Additional written evidence submitted by Professors Tony Crook[1], John Henneberry[2] and Christine Whitehead[3] [FPS 164]

 

Key Points

Introduction

In this additional evidence we are submitting some initial indicative estimates of the revenue which might accrue to local planning authorities from the infrastructure levy (IL). We show that what the levy might yield is highly dependent on key details – notably thresholds and the rate charged.

In this evidence we demonstrate how plausible assumptions about the details of the IL make very significant differences to what the levy might yield, the land value consequences of the yield and what the latter implies for landowners’ willingness to bring land forward for development.

The Infrastructure Levy

The government anticipates that the proposed infrastructure leyy (IL) will yield as much as the current S106/CIL regime (which raised £7bn in 2018-10, of which £4.7bn was for affordable homes, i.e. 67 percent of the total). It has indicated that the IL will also secure the new affordable housing that LPAs need as well as new infrastructure.  LPAs are expected to be able to require that the provision of new affordable homes be on-site, with the costs of providing these being treated as part of the levy.

Whether the IL does secure what is anticipated will depend on the detail, much of which is not spelled out in the White Paper.  And, of course, the take from the IL will depend crucially on the Gross Development Value of each site. IL income will vary with market conditions (in a way that S106 generally did not), leading to uncertainties with respect to payments, compared with what was anticipated when planning consent was agreed.

Core assumptions: prices, costs, thresholds, IL rates and affordable housing requirements

We have made a number of core assumptions which are common to all three estimates.  Our assumptions use the most recent available data on new house prices, costs of construction, financing, and industry profits (for example, see Valuation Office Agency, 2020). We have used a cash flow residual valuation model (Henneberry, 2016) to arrive at our estimates.

Our core assumptions for all three examples presented here are:

  1. 105 new homes on a 3.0 ha greenfield site; each home at 90 sq metres with construction costs including the building of the homes plus fees, site development costs (assuming no abnormal ground conditions), marketing of the private homes, financing costs at 3.5 percent pa (estimated over a 13 quarter development period) and profits at 15 percent of GDV.
  2. A sales price of £306k for the national estimates (approximate national average for newly built homes) with regional variations.
  3. No IL is paid on sites with GDVs below the threshold and for developments with values above the threshold there will be a zero rate on the amount up to the threshold. The White Paper suggested that the threshold will be related to construction costs and some contribution to land costs. We have assumed a threshold of national average construction costs and an allowance for land costs assumed to be ten times agricultural land value.[4] Neither construction costs nor agricultural land values vary greatly by region, but house prices do.
  4. Other than as a result of the threshold there are no exemptions[5].
  5. Housing associations pay 66 percent of market values for shared ownership homes and 50 percent for affordable rented homes; these were the national average as estimated in our 2018-19 study of S106 and CIL for MHCLG (Lord et al, 2020).
  6. Developers sell First Homes at the required 30 percent discount on market price.

These assumptions are also critical to estimating what land values might be as a result of the levy on GDV and whether this is likely to be enough to ensure landowners and land promoters bring land forward for development.  To investigate this latter issue we have estimated residual land values under the IL and compared this with residual values when S106/CIL is charged.

Example 1: 

  1. A levy rate of 20 percent charged above the threshold;
  2. An affordable housing requirement of 30 percent of all new homes (which is a typical ask though not a typical actual contribution).

The White Paper assumes the costs of meeting this requirement will be the difference between the market price of the dwellings and the price paid by the Housing Association or equivalent. The mix of affordable homes therefore affects the charge. Our 30 percent requirement has a mix of 8 First Homes, 4 shared ownership and 19 affordable rent. This mix is based on the government’s proposals in its recent consultation on technical changes to the planning system (MHCLG, 2020a). 

Figure 1 clarifies the national and regional picture. At the national level the levy raises some £6bn on residential sites (assuming a similar completion rate to that in 2018/19) but on the typical site almost all of this is used for affordable housing. The total raised is broadly similar to the total that raised by S106/CIL in 2018/19 which included commercial sites as well.

Breaking the figures down by region, the figure shows that the cost of providing the affordable homes takes up all of the IL funds, leaving no funds available for infrastructure spending in most regions.   London and the South East are the only two regions where a 20 percent levy above the threshold allowance secures funds for both affordable homes and for some infrastructure.  In the South East the amount is small (£33k on our hypothetical 105 dwelling site). In London the proportion of the developer contribution going to infrastructure is 12%. In the North East, charging IL at the 20 percent rate and securing 30 percent affordable homes results in negative residual land values.

 

 

Our first estimate also shows (Figure 2) that, at national level the residual land value of the typical site is higher with the IL than in our schematic S106 and CIL estimate.  For the latter we have used contributions to both affordable housing and infrastructure estimated in our 2018-19 study of the incidence value and delivery of developer contributions in England (Lord et al, 2020). The residual value of our 3.0 ha site without any s106 plus CIL or IL payments is £5.8m; with IL it is £3.5m; with the current S106 plus CIL contributions it is £2.1m.

 

 

Variant 1: 20 percent levy; 20 percent affordable homes

As Figure 3 shows, the lower affordable homes requirement makes a significant difference, simply because there is more for infrastructure as less is taken for the provision of affordable homes. Under this assumption, funds for infrastructure are available in several other regions (the East, the South West and the East and West Midlands) regions.  However, in two regions, (Yorkshire and the Humber and the North East) this variant still provides no infrastructure funding.

This variant also generates different residual land values, mainly because the developer now faces additional costs associated with higher market output levels.  On the typical site for England when the levy is charged on these assumptions there is a residual value of £2.1m compared with £3.2m under the current S106/CIL scheme - suggesting that the approach puts more pressure on landowners.

 

 

 

 

 

 

Variant 2: Lowering the threshold by limiting the allowed land value contribution

Figures 5 – 8 (in the Appendix) show the effect of halving the land value contribution to the threshold – leaving land owners only 5 x agricultural value.[6]

The impact of such a reduction is very limited – mainly because the initial assumed land element determining the threshold at ten times agricultural value is anyway so low.   To make any significant difference by lowering the threshold it would be necessary to reduce construction costs. As these do not vary greatly between regions this has the potential for reducing viability across much of the country.

 

Conclusions

A 20% Infrastructure Levy has the benefit of simplicity and a much greater degree of certainty than the current system. These are major benefits.

However, if the IL is to be set by central government as a single rate across the country the benefit of obtaining larger contributions from high demand areas are significantly lost, without a comparable increase in the take in lower demand areas.  It is clear that 20% is ‘too high’ in many areas so it is almost certainly not possible to charge a higher national rate This raises the issue of whether the rates should be regionally or locally determined. 

Secondly, if affordable housing is to be made the priority, which is not certain, it eats into the available levy to a very significant extent. At 30% it leaves hardly anything for infrastructure and even at 20% the proportions available for infrastructure look far less than might be expected – and needed. This is especially relevant as strategic and Mayoral CIL is assumed to be within the envelope.

Third, this analysis takes no account of the fact that the IL will be charged on all types of development. Both S106 (although not affordable housing) and CIL are already charged on non-residential sites so this is not all new money; although few such schemes currently pay much S106 or CIL (Lord, et al, 2020). Extending the levy therefore has some potential to raise additional funding.

Finally, the estimates are based on 2018/19 completion figures. Were these to rise significantly so would the take - as it would under S106 and CIL. The differential value of a levy therefore depends on the overall reforms generating far higher levels of investment than under the current system.

 

November 2020

References

CROOK, A.D.H. et al (2020) ‘Evidence to the House of Commons Select Committee on Housing Communities and Local Government Inquiry into The future of the planning system in England’

 

CROOK, A. D. H., HENNEBERRY, J. M. and WHITEHEAD, C. M. E. (2020), Planning for the future: challenges of introducing a new Infrastructure Levy Need to be addressed

https://housingevidence.ac.uk/planning-for-the-future-challenges-of-introducing-a-new-infrastructure-levy-need-to-be-addressed/

 

HENNEBERRY, J.M. (2016), ‘Development Viability’ in Crook, A,D.H, Henneberry, J.M. & Whitehead, C.M.E. Planning Gain, Oxford: Wiley Blackwell, pp 115 -139.

 

LETWIN, O (2018) Independent Review of Build Out, Cm 9720, London:  MHCLG

 

LORD, A., DUNNING, R., BUCK, M., CANTILLON, S., BURGESS, G., CROOK, A., WATKINS, C. and WHITEHEAD, C. M. E. (2020), The Incidence, Value and Delivery of Planning Obligations in England in 2018-19, London, Department for Communities and Local Government.

MINISTRY OF HOUSING COMMUNITIES & LOCAL GOVERNMENT (2020a) Changes to the current planning system Consultation on changes to planning policy and regulation, London: MHCLG

MINISTRY OF HOUSING COMMUNITIES & LOCAL GOVERNMENT (2020b) Planning for the Future White Paper, London: MHCLG

VALUATION OFFICE AGENCY (VOA) (2020), Land value estimates for policy appraisal 2019: guidelines for use, London: VOA

 

 

 

 

 

 

 

 

[1] Professor ADH Crook CBE FAcSS FRTPI is Emeritus Professor of Town & Regional Planning at the University of Sheffield.

[2] Professor JM Henneberry FAcSS FRTPI MRICS is Emeritus Professor of Property Development Studies at the University of Sheffield

[3] Professor CME Whitehead OBE FAcSS Hon RTPI ARICS is Emeritus Professor of Housing Economics at the LSE

[4] As discussed in the Letwin Review (2018).

[5] There is a suggestion that self-build and custom build dwellings will be exempt as they are from CIL at the present time. In some parts of the country – and if other aspects of the White Paper are successful this could make a significant difference to the take.

[6] In London this is a highly unrealistic figure as the alternative use for land is hardly ever agriculture but rather commercial or industrial uses where the value is very much higher.