1. Introduction
Developments that occur within urban scale covers a variety of living dynamics ranging from social, cultural, environmental, lifestyle, as well as urban economics. Development of urban economics results in an extensive growth of business firms which then creates a concentration node of commercial activities or also known as Urban Cluster. The presence of Urban Cluster generates externalities towards its surroundings, both positive and negative externalities. Each externality generated by an urban cluster directly contributes to the changing conditions of urban elements in a variety of aspects, and the real estate market is no exception. This paper aims to address current theories about Urban Cluster as well as theories that clarify the idea of land value or valuation in the sense of real estate.
2. Material and Methods
This research will use qualitative methods through literature studies from books and journals that contain theories about urban clusters along with theories about land and its value in the real estate context. The literature review carried out will be divided into five parts consist of:
o Defining Urban Clusters and The Development: A study finding the definition of the term urban cluster through several different approaches.
o Externalities or Impacts of an Urban Cluster: Understanding the local effects of urban cluster growth.
o Land in Real-Estate and Known Determinants: Determining the role and valuation of land, particularly in the real-estate or property sector, assess what factors are known and proven to affect land value.
o Location as Major Determinant: Exploring further how location dominantly affects land value.
3. Literature Review
3.1 Defining Urban Clusters and The Development
A cluster, by definition, is a collection of related activities concentrated in a single location (Banerjee, 1998). In regional planning, the spatial structure of a cluster is referred to as an Urban Cluster (Photis, 2014). The study of the spatial formation of urban clusters began in 1915, with several terms describing the conditions of urban spatial structures. Terms that commonly used are megalopolis, an urban agglomeration, grouping of cities, and city cluster (Fang & Yu, 2017). The terminology of cluster was first used to define an area of industrial concentration by Michael Porter in The Competitive Advantage of Nations (1990: 120). He stated that the most successful companies in various countries are those who are members of a cluster. Dong (1989) uses the same concept of the urban cluster in his research entitled “Initial Exploration of China’s Urbanization” as areas that are more developed and densely commercialized. This definition is later demonstrated by Cui’s (1992) statement in “Studies on China’s Urban Development”. Accordingly, the formulation of the urban agglomeration of clusters is distinct from ordinary clusters with high population densities that are unrelated to industrialization or commercialization processes. More to urban agglomeration, Fang (2017) conducted a study where he traced the usage of the term ‘urban agglomeration’. Among all definitions, the word “Cluster” and “Concentrated” frequently appear in describing urban agglomeration. For instance, the word cluster was used by W. Christaller (1933) to define the systematical structure and spatial arrangement of urban agglomeration, Dong (1989) to describe urban agglomeration as a clustered urban system, Yu and Ning (1983) where they used the term concentrated urban forms while describing the agglomeration impacts, or Qi and Duan (1997) as they noticed the development trends were going towards a spatial clustering form because of agglomeration (Fang Et. Al 2011) further explain that the distinction between urban clusters and general clusters is that an urban cluster is formed through an urban agglomeration process and exhibits some characteristics such as industrial and population concentration, a well-developed transportation network, and the presence of favorable regional policies. Thus, the urban cluster can be understood as a cluster that results from urban agglomeration with a high concentration of economic activity that is associated with urban economic development, not simply the accumulation of urban population in a certain area. Figure 1 explains a simplified version of how urban cluster is formed throughout the years. In year X or present, commercial nodes are present in several spots of the city and within 40 years span, more commercial nodes existed as the city is developing. The increase of commercial nodes in the dark blue box is significantly higher than a light blue box, which explains the cluster formation tends to be more concentrated within the dark blue box area. Furthermore, the presence of higher commercial nodes changes the area’s spatial distribution as more business stakeholder requires certain space for their venture from the commercial center (shopping malls, shophouses) to building offices.
Figure 1. Visualization of Urban Cluster Formation
Swinney (2017) argues that urban clusters can be classified according to their type. These include clustering around natural assets, area-specific industrial clustering, and multisector clustering. Natural Clustering is generally based on the presence of natural assets as a source of revenue, such as oil or natural gas companies. Area-specific industrial clustering is defined as the formation of clusters that contain only one type of industry throughout the area (identical). Multisector clustering, on the other hand, is the formation of clusters comprised of multiple firms from disparate sectors, both complementary and competitive (Swinney, 2017). Among these various types, multisector type clustering appears to be the most representative of the cluster formation phenomenon in urban areas. This is because a city is typically composed of several clusters of distinct economic/industrial sectors that coalesce into a single concentration point and form internal connections (Harthshorn, 1992). Harthshorn further characterizes the formation of urban clusters by several indicators, including the densification of buildings, an increase in land-use intensity, and the presence of land use functions to regulate their growth. In numbers, according to the IGI Global website, an urban cluster is a dense area with a human population of at least 2500-49.999 and at least 5000–10,000 units of employment that is not located within a city’s suburbs/rim (INSEE, 2020).
It is clear from the theoretical descriptions of urban clusters that different terms are used to describe the phenomenon or process of concentration and increasing commercial activity in a city. It is considered natural to regard the concept of an urban cluster as a dynamic concept, with any criteria and standards previously established being relative to when and where the concept is used (Fang & Yu, 2017). Despite differences, it can be concluded that the adjacent clustering that occurs as a result of urban clusters primarily causes changes in the spatial configuration of the environment, particularly in the commercial sector, which becomes more concentrated and represented as a sub-centre of the city.
3.2 Externalities/Urban Cluster Impacts
As is the case with numerous other forms of urban development, urban clusters generate externality to the surrounding environment. With the presence of close groupings, the clustering develops a localization economy in which activities within the cluster can benefit from infrastructure support and ease of access (Mommaas, 2004). The development of a localized economy is generally based on three fundamental principles: scale economies in intermediate inputs, labor-market economies, and economics of communication (Sullivan, 1993).
One of the advantages gained for a company based on the “Scale Economies in Intermediate Inputs” principle is the ease of access in meeting the basic needs of the company (capital and labor) and enabling quality assurance of the goods/services provided. For the “Labor-Market Economies” principle, Sullivan discusses how the close grouping that occurs as a result of urban clusters will increase labor market productivity. There are two approaches to how the close-grouping formation enables the company to take advantage (Sullivan, 1993). The first approach is to have low search costs, as knowledge about job openings can spread easily within a cluster area, either formally or informally. On the other hand, close grouping facilitates job search activities by bringing together prospective recruiters in one proximity. In terms of the second approach, the presence of a cluster also provides physical proximity between employers, making it easier for job seekers to move from one organization to another without incurring significant relocation costs. The final principle, communication economics, is beneficial in how the presence of urban cluster results in increased knowledge sharing and technology diffusion (Sullivan, 1993). Members of a cluster who cover a wide range of fields foster the exchange of ideas and information. This exchange of ideas then encourages the emergence of innovations as a result of knowledge transfer between workers from across fields. Sullivan’s additional externalities, which the foregoing three principles do not address, are shopping externalities. This externality described in which close groupings would have a significant impact on inter-store sales, especially of complementary goods (Sullivan, 1993).
The emergence of urban clusters has several additional externalities, including positional advantages, proximity advantages, and environmental advantages (Choe & Laquian, 2008; Hartshorn, 1992; Cervero & Duncan, 2004; Bowes & Ihlanfeldt, 2001). From the numerous studies and theories discussed, it can be inferred that cluster development has externalities or favorable impact on human activities therein, especially on human activities associated with urban economic activity.
3.3 Land in Real Estate and Known Determinants
The land is essentially a natural resource that allows humans to perceive and respond differently in all aspects of their lives, resulting in value differences depending on the attributes, resources, and capabilities of land as a resource (Fahira, Basong, & Tagasla, 2010). Furthermore, land could be described as a tangible entity with abstract properties. The land has physical properties since it blends with the earth’s crust and adheres to the top (surface) or under it. Land, on the other hand, is also an abstract property since it has the potential to be used and valued in the real estate market (Dale & McLaughlin, 1999). Thus, land value in real estate market is a price calculated by buyer and seller based on the agreement of both parties without any pressure during the transaction process (Saprudin & Mahmud, 2019). Eckert (1990: 151-180) supports this argument by stating that the word value represents the price or monetary value of the land at a specific time, place, and market conditions.
Table 2. Known Determinants of Property/Land Values
As the word ‘value’ always fluctuates in the real estate market, there are several determinants influencing property values that also apply to land prices. In general, Wolcott (1987) mentioned that there are 4 basic factors of value determinants which include economic, social, government, and physical factors. Economic variables are more likely to be reflected by the relationship between demand and supply in connection to the community’s economic ability to satisfy its requirements. The population’s features, such as the number of people, the number of families, and the degree of education, all reflect social aspects. In a country, the government always has a share in the land development of the city, both in terms of planning or making certain regulations. One of the government policies that have an impact on land value is the area of development or land use (zoning). The provision of facilities provided by the government also has a role in determining the value of the land. Physical factors are indicated by the tangible characteristics of the soil and its environmental conditions, such as location and the availability of social facilities within reach.
Barghava in his journal titled “Determinants of Property Values, Jaipur City” categorized property value’s determinants into several scales that include city level (urban), neighborhood level, and property level. On a city scale, the determinant factors are environmental, location, physical infrastructure, demand/supply, land use, and transportation. As to neighborhood scale, there are several prior determinants factors such as environmental, transportation, and location, but with the addition of social infrastructures such as educational, medical, institutional, and commercial elements. Within the property scale, Barghava includes three major determinant factors consisting of physical infrastructure, building structures, and legislative control regulations. On physical infrastructure, it is specifically mentioned that areas that have high infrastructural provision, such as power supply, water supply, sewerage network, drainage, waste disposal system, tend to have higher land values. Building structural factors are related to plot or property size; for instance, in the case of the residential building, it might be the number of bathrooms or bedrooms available. Lastly, legislative control regulations, influencing tax systems on purchasing, ownership, and usage of the property.
In term of land value, Emo et. Al creates a priority list of land value determinants with the case study area of Onitsha, Nigeria. The research includes thirteen different local determinants and among those thirteen determinants, the research found that accessibility was the major land value determinants followed by neighborhood quality in the second rank and irrevocable power of attorney in the lowest rank.
In Indonesia, there are several types of research on land value determinant factors. Prasetya and Sunaryo include six different determinants consist of environment quality, land use, comprehensive amenities, CBD distance, transportation network, social and economic factors (Prasetyo & Sunaryo, 2012). Astuti, Subiyanto, and Haniah applied Wolcott’s theory with some additions, which are physical environment quality, economic factor, accessibility, public facilities, social and governmental factors. Further, Adrian Sutawijaya includes four different determinants in his research that includes road condition, CBD distance, transportation network, and flood proneness. Among all researchers previously mentioned, though the determinants usage might differ from each other, similar significant determinant factors can be seen throughout the researches’ results which are locational (CBD Distance), physical environment, and transportation.
Table 2. Synthesis of Determinant Factors of Land Value in Indonesia
It can be seen that at the global level, there are similarities in land value determinants. Determinants like location, access, and are generally applicable in valuating property product. Though there are a variety of determinants, locational factors seem to be one of the most influential determinant factors.
3.4 Location as a Determinant of Land Value
There are essentially two attributes explaining how location influences the production of real-estate products. These attributes are the location decision-making process and the outcomes of the process (Stryjakiewics, 1988). The process of deciding the location is the stage of specifying the particular product or investment to be built and locations that can boost the growth of the related business, while the outcomes are how the location that has been specified influences the property product developed. Magorzata Rymarzak (2012) explains that the factors affecting the location can be grouped into two categories: macroenvironment and microenvironment.
Macroenvironment is a broader environmental scope of the relationship of a location towards more distant environmental factors. The macroenvironment has a greater effect on the overall state of business operations and its impact on the attractiveness of a location over a particular time span for specific business groups (Rymarzak & Siemiska, 2012). Although the macroenvironment’s effect is not directly related to location, it plays an essential part in assessing opportunities for business owners to grow and assessing its effects on the surrounding environment to mitigate uncertainty during business operations. On the other hand, the microenvironment is a subset of the environment that is closely connected to the location due to the closer proximity. Due to their close association, the determinants or variables in this category have a direct connection with the location of a property product and its surrounding setting. In the microenvironment, the location determinant is truly dependent on the type of business and product being developed.
By using a macro or microenvironmental research method, each has its own set of effects and consequences. Generally, the macroeconomic analysis explores the relationship between property product and urban economic conditions, since existing determinants on this scale are more likely to point to how a business operates in the global scope. In terms of the microenvironment, the approach is more indicative of how the environmental characteristics under which a property product is located would have a direct impact on the product’s performance. Therefore, the microenvironment is considered to be more representative of conditions as it is physically related to the characteristics of related property products (Rymarzak & Siemiska, 2012).
4. Conclusion & Further Research Recommendation
Numerous prior literatures have shown that several determinants influence land values, most notably location factors. The importance of location in determining land value has indeed been commonly recognized. This is because the location has a significant impact on how land is used for property goods, both macro-and micro-environmentally. Location attributes that are known to influence determining land values are distance to CBD (Clapp, 1980), image of the area (Razali & Adnan, 2015), distance to commuter stations (Hough & Kratz, 1983), distance to Highway (Wheaton, 1987) and CBD/Non-CBD locations (Nurzukhrufa, Setijanti, & Dinapradipta, 2019).
Figure 2. Logical Structure of Recommendation.
According to previous research, the majority of research examining the relationship between location and land values concentrate on two-point comparisons, the distance between the product and other points such as the Central Business District, Commuter Stations, or Highway. With this comparative process, the appraisal for land values depends on the presence of each point’s relation to its surrounding setting, creating a weak point for the method to be altered as urban development would affect the point’s relation. As a result, new ideas about methods to determine how a location affects the general and overall value of a property are necessary. The cluster has beneficial externalities such as locational advantages, proximity advantages, labour market advantages, connectivity advantages, and environmental advantages. However, most research on Urban Clusters’ externalities is viewed only from the operational perspective in a business manner. Essentially, the development of commercial nodes in the form of urban clusters should definitively increase land acquisition demand, as developers and investors would be interested owning a land in highly accessible with high traffic areas. The effect of the urban cluster on land values has not been thoroughly investigated either in terms of correlation existence or extent of significance.