Baseline Study of Land Markets in and Around Mexico City’s Current and New International Airports Report to the Lincoln Institute of Land Policy July 10, 2017 Paavo Monkkonen UCLA Luskin School of Public Affairs Jorge Montejano Escamilla Felipe Gerardo Avila Jimenez Centro de Investigación en Geografía y Geomática 1 Executive Summary Government run urban mega-projects can have a transformative impact on local property and land markets, creating significant increases in the value of land through investment by the state. The construction of a New International Airport and the redevelopment of the existing International Airport will be one of the largest public infrastructure projects in Mexico City in recent history. The potential impacts on the price of nearby land warrants consideration of a land value capture program. Regardless of the form this program takes, the city needs an accurate and well-justified baseline measure of the value of land and property proximate to the two airport sites. This report contains three parts. The first is a review of relevant academic literature on property appraisals, the impacts of airports and mega-projects on land and property values, the role of value capture in infrastructure investment, and the methods and tools through which land value impacts can be estimated. This latter component of the literature review is especially important. Much of the data on land and property values in Mexico City are from appraisals and estimates rather than actual transaction records, and the methodology governments use to assess land values plays an important role in the credibility and political feasibility of efforts to recapture value increases. The bulk of the report is a presentation, assessment, and analysis of available data on land and property values in Mexico City and the proximate municipalities of the State of Mexico. The market value of property is expressed infrequently – at the point of sale – and sales records are the best way to estimate average property values. In Mexico, however, there is no reliable, publically available record of sales prices. Nonetheless, we identify and acquire three sources of data on property values; official publically assessed values reported by local governments’ cadastre and Secretaries of Finance as part of the property tax system, a database of appraisals for new mortgages generated in part and managed by the Sociedad Hipotecaria Federal (SHF), and the sale and rental listings available on the internet and in newspapers. The combination of three data sources on property values provides as comprehensive a picture as possible on land and property values in Mexico City. The values reported in the different sources vary. Values used by local government to calculate property taxes are a fraction of prices in listings of property for sale, and appraisals reported by the SHF are somewhere in between. There are some explanations for these discrepancies, based on our understanding of how the numbers are generated. Nonetheless, we also gathered data on neighborhood built environment attributes and jobs to assess the characteristics of the neighborhoods near the AICM and NAICM, and to provide a potential source of analytical check on value data. The final section of the report is a summary of two additional analytical exercises. The first is two simple case studies of the price changes near recent major urban interventions in Mexico City; the CETRAM in Rosario and the Granadas urban upgrading project. We find that land values in these areas increased at a slightly higher rate than the average change for the city as a whole. The second is an overview of current real estate development activity in the central region of Mexico City starting near the current airport and extending into the more expensive core. From this analysis, we can learn a great deal about potential price impacts of the redevelopment of the existing airport. It also gives a valuable perspective on the price of property – construction costs among other things - and the ways in which we can evaluate the value of land. 2 Table of Contents 1. Introduction: Land Value Capture and Mega-Projects 2. The Valuation of Land and the Impacts of Mega-Projects a. How much is urban land worth? b. Assessing the value of land for value capture c. Airports and property values 3. Data on Land and Property Value, and Study Area Characteristics a. Appraisal Data from the Sociedad Hipotecaria Federal b. Cadastral Data from Mexico City and the State of Mexico c. Publically Listed Prices for Property Sales d. Data on Built Environment, Socioeconomics, and Employment in Study Area 4. Analysis of Price Data and Assessment of Validity 5. Potential Impacts of Airport Transformation: Case Studies and Scenarios a. Property market impacts of the Granadas project and the CETRAM El Rosario b. Real estate projects in Mexico City c. Estimating a range of property market impacts 6. Conclusions 3 1. Introduction: Land Value Capture and Mega-Projects The Mexico City airport project has the potential to transform an entire district of the city. The scale of the public investment is such that it will inevitably impact the neighborhoods surrounding it – both the new and existing airport. If the city government is to capture some of the increase in land, it value needs an accurate and well-justified baseline measure of the value of land and property proximate to the two airport sites. Although there is no reliable, publically available record of sales prices, in this study we identify and summarize three sources of data on property values; those used in the property tax system, a database of appraisals for new mortgages, and advertised sales listings. In combination, these three sources of data provide an important perspective on the market price of property. The neighborhoods around the site of the existing international airport of Mexico City (AICM) are somewhat above average in terms of neighborhood conditions and property prices for the Federal District of Mexico City. In an average Delegación of Mexico City, land was valued at 1,500 and 4,500 per square meter in 2014. Land in Venustiano Carranza – the location of the AICM – was valued by the government at 2,222 pesos per square meter in 2014, and 7,500 in property appraisals for mortgages. However, they are relatively close to the highest priced neighborhoods in the city, where land was valued at 4,500 and 10,000 pesos per square meter. Thus, though it depends on what is built at the site of the existing airport, it is likely that property in affected neighborhoods will gain value. According to one of our data sources, land within three kilometers of the AICM is assessed at 50 to 60 percent less on average than land in the same Delegation outside of this buffer. Thus there is great potential for dramatic change in the property market. Land near new international airport of Mexico City (NAICM) is currently either undeveloped or developed at a low level of capital intensity, thus the transformation of these areas is almost guaranteed. In 2014, land was valued at about 700 pesos per square meter in the municipality of Texcoco by the government, and about 2,000 pesos in property appraisals for mortgages. Land in the area within three kilometers of the site of the NAICM was roughly half these values. Thus even if the neighborhood property values increased to those the municipality average, they would double, and if the municipality’s land value rose to that of an average neighborhood of Mexico City, it would also double. Moreover, the NAICM as proposed is likely to have a greater positive impact on proximate neighborhoods than the old model of airport development. The new model of airport development does not emphasize industrial land or working class housing, rather, high-end housing and retail are often developed near new airports, and thus the nearby neighborhoods can become a destination not only for those traveling through. The academic study of the land market impacts of airports has traditionally focused on the negative impacts on property prices due to the noise planes make when landing and taking off, yet nature of the new kind of airport and real estate development proximate to them suggest it is time for revision in thinking about their relationship. The map displayed in Figure 1 presents the majority of the core of the Mexico City urban region, with the Federal District at its center and extending well into the State of Mexico. The map displays the location of the existing and new International Airport of Mexico City, the boundaries of the 4 study area (a simple three kilometer buffer around the airports), as well as political (state and municipal) boundaries. <<Figure 1 here>> Figure 1 also displays land values for the areas designated as homogenous by the property tax agencies of the government of Mexico City and the State of Mexico. The location of the existing International Airport, on the Mexico City side of the border between the Federal District and the State of Mexico, places it exactly on the edge of the most highly priced real estate in the city. Moving the airport to a new site to the northwest frees up this potentially highly valuable land and creates a new node of development, extending the potential for development into the State of Mexico. Most of the homogenous areas of Mexico City are grouped together in price in this map, but there is actually wide variation between them.1 There is a growing, positive consensus on the importance of value capture mechanisms for local governments engaged in mega-projects (Suzuki et al., 2015). There is no question that the construction – and removal or decommissioning – of airports represent mega-projects, and entail substantial public investment and attention.