Impact of Planning and Development on Property Values

Impact of Planning and Development on Property Values The first chapter has discussed the issue regarding this particular study in terms of the objectives, scope of study, and significance of study, methodology of study and chapter outline. In this second chapter, the discussion will be mainly on the theoretical aspect of the planning and development in this study. The explanation by literature review will be given in this chapter is as continuity to achieve the objective. The purpose of literature review is to establish the microeconomic factor affecting residential property values. Furthermore, this chapter is also going to discuss the planning and the market, planning system in Malaysia and zoning definition .Apart from that, this chapter will also look at the relationship between microeconomic factor and residential property value and the impact of planning and development towards residential property values. The chapter start with discuss planning and the market and what is the factor affecting residential property value and underline theoretical on property value. The theories to achieve the second objective of this study which is identify factor affecting residential property value based on planning and development. Conclusion of the finding will be given at the end of this chapter. 2.2 Planning and The Market According Peter Cowan (1973), planning is defined as making plans, strategies, interpretation, according to which planning covers almost every aspect of human affairs. Alternatively, Neutze (1987) suggests that planning of land use helps to reduce the level of improbability about the form and level of development that will be suitable and allowable. It raises the supply of residential and to reduce the price of land for development. The main objective of planning is to allocate land uses to meet the economic and social needs of people. Referring to Lean and Goodall (1966), planning and development are subject to change in use of pattern and consequently in value. Social and economic changes will effect on property such as land and building values. Basically the pattern of land use is a signal of competition for sites between various uses functioning through the forces of demand and supply. In an attempt to compete for space at the choice location, some uses are displaced for other potential uses that willing to pay higher prices. In the same element, owners of property will choose location will that offer the greatest advantage on price. Subsequent to Mayer and Somerville (1999) established a structural model describing the relationship between planning regulation and residential market supply. They considered two types of planning regulations, namely impose explicit financial costs on builders such as development or impact fees and those that delay or lengthen the development process. The model shows that in the absence of input prices for land, housing starts are properly specified as a function of changes in the level of house prices, and not as a direct function of the level itself. According Li and Brown (1980) tested the impacts of three types of neighbourhood factors such as aesthetic attributes, pollution levels and proximity on housing values. Li and Brown (1980) findings suggested that housing prices rose due to accessibility but fell due to problems such as congestion, pollution or unsightliness. Based on Monk Whitehead (1996), planning bring impact on the property market by restraining the location and type of house thus increasing property price. 2.3 Planning system in Malaysia Planning activities mainly fall into three broad categories such as forward planning, which mainly involve the preparation and updating of regional strategies, county structure plans, and local plans. According to Bramley, Barlett, and Lambert (1995), development control which involves local planning authorities responding to applications for the right to undertake specific developments from land owners or developers implementation, which involves direct industrial, commercial or housing development by or involving public authorities. As mentioned by Dale and Mclaughlin (1999), there are two basic approaches to regulating how land is developed and used. This can be by way of legislation applying to all properties uniformly, or by way of a permit system in which a property owner must make application at the time of a proposed development. According to Sukuran and Ho (2008), town planning system is principally a system of preventive control of various land uses patterns where upon the controlling authority would not allow any approval for development activity if adverse impact on surrounding environment were visualize. Town and country planning has been called urban and regional planning, land use planning, and city planning or physical plan in different countries. Town planning is therefore not mere layout plans of residential, industrial commercial or recreational activities, but a combination of components and elements which help to make the complete living, working and play environment which determines the quality of life its residents. Above are town planning concepts and principles which have taken into consideration by a planner in the preparation for planning submission for property development in general and specifically in Malaysia. Malaysian town planning system consists of development plans and development control procedures that include consistent matters for planning considerations (Lee et al., 1990 and Bruton, 2007). The development plans under Malaysias Town and Country Planning Act,1976 consists of a Structure Plan prepared at state level and Local plans prepare at local levels The structure plan consists of written statement formulation a States Policy and general proposals for the development use of land in the State. The Structure Plan suggests direction and approaches on how area in the States could be developed in an appropriate and sustainable manner. According to Tiesdel and Allmendinger (2005), have been carried out which provide empirical evidence of the effects of land-use planning on housing development in Malaysia. Empirical evidence of the effects are demand and supply activity, risk and confidence, financial and information. However, those observed evidences did not sufficiently identify the causes of town planning effects. It is necessary identified the causes of these effects so as to enable town planners and decision makers to make the right choice to avoid undesired outcomes. Planning is regarded as a mechanism for the government to exercise its control on the urban development process. There are theories which advocate that land use regulations such as zoning and growth controls may affect property market by constraining supply and increasing demand. 2.4 Zoning Definition Zoning is well known as a key instrument in planning regulation which is environmental regulation in its broadest sense. It establishes the tone of neighbourhood and raises average property values. Zoning is changed from agriculture to another class this can mean a higher property value and more value for your investment. If the class is changed to argriculture then the property value may drop, causing you to lose money on your investment. Even planning systems without specific zoning regulations have contained elements of zoning such as government description and restrictions of rights over land within certain spatial limits (Willhelm, 1962 and Hagman, 1973). In general, zoning has a dual character such as assigning exclusive property rights and as a planning instrument which attenuates private property rights over the most valuable uses of land. Zoning as a non-contractual obligation imposed by town planners was legally introduced into Malaysia by the Town Planning Act 1976. Zoning regulations not only determine the type of use, they also regulate land and structure characteristics such as lot size, set back and building height (Pogdzinski and Sass, 1991). It is important for residential, commercial, agriculture or even industrial area such as manufacturing factory and raw material processing company to have well connected and convenient infrastructure. This will ease transporting of goods, communication or even travelling. 2.2.1 Types of Zoning Zoning seeks to protect public health, safety and welfare by regulating the use of land and controlling the type, size and height of buildings.ÂÂ   Some goals of early zoning codes were to prevent overcrowding and limit incompatible uses. Referring to Raymond (2000), the zoning helps the development areas to have less environmental complaints and higher economic values. According to Ed. Shirelle Phelps and Gale Cengage (2003) there are four different types of zoning districts. The types included in an area will depend on the complexity of the townships or countys development problem. 2.2.1.1 Residential Zoning Residential zoning may be established in several categories depending on the type of development already established or anticipated. Factors that must be considered are density of population , existing and proposed streets and utilities, variety of housing types and variety of housing price groupings. Residential zoning can include single family residences, suburban homestead, or any number of other designation which cover homes, apartments, condominiums mosque, community center and parks. 2.2.1.2 Commercial Zoning Commercial zoning usually has several categories include office buildings, shopping centers, nightclubs, hotels, certain warehouses, some apartment complexes as well as vacant land that has the potential for development into these types of buildings. The availability of parking may affect the type of commercial zoning that is permitted. 2.2.1.3 Industrial Zoning Like commercial zoning, industrial zoning can be specific to the type of business. Environmental factors including noise concerns usually are issues in determining into which industrial level a business falls. Manufacturing plants and many storage facilities have industrial zoning. Certain business such as airports may warrant their own designation. Industrial zoning is often dependent upon the amount of lot coverage which is the land area covered by all buildings on a lot and building height. Industrial zone include manufacturing factory such as light, medium and heavy factories 2.2.1.4 Agricultural Zoning Agricultural zoning is generally used by communities that are concerned about maintaining the economic viability of their agricultural industry. Agricultural zoning typically limits the density of development and restricts non-farm uses of the land. In many agricultural zoning ordinances, the density is controlled by setting a large minimum lot size for a residential structure. Densities may vary depending upon the type of agricultural operation. Agricultural zoning can protect farming communities from becoming fragmented by residential development Mayer and Somerville (1999), they concluded the land-use regulation such as zoning and growth control has significant effects on both of the new development and responsive of local supply to price shock. This showing there will be a price different depending on types of zoning. 2.3 Factors affecting Residential Property Value Property value is dependent upon many characteristics associated with that property such as physical characteristics of property such as location of the site in relation to employment centres and other recreational facilities. In addition the social and economic characteristics of neighbourhood, including the presence of such amenities as view, parks, schools and community services affect value. Rosen (1974) explains that a property includes lots of factors and these are totally show in property prices. Buyers and sellers consider these factors separately before making decision for the purchase and of the property. In order to understand the weighting for the different factors, hedonic modelling was used to explain how each factors made up the prices of the residential market. According to Malpezzi (2003), the method of hedonic modelling can used as calculation in expenditures on housing. Hedonic can be measurable on prices and quantities so as to make possible judgement and predictions of properties between identical and different residential in different areas. Sibel (2008) noted the results of the hedonic model reveal that water system, pool, type of house, number of rooms, house size, locational characteristic and type of the building are the most significant variables that affect the property prices. In order to assess the impact of the planning system on the property market, Hui and Ho (2003) shows the model which investigate the effect of the land-use planning system on house prices in Hong Kong. The model first determines the demand and supply equations to establish the market at equilibrium level. Based on the research, the model analysed planning system variables such as usable floor area (UFA), land supply (LS), residential gross floor area under planning applications (GA), residential zones (RZ) and green belt or open space (GB) and approval rate of planning applications (AR) relationship to house prices (HP). Using stepwise regression for a three-year period the result that the significance of approval rate of the planning applications supports the view that development control maintain the structure of housing supply in a way which may change the equilibrium price of housing. Tables 1 show parts of the literatures that identified attributes influencing property value. Researchers Determinant Joslin, 2005 Location, Age Size Kauko, 2003 Location, Shopping Centers, Highway , Parks, Metro Neighbourhood characteristics Paz,2003 GDP, Level of income, Migration, Construction Activity, Economics Activity Purchasing Power Wong, Hui Seabrooke, 2003 Interest Rate Case Shiller, 2003 Number of Employment Han,Yu, Malone-Lee, Basuki, 2002 Land Area, Parks CBD McCluskey,Deddis,Lamont Borst,2000 Location Blackey,1999 Change in tax policy, Age composition of the population Rate of household formation Meen Andrew, 1998 Income, real interest rates, Nominal interest rates, General level of prices, Household wealth, Demographic Variables, Tax structure Financial liberalization Cheshire Sheppard, 1998 Location, Level of income, Population, Transport, Policy Neighbourhood characteristics Lenk, Worzala Silva, 1997 Number of bathrooms, Number of bedrooms, Age of house, Lot size Basement area, Total area of house, Number of fire place Number of car garages Table 1 : Main Factors Influencing Property Value Source : Ge and Du, 2007 Few factors can affect residential property values such as infrastructure facilities, locational factors, physical factors, legislative factors and demographic factors. 2.3.1 Infrastructure Facilities Viable and good infrastructure will be the basic foundation for development of housing projects. Infrastructure facilities include basic public amenities including transportation which will ensure timely delivery of service and goods. Main amenities such as electricity, telephone and water will affect the residential property value. (Rosman,1988). Comprehensive infrastructure will ensure the value of the property. Lacking this public facility could be construed as a sign of planning deficiency or even planning blight. The model presented in Antunes et al. (2009) assumes that the infrastructure network does not change during the whole planning period. Yet, the topology of the transportation network may have a strong influence on the location decisions. A study of the influence of transport on house prices was examined by So et al. (1997) noted that the major risk of using hedonic price regression is the presence of the multicollinearity between housing attributes and the resulting insecurity of estimates. 2.3.2 Location Factors The factor of location is very important in the determination of property values. Location is very unique as two adjacent sites may command different values depending on underlying factors of accessibility, physical terrain, size and configuration etc. Turner (1990) that the three most significant influences on property value are location, location and location. Royal LePage (2003) emphasises strongly on location and type of mortgage debt financing as principal factors affecting the market value of listed property. Location has a major influence in terms of proximity to centres of interest, traffic congestion, crime levels, level of cleanliness or scenic beauty of the environment, infrastructure services and social amenities, security and planning laws. On the other hand, the type of mortgage can affect the property value either up or down depending on the amount, terms and conditions applicable, rates of interests and method of repayment. Location theory stated that property value decrease when the location is situated far away from town center. Whereas, property which are located within town center are high in demand and the property value will increased. Nelson (1958) emphasis about higher property value exists in good locations. Town center areas activities such as economy, social and property market. According to Khan (1977) stated that land situated near town center have stiff competition usage. The further the location form town centers, the value of property will decrease due to low demand. (Zulkifli. 1995) Kryvobokov (2007) modelled the property market of the most important location attributes influencing values in well-developed foreign real estate markets and use this list in Ukraine. Using experimental evidence of developed property markets, the meta-analysis is applied to extract location attributes and weigh their importance. Results suggest that it is possible to substantiate location attributes, which influence market value for different real estate types. Location factors influences on neighbourhood and access appear to be dominating location. 2.3.2.1 Surrounding Areas and neighbourhood Development According to Babcoak (1932) and Tan (1997), the future of residential property depends on the development planning in the area located. Surrounding areas developments are interconnected especially in economic activities namely Neighbourhood areas. For example, residential property which includes commercial industries will have added advantages especially in the property value. Surrounding development refer to the activities within the neighbourhood areas which could give positive effects or negative effects to a particular property. For example, residential houses located nearby industrial areas will be affected by pollution, noises, congestion and heavy traffic. The value of the residential houses will be lower due to the lack of interest of buyers when such situation occurs. (Zulkifli, 1995). Rosiers et al., (2000) noted that neighbourhood and access factors influences between both series as to achieve most select model design with minimum information loss. Its aim is to explain property prices on the basis of physical and neighbourhood related characteristics. Using hedonic model on property information are located using geodetic co-ordinates, which are integrated into MapInfo GIS. Variety of data such as schools, universities, colleges, shopping centres, remote sensing images, street grids, road, highway networks and power lines are located using relevant system. Results shows that model have greatly improved with location and access factor influence in property values. It suggests that the factor analysis used is highly efficient at sorting access and neighbourhood attributes. The method provides useful approaching the housing market. 2.3.3 Physical Factor Physical factors refer to the physical characteristics of a property. A physical characteristic is different in residential property with other property types. Differences in physical characteristics of the residential property itself may cause differences in value. 2.3.3.1 Building Features In terms of size and number of rooms were perceived as the most significant factors influencing the value of residential property. Next to these is the aesthetic appeal include design, finishes, etc. It was surprising to note that these aspects were accorded high priority over running and maintenance costs and the age of building or obsolescence. This could be as a result of the reported poor maintenance culture of most developing countries (ADB, 2005). Physical elements of property differ from physical elements of another property. Such difference could result towards the value of the property. Physical elements cover land size, floor area, location and type of property. ( Hamid, 2005) Referring to Creedy and Wall (1979) stated that size of lots or buildings could influence the value of property. The size of lots or buildings has positive impacts on the value of property. The bigger floor area of residential houses the higher the value. In norm, bungalow lots or houses are higher in value compared to teres houses due to bigger land and floor areas. 2.3.3.2 Age and Condition of Repair Changes in taste and fashion in new design houses tend to reduce the value of older houses. Besides, the condition of repair must be considered as the cost of putting the property into a satisfactory state of repair now and the cost of maintenance cost in future. Therefore, age and the condition of repair are proved to be negatively related to property value. All else being equal, older houses have experienced greater depreciation (Radriguez et al., 1994; Raymond and Peter, 2000). 2.3.4 Demographic Factors Demographic factors are primary derives of the real estate market. Demographic factors include population growth and income levels. 2.3.4.1 Population Growth Refer to Tse and Webb (1999) the growth of urban population through migration and urbanisation. Increase of population whether locally or migration of others will increase the economics of an area. Such situation will increase the residential property value when the demands exceed supply especially in goods and services which will encourage investors to participate actively in an area. Increase of population in an area will result in the demand for land. When there is an increase of population in an area, the economic activities will increase in tandem with the demand (De Wang, 1999). Increased economic activities will result in the demand for residential property market. Current usage of land will be converted into intensive land usage. The changes of intensive land usage will increase the economic activities to be productive and resulted in the property market value to rise due to the increase of population. 2.3.4.2 Income Levels According to (Gallimore, Fletcher and Carter, 1996) households which have the same tastes and income tend to live within the same area. Therefore the size of households, income, age, education levels and the availability and cost of mortage , financing have to be included in affecting the types of housing and the values. High-income residents will seek out a part of city that may offer leisure facilities, parks, amenities and the most convenient form of transportation and infrastructure. This also expose that the proximate and relevant influences on the property are related to the same influences operating on other properties in the neighbourhood. Spatial segregation refers to the residential separation of sub-groups within a wider population which could be associated primarily with racial groups, ethnicity, religious beliefs or income status (Johnston et al., 1983). 2.3.5 Legislation Factors Value of properties is determine by the importance of properties itself. A person would be subject on buying properties mainly is because subject is aware of the importance of properties to self. The right of property owner to be guarenteed with the enforcement of law. However these rights are controlled by the provisions of the law. This will indirectly or indirectly affect the price of property. Among the legal provisions that affect the property values are restrictions interest and tenure of land. 2.3.5.1 Restriction Interest Restriction interest is bind on right upon the importance which contained in the ownership document. Restriction interest is introduced by state government. There are two types of interest towards ownership right, bumiputra and non-bumiputra. Bumiputra mean person who owned Malaysia citizenship and included in group of original in Malaysia and Malay race. Restriction interest bring meaning where lot from bumiputra only can be exchanged towards another indigenous and not to other. Properties without this restriction can be freely exchange to others. Bumiputera lot suffer less affect from property value comparing to property with no restriction interest. 2.3.5.2 Tenure of Land Tenure of land had been distributed into two categories such as Freehold and Leasehold. Duration for each category are 99 years , 66 years and 20 years. Tenure of land showed that it is importance and owner rights in the property. There are two types of tenure such as Freehold and Leasehold. Freehold means the owner can have their property for whole lifetime. Besides that, leasehold is given limited years to the owner to own the property. Freehold tenure has a higher of value in property. (Norhaya, Dzullkarnian, Ibrahim et.al, 2010). Referring to Kestens et al. (2006) introduce household-level data into hedonic models in order to measure the heterogeneity of implicit prices the previous tenure status of the buyers. 2.4 Conclusion Based on discussion that have been made, clearly shows that there are many factors that affect residential property values in general can be divided as infrastructure facilities, locational factors, physical factors, legislative factors and demographic factors. Each factor contributed to their forming value in the property. Therefore, the research will focus on impacts of planning and development in residential property value. Overseas literature considers that planning also has a significant impact on housing market by affecting locations, neighbourhood, environmental and population growth. Based on discussion that have been made, clearly shows that there are many factors that affect residential property values in general can be divided as infrastructure facilities, locational factors, physical factors, legislative factors and demographic factors. Each factor contributed to their forming value in the property. How do these factors really contribute to Senai development? In order to go international at a fast phase, infrastructure is a must. Therefore, a huge reserve area in Senai is place under infrastructure; ease of excess from factory to the world is the main concern of government. Although named as transit town, but most of the area is not yet under development until federal government decided to expand its potential. With the amount of land and strategic location at south, it can be our second industrial doorway to other country other than Penang. This will evenly distribute industries among north and south of Malaysia. Modern design with end edge technology is the concept for the coming SHTP (Senai High Tech Park), this will be one of the physical attraction for investor.