introduced by the State, and also by the private sector.

The State had given a lot of prominent, and attractive concessions to investors on housing development, and the number of private property developers in the Urban Sector was growing.

This trend continued until 1983.

As a result by 1978/79 property values started rising. By this time there were several important features that influence the property development activities as introduced by the State, and also by the private sector.

The State had given a lot of prominent and attractive concessions to investors on housing development, and the number of private property dev elopers in the Urban Sector was growing.

This trend continued until 1983.

In 1983 due to the unsettled conditions that prevailed in the country there was a slight setback in the Urban property market, but still there was no reduction in property values, the number of transactions that took place were few.

By 1986 the price of Urban property started rising again. During this period property values in major cities rose rapidly as there was instability in most of the remote areas in the country due to insurgent activities.

During the period 1990/93 it is observed very steep increases in Urban property values both in the case of commercial and residential properties.

It is observed that in 1995 the economic conditions of the country was not stable and a decline in the share market, nevertheless there was no decline in the property market. Investments on property market mainly on Urban property seemed to be the best secured investment.

The reasons observed for rapid escalation in land prices is mainly due to the physical development in the study area.