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
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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.
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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
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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.
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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. Best practices in computing and carrying out the capture of increased land values near these sites are fairly well established. It is extremely important than in a context of low planning credibility, these must be followed. As is clear from the controversy surrounding the inclusion of land value capture language in the constitution of Mexico City, the government must use a conservative, well-established practice.
Three guiding principles should shape the capture of land value. First, governments should conservatively identify price increases attributable to the investment itself, to avoid backlash and not cut into local government revenues from property taxes. Second, governments should levy fees or taxes on a large enough geographic area, to ensure fairness. Finally, and importantly, governments should levy fees or taxes periodically on all parcels - rather than on specific sites at the point of development – to minimize distortionary impacts. Charging for development rights or imposing linkage fees might be politically expedient way to exact value from property, both approaches reduces development activity, and unfairly leave those who do not develop their land to enjoy unearned profits.
The state of the art tools of land market analysis are not exceedingly complex, yet any effort is severely limited if the right data – microdata with property characteristics - are not available. As this report makes clear, we can estimate the “true value” of a property even if actual sales amounts are not recorded, but we will not know it definitely. In Mexico, there are three sources of data that get us close to an estimate of the market value. List prices, however, are not regularly collected thus an effort to do that – and to accurately record sales prices – would provide the government with a much more comprehensive understanding of the market. In lieu of this, if the microdata that are the basis of the averages reported by the Sociedad Hipotecaria Federal by postal code were released it would enable a better estimate of actual trends in land values.
1 Note: We could do many different kinds of maps depicting prices, but will wait for discussion over which would be most useful.
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2. The Valuation of Land and the Impacts of Mega-Projects
Urban planning and infrastructure interventions in cities benefit greatly from an understanding and analysis of land and property markets. Moreover, this analysis is essential if governments intend on capturing the increase in value in land associated with urban growth or infrastructure investment. The accuracy of government estimates is important, if a policy is to be sustainable.
How much is urban land worth?
There are two basic sets of challenges to assessing the value of urban land. The first are challenges that stem from the nature of property markets and apply to any kind of real estate analysis. The market value of a property is expressed infrequently, only at the point of sale. Unlike homogeneous goods like cars or pens, two properties are never identical thus any estimation of market value is inherently imprecise. More transactions and in markets with less heterogeneity of property makes it easier estimate values.
The second challenges are specific to land valuation. Data on the value of land in urban areas is primarily obtained indirectly. Most property transactions are of parcel that is already developed and the sale includes the land and structure. There are different techniques for disaggregating these two values, though all have challenges. Thus, land and property markets are studied together not only because the market for urban land is a core input to property development, but also because land values are mostly estimated indirectly using data on the sale of already built housing or commercial real estate.
Although improvements in information technology have led to more sophisticated spatial and statistical analysis of land and property markets in recent years, the basic tool for property market analysis remains the hedonic pricing model (Rosen, 1974). This model is a multivariate regression that models the sales price of property as a function of its most important attributes – size, physical condition, proximity to amenities and jobs, etc. – for as large a sample of properties as possible. Then, the price of an unsold property can be estimated by applying the coefficients generated for different attributes in the statistical model to the features of an actual property.
The statistical approach is a formal and more systematic version of a common approach to valuing properties used by appraisers, the “comparable sales” approach. This approach consists of finding properties similar to the one in question and making judgement calls as to the price difference implied by any differences in attributes.
There are two common ways to assess land values. The most straightforward would be to simply use data on vacant land sales, however, these data are difficult to come by as most urban land is already built on. The more common is to use data from all property and impute the value of the underlying land, known as the ‘residual’ approach. Both approaches present challenges.
Examples of the direct measurement of land sales in the United States include the geographically comprehensive study by Albouy and Ehrlich (2012), though they analyze values at the metropolitan level, which enables them to overcome the problem of few observations in some parts
6 of cities. An effort at the scale of sub-metropolitan unit is that of Kok, Monkkonen, and Quigley (2016), who use land sales records in the San Francisco Bay Area to assess the price impacts of regulatory stringency.
A more common method of estimating land value is to subtract an estimate of the value of a building from the sale price of a property. This is the ‘residual’ method. For example, if a house sells for $1 million and replacing the structure itself would cost an estimated $400,000 based on standard construction costs, then the land can be assumed to be worth $600,000. This is a more common method of land valuation, as data on sales of vacant land are generally hard to obtain. Davis and Palumbo (2008) use this residual method to generate estimates of land values across US metros. They find that land represented about half of housing costs in 2004, up from 32 percent in 1984. Case (2007) uses a similar method, but arrives at a much lower estimate (38 percent in 2005).
Assessing the value of land for value capture
Beyond the challenges of measuring land values, isolating the impacts of nearby investments on the value of land in a neighborhood land presents additional challenges. Most importantly, defining the ‘affected’ area well and isolating the effects of the investment itself on nearby land values beyond any price changes that would have occurred in its absence is difficult.
Questions about the timing of land price impacts are also relevant. The expectation of future changes after the announcement of a major project had long been demonstrated to affect prices (Damm et al., 1980), in fact, in some cases prices have even come down relatively after the completion of infrastructure projects. In a rigorous study of this phenomenon in Hong Kong, Yiu and Wong (2005) showed how the expectation of a new tunnel across the harbor changed real estate prices. In a different political environment, Torre and colleagues (2014) demonstrated how the impact of expectations about future urban investments is mitigated by the probability that proposed projects will come to fruition. As is expected, projects that are less likely to be completed due to controversy have a lower price impact.
The implementation of Tax Increment Financing (TIF) by local governments in the United States gives an important lesson for the practice of estimating land value capture increments. TIF is a common tool of local governments to recapture some of the cost of public investments pioneered in California, but now made illegal there – in part because of a poorly justified methodology. Local governments designate a TIF area of influence around redevelopment projects. Then, they shift all property tax revenues from the increase in the assessed value of properties in that zone into a redevelopment fund.
Figure 2 presents the most common way to estimate the size of contributions in a TIF zone on the left, and an alternative model on the right. This alternative model incorporates the reasonable assumption that urban property increases in value over time, and does not attribute all value increases to government investment nearby. Determining the exact slope of this ‘inflation adjusted increment’ will be a challenge and surely contested by property owners as it is essentially a counterfactual without a control group.
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A major lesson from the TIF experience in California is that governments should not assume that all increases in property values in a certain area are from a specific investment. Not only does this overstate the impact of public investment, it makes the government vulnerable to credibility challenges. It is difficult to isolate the impact of a nearby development on property values in a causal manner in the best data environment, and it is almost never the case that other changes in an urban area would not impact land and property values.
Thus, the more conservative approach to assessing what tax increments from a nearby area are eligible for recapture depicted on the right hand side of Figure 2 is more justifiable and retains credibility on the part of the government. Instead of assuming that all of the increase in property value is attributable to the nearby investment, the assumption is that the property would have increased in value at the city’s average rate.
Airports and property values
Residential property near airports has traditionally hypothesized to be less valuable, because airports are noisy. This is especially the case along the flight path of arriving and departing airplanes, and for airports that operate at night. Noise, measured in decibels (dB), typically ranges from about 65 to 80 dB in close proximity to airports. In urban areas generally, noise levels are about 50-60 dB during the day and 40 dB during the night (Nelson, 2004). Partly because of this lower level of noise at night, flights many airports have a curfew on flights.
Dozens of empirical studies – of increasingly high statistical quality and broad coverage of cases - have attempted to isolate the impact of airport noise on property prices. For example, a sophisticated study of one of the world's busiest airports, Chicago O'Hare, found that home values were roughly nine percent lower within the 65 dB noise contour band in 1997 (McMillen, 2004). A broad meta-analysis by Nelson (2004) examines the effect size – i.e. the percentage depreciation per decibel increase in airport noise – found in over 20 hedonic property value studies of over 30 airports in Canada and the United States. He finds that properties for every dB increase in noise, properties suffer a 0.5-0.6 percent price reduction. Thus, there is a 10 percent price difference between a house located in an area with daytime noise of 55dB and an otherwise identical one in area with 75dB of noise, typical of neighborhoods close to airports.
Research design and modeling strategy matter in this empirical endeavor. As Pennington and colleagues (1990) point out, unsophisticated models will overstate the impact of airport noise because of omitted neighborhood variables – neighborhoods near airports are different from others in many ways. Ironically, though they raise doubts about the universality of deleterious impacts of proximity to airports on the prices of residential properties, they also open the possibility of large effects of airports in some contexts. Moreover, the vast majority of studies, as well as recent work that controls for spatial and apartment heterogeneity and often omitted variables, find similar impacts as the meta-analysis mentioned above. On average, apartment rents drop by about 0.5% per decibel of airport noise though noise effects are not constant over the entire range of noise (Boes and Nüesch, 2011)
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Yet this theme of the empirical research relevant to the present study is that many aspects of the noise-property price relationship– such as housing type - do not have a systematic relationship across countries (Nelson, 2004). Simply put, context matters. Moreover, as Mcmillen (2004) argues, because aircraft are becoming less noisy, airports might be expanded and operating hours increased without a meaningful decrease property values nearby. In fact, as Knippenberger (2010) points out, airports are currently undergoing a transition in many places, from simple infrastructural nodes, to multifunctional real estate development locations. Property located near the new Airport Cities (Güller and Güller, 2001) of the 21st century might well be much more valuable, in spite of the noise.
Notably, in reviewing literature on property prices and airport noise, we could not find any hedonic price studies in countries outside of Europe, Australia, the United States, or Canada, with most of them are from the latter two. The property price impacts of being near an airport are likely to be different in Mexico, though in which direction is uncertain a priori. On the one hand, regulations on noise, the timing of flights, and the rules governing development on flight paths land might be more permissive to airlines in Mexico. On the other hand, the price sensitivity to noise might be lower in urban contexts with more ambient noise. Nonetheless, there is good grounds to expect a negative impact due to proximity to the airport.
3. Data on Land and Property Value, and Study Area Characteristics
Housing and other kinds of real estate are heterogeneous goods. Every property is unique in some ways therefore price discovery is challenging. Asking prices can often differ significantly from final sales prices, which are taken as the true market value by most analysts. Unfortunately, final sales prices are often not recorded in many countries, in order to avoid taxes. In fact, access to data on sales remains a limit to an understanding of how markets function in most cities.
In many contexts, data must be gathered through surveys. The standard approach to surveying land brokers is outlined by Dowall in the 1995 Land Market Assessment (LMA), and its update in 2010. Though there have been improvements in the surveying of informal land markets (Development Workshop, 2011; Napier, 2007), the core approach is similar. Brokers and other kinds of real estate agents, who have knowledge of a market are asked to appraise different kinds of hypothetical properties in different neighborhoods. Several experts are surveyed for overlapping neighborhoods and the median estimate is often taken as more reliable. Recently, the use of satellite imagery has also been employed in the categorization of housing stock and incorporation of transportation infrastructure and urban growth in LMAs (Bertaud, 2008).
Fortunately, Mexico has several reliable sources of data to draw on and we did not resort to surveying agents. We have obtained and processed three kinds of data – estimates of value by local governments, average appraisals for mortgage lending, and list prices for sales – on land and property values from four core sources. Table 1 below identifies the source, content and coverage of four databases. The following sections describe them one by one, including processing we have conducted and other relevant features of the dataset.
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