Harnessing the potential of urbanisation in Africa: Challenges in real-estate markets

Customary land-tenure systems, which can work well in the rural hinterland, cannot accommodate the high prices and complex land markets of large, modern cities.

There are at least two key institutional features that present challenges to the land markets of African cities: a lack of property rights and minimal urban planning. Property rights are fundamental for private investment and trade in land. Customary land-tenure systems, which can work well in the rural hinterland, cannot accommodate the high prices and complex land markets of large, modern cities. Urban planning is also important to ensure that public and private lands are not overcrowded. On the other hand, laissez-faire urban development leads to encroachment of land and crowding of services. Finally, property rights and planning are inherently interlinked. The ability to register ownership and provide legally binding title deeds depends on the precise delineation of plots and orderly development of properties according to a centralised plan. This post addresses the importance of land tenure and property rights, while the next post in the series will discuss policies that can improve planning and organisation of property markets.

City skyline, Nairobi, Kenya

A case study of the Nairobi property market

If property rights are so important, why not just grant them to de facto owners and let the market do its work? The issue is that creating exclusive property rights can be extremely difficult, given the informality that arises from complex tenure histories and competing claims to land. An example of this comes from the history of Kibera, a mega slum in Nairobi widely considered to be as the largest in Africa.

A history of competing claims to land

Kibera was first settled in the colonial era on what were the outskirts of Nairobi by Nubian soldiers who had been given the land for their service to the British military.[1] Initially they were given the use rights to this land, but no formal title documents. At independence these rights were revoked, and while the Nubians could continue as occupiers, the lands were thereafter government property. All the while, migrants to the area began to settle either through irregular allocation of land or sub-letting from the Nubians. Today, the Nubians make up a minority of the population in Kibera, which is in the hundreds of thousands. This history has created competing interests in the densely packed land that make it difficult to allocate property rights.

Walking through Kibera with high-rise apartments in the distance

Slumlords and their political economy problem

An added complication to this scenario is that the occupiers of Kibera are not simply squatting for ‘free’ on government land. In fact, Kibera is predominantly a rental market, with some 90% of residents being tenants. This begs the question: if this land is publicly owned, who are these tenants renting from? The answer is that these areas are not managed by the government, but rather by ‘slumlords’ who operate illegally. According to a survey of landlords in Kibera, 41% were government officials, 16% politicians and 42% other absentee owners.[2] These are individuals with the clout to protect their de facto status as landlords, and therefore their rents, while still not being able to take the formal ownership of this land from the public.

Consequences for the property market

How does this all link back to the real-estate market? Well, as density rises, it becomes more efficient to house people in multi-story buildings rather than the single-story shacks that characterise slums. Since the slumlords of Kibera do not have legal ownership of the lands they control, they have little incentive to invest the capital required to construct multi-story, concrete buildings. In recent work, we modelled the allocation of built capital by developers across Nairobi and over time.[3][4] A key result is that impediments to the conversion of informal land to formal land, such as the slumlord problem outlined above, can have great implications for the welfare of a city. Our estimates suggest that overcoming these frictions could result in gains worth the equivalent of about 30 years of the typical rent paid by tenants in slums like Kibera.

Formal title deeds alone do not make a system of strong property rights

What this all suggests is that clarifying property rights can lead to large gains if we are willing to pay off or remove the slumlords and allocate title deeds to the occupiers. However, it is key to recognise that formal documents depend on a wider system of property rights and the rule of law. A case in point is abuse of formal property rights in Kenya revealed by the Ndungu Commission.[5] Its report found widespread illegal allocation of land by Presidents Kenyatta and Moi and members of their administrations. Precisely because property rights were formalised, the central government was able to (mis)allocate land by signing off on documents which could be used as legal proof of ownership.

The land markets of African cities can be complex, with competing claims to ownership and varying levels of tenure security. By strengthening the institutions that govern property rights, these cities can develop capital-intensive buildings and efficiently house their millions of residents.

Background reading

[1] More reading here: www.kenyasnubians.com/timeline

[2] Gulyani, S. and D. Talukdar (2008), “Slum Real Estate: The Low-Quality High-Price Puzzle in Nairobi’s Slum

Rental Market and its implications for Theory and Practice”, World Development, 36, 1916–1937.

[3] Henderson, J.V., A.J. Venables, T. Regan, and I. Samsonov (2016), “Building functional cities”, Science, 352(6288).

[4] Henderson, J.V., T. Regan, and A.J. Venables (2021), “Building the City: From Slums to a Modern Metropolis”, Review of Economic Studies, 88:1157-1192.

[5] Southall, R. (2005), “The Ndungu Report: Land & Graft in Kenya”, Review of African Political Economy, 103:142-51.

Harnessing the potential of urbanisation in Africa is a short series exploring the exponential growth of African cities and the challenges and opportunities this presents for the housing market and its impact on productivity and quality of life. Over the next few months, we will release several articles covering (1) the issues facing the efficient development of African cities, (2) policy options to mitigate these issues, and (3) how we can improve state capacity to allow African governments to implement new policies. The series aims to inspire further research and interest from practitioners in this increasingly important area of real estate and urban economics.

Tanner Regan is a Research Fellow in Economics at London Business School, focusing on the economics of housing, land tenure, urban planning and property tax in developing country cities. He holds a PhD from the London School of Economics and MA and BSc degrees from the University of Toronto. He is affiliated with the Centre for Economic Performance and the International Growth Centre at the LSE.­­­­­­­­­­­­­­­­­­­­­

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