Efforts to reform the country’s land title system

The recent influx of people and investment into the National Capital District (NCD) has sent demand for housing through the roof, changing the area’s social and economic climate in ways that have severely tested the regulatory framework that currently governs the construction and real estate sector.

A key contributor to the spike in property prices is the country’s customary land title system, which makes it difficult to free up land for development, rental, sale or use as collateral. Compounding this, the state agencies overseeing property sales, construction, land use codes, transfer of title and related tasks have been inundated by a flood of requests as construction and real estate activity has soared. Meanwhile, the rise in property values and large-scale migrations to the greater Port Moresby area has thrown the government a separate and growing challenge: squatters. As makeshift camps crop up around the city, the state is under new pressure to provide affordable housing for low-income citizens.

Land Ownership

PNG’s customary land title system is at the root of the current bottleneck, affecting not just the real estate market but virtually every corner of the economy. Under this system, which is written into the constitution, a full 97% of the country’s 462,840 sq km of land is owned by the individuals historically living on the land. This leaves very little turf for the government to develop or sell in large scale. Such a restrictive policy is an especially big obstacle for mining and energy projects, which must get the approval of multiple groups of landowners before they can move forward with any large project in resource extraction. It has also proved a big hindrance in agriculture, where farms are held back from expanding into large-scale plantations.

For the real estate sector, the chief impediment this framework poses is to stifle lending. With land incorporated in this way, very little of it can be used as collateral for financing from commercial banks, leaving most land simply locked up from development. Banks are hesitant to lend to landholders without a secure title, particularly given that contract sanctity and property rights are not rigidly enforced in PNG and thus can leave the lender with little recourse in the case of a default.

The string of hold-ups related to the land title system means that most lending for property development is restricted to a small minority of urban areas where individuals or corporations have secured both a land title and a lower credit risk. The rarity of this combination has in turn limited the supply of transferable, or leasehold, real estate – particularly the kind most in demand, such as vacant land along the outskirts of major towns and cities. A 2010 report on the housing and real estate sector by the Independent Consumer and Competition Commission (ICCC) confirmed these shortcomings, and recommended to the Treasury Department “freeing up the supply of state land; and encouraging the ‘bringing to market’ of customary land; and to address scarcity of ‘raw’ land wherever it exists”.

Past Reforms

Earlier reforms made to the sector were targeted primarily at the consolidating contiguous parcels of land held by various land owners so that large swathes of terrain could be exploited for expansive mining, energy and agricultural ventures. These provided long-term leases to land held under customary title by traditional clan groups and were designed to deliver benefits to the landowner, the investor, and the public as a whole through commercialisation of previously unused land.

More recent reforms passed by the government, both of which were gazetted in February 2012, include the Land Groups Incorporation ( Amendment) Act of 2000, and the Land Registration (Amendment) Act of 2009. The first of these lays the foundation for customary land owners to incorporate as legal entities, formally register their land and lease all or portions of it to private companies or individuals. This dovetails with the second, which lays down statutes governing leases of up to 99 years for the aforementioned incorporated land groups, as well as other laws on the creation of mortgages, the sale of property and procedures for transfer of property in the event of default.

The Road Ahead

Even with these new reforms now on the books for two years, much work remains to unfreeze the majority of land for development, especially outside the urban centres of Port Moresby, Mt Hagen, Lae and Kokopo. According to a March 2014 paper published by the National Research Institute of PNG, entitled “Use of Land Lease as Collateral for Accessing Formal Sector Finance in Papua New Guinea”, a number of obstacles remain that are placing severe limitations on the sector’s growth. The findings concluded that land held under customary title (dead capital) was still not being used as collateral to raise finance from the formal sector.

The report gave three main reasons for this. These were, first, that lenders were not fully knowledgeable about the new laws; second, that the small size of the market for secondary land lease made leases illiquid; and third, that insecurity over property rights was a strong impediment to commercial property lending. The last of these, in particular, has long plagued the real estate market.

Ownership disputes are therefore commonplace. This is down to a number of factors, including duplicate titles to the same piece of land (often forgeries), weak capacity to enforce contracts and restrictions on the transferability of leases. All of this leads to more restrictive lending by commercial banks to the majority of the population. Other contributing factors are poor land administration practices, such as the issue of the same titles to competing parties; the exercise of ministerial discretion in issuing leases on state land that have subsequently been rescinded by the courts; and a history of large losses incurred by lenders, which have caused banks to pull back severely from lending for real estate development. The 2010 ICCC sector report echoed these concerns, recommending “improving title registration, recordkeeping and title transfer procedures to ensure the security of land as collateral.”

International Yardsticks

The concerns of domestic lenders and the ICCC are well-founded. According to the results of the World Bank’s “Doing Business 2014” rankings, PNG ranked 168th out of 189 countries for contract sanctity, far below regional rivals such as Tonga (48), the Marshall Islands (61) and Fiji (63) and well below the East Asia and Pacific regional average of 91. Most worryingly, the average cost of enforcing a claim exceeded the actual value of the claim itself – costs were 110.3% of the claim, compared to a regional average of 48.7% and OECD average of 21% – giving claimants little hope of a positive outcome.

The country faired marginally better for resolution of insolvency, but even there it finished in the bottom third, with a ranking of 128 compared to the regional average of 108. Insolvency in PNG takes three years on average to resolve and costs 23% of the debtor’s estate, the most likely outcome being that the company is sold piecemeal. PNG fared much better for property registration, taking 87th, ahead of Tonga (146th) and the Marshall Islands (189th) and above the regional average of 92. To register a property requires four procedures, is completed in an average of 72 days and costs 5.1% of the property’s value, mostly from a 5% stamp duty levied by the Internal Revenue Commission.

A Way Forward

Faced with such shortcomings, and aware of their retarding effects on the property market, the government has lately begun making noises about a more comprehensive land reform. Starting in 2014, these are to be led by the ICCC, which it has tasked with preparing a new code of conduct for the real estate industry. The new code is to implement the recommendations made by the ICCC in its previous reviews of the sector.

Many of these ideas are to be crystallised in the new National Land Development Programme (NLDP), a government initiative to guide land policy reforms in the right direction. Work on this is already under way. The policy will include legislative reform to ensure more effective administration of incorporated land groups, and enable the freeing up of customary land through increased voluntary registration, effective resolution of land disputes, and proper and transparent administration of the land markets.

The new NLDP will be combined with other ongoing improvements being made to the national land database, the Land Information System, which are expected to bring about improved land administration and an enhanced understanding of the value and commercial potential of land, according to the 2014 national budget. In addition to these administrative changes, the government is also rolling out efforts in 2014 to address the lack of affordable housing options in the country, most notably the National Affordable Lands and Housing Programme.