MOVING AWAY FROM THE CITY

http://www.todayonline.com/articles/272058.asp

Thursday, August 21, 2008

MOVING AWAY FROM THE CITY

There is a need to manage demand for land and its increase in value across the island

Tan Chin Wei and Chua Yang Liang


ONE of the highlights of Singapore’s Draft Master Plan 2008 is to bring jobs closer to home.

Economists point out that it makes financial sense for firms to locate in suburban areas. What then are the limiting factors that prevent complete decentralisation?

Agglomeration benefits, such as accessibility to clients and supporting services, largely account for the continual concentration of businesses in the Central Business District (CBD). However, with the advent of communication technology, will these benefits diminish and cause further decentralisation? If so, which locations are conducive for the development of a new commercial hub?

In 1964, William Alonso proposed the bid rent theory which explains how land will be allocated under perfect market conditions and how the CBD is established.

The theory has two significant assumptions: One, a monocentric city has a single activity node at the centre of the CBD Core where all transactions are done. Two, land is allocated to the bidder that will pay the highest rental.

According to the theory, a firm’s profit varies with its distance from the city centre due to savings from transport or shipping costs. But in today’s context of a knowledge-based industry, locating near the city centre provides accessibility to clients and enhances corporate image.

City-centre location continues to be dominated by high-paying firms, whose profits are not necessarily affected by physical distance or savings from transport cost.

There is a multitude of other soft factors such as prestige, image and convenience that attract such high-profit-margin firms to the city centre. Nonetheless, profits vary inversely with the distance from the city centre.

Likewise, residential land rental function is sloping downward as closer proximity to the city centre translates into higher quality of life, image and prestige.

However, home owners are unwilling to pay the same premium as that of firms.

To a certain extent, the bid rent theory can explain the pattern of land-use allocation in Singapore.

A comparison of development charges rates over the past years shows that premium in commercial land value for areas closer to the CBD area is rising, suggesting that there are increasing preferences for offices near the city area. This is contrary to common belief that the advancement of communication technology will render proximity to the city centre less important.

This continual rise in the premium of land value in the CBD is associated with robust economic growth.

However, there is a need to manage demand for land and its increase in value across the island. If left to pure market forces alone, the development pressure will result in a phenomenon known as “leapfrogging”, which is not uncommon in other countries.

Instead of an orderly growth from the city centre going outwards, developments will leap to areas further away from the city where cost of land is cheaper.

While this may benefit residences around the area, there may not be enough threshold population and amenities to support the developments.

Tan Chin Wei is a research analyst and Chua Yang Liang is head of South-east Asia research at Jones Lang LaSalle.