LVC0090 - Evidence on Land Value Capture

Written evidence submitted by Dr. Tom Archer and Professor Ian Cole, CRESR, Sheffield Hallam University [LVC 090]

Introduction

Reforming the treatment of land by various actors - for instance in regard to ownership, access, use or value - has long been a perennial policy concern, but it has received renewed prominence in the past two or three years. Increasing the supply and reducing the cost of land for residential use is central to the achievement of two major government commitments - to sharply increase housing supply and to tackle housing affordability, especially in terms of reducing barriers to home ownership for potential first time buyers.

There is a broad acceptance across the political spectrum that changes are needed to the current system, but there is less consensus about the focus and nature of any potential reforms. There are differing views on the extent to which government and local authorities should intervene more actively in the land market, potential problems of implementation with different approaches and questions about the intended and unintended consequences of new measures. Given this, it is our view that land value capture would be an apposite topic for a future inquiry by the Select Committee.

The purpose of land value capture

Land values have increased rapidly in recent years, having a direct impact on the price of housing, whilst volatility in the price of land increases uncertainty for those seeking to increase supply.

74% of the increase in UK house prices between 1950 and 2014 has been due to land price inflation (Knoll et al, 2015)
In 2015 the average price of agricultural land in England was £21,000 per hectare, while land with residential planning permissions was around £6m per hectare (DCLG, 2015).
Between 1994 and 2007 the value of land with planning permission in England quadrupled from an average of 1.3m a hectare to over £5m (DCLG, 2010).
In 2014/15 landowners collected £9bn in profit from the granting of planning permission (The Centre for Progressive Capitalism, 2017), an ‘unearned increment’ often made possible because of public investment in infrastructure such as roads, railways, and other public services.

One of the primary reasons for capturing this uplift in land values resulting from permissions for residential development is therefore to invest in, or recompense for, infrastructure provision. Another is to recycle the proceeds in some manner to produce more affordable housing, especially in high pressure areas (Jefferys and Lloyd, 2017).

It has been estimated that around 75% of the value arising planning permissions is not currently captured by public bodies (Shelter, 2017).
Delivering land into development projects at lower values that have not priced in expectations (hope value) could release an extra £9.3bn per year, in addition to the £2.8bn a year currently captured through Section 106 and the Community Infrastructure Levy (The Centre for Progressive Capitalism, 2017).

Current systems for capturing value from residential development, in the form of s.106 agreements, have resulted in a decline in value capture. In inner London it is estimated at 70% of site value was captured in developer contributions in 2005, but this dropped significantly to 49 per cent by 2017 (McAllister, 2017).
The 2016 review of the Community Infrastructure Levy (CIL) commissioned by the Government (DCLG, 2016) concluded that take-up had been slow and uneven, implementation had been inconsistent and unfair in terms of the burden borne by different developments, that the funds generated were considerably less than anticipated and further undermined by the ongoing introduction of exemptions, noting:. 'The way CIL works is not liked by many developers who seem to have discovered a nostalgic fondness for the Section 106 process, notwithstanding all their previous complaints about it.'(para 3.2.5)

The prize of reform is clear - an effective system of land value capture (LVC) would provide a means to enhance infrastructure expenditure, apply downward pressure on the pricing of new housing, and affect pricing dynamics in the wider market. However, the history of land policy in Britain is not short of examples of good intentions meeting with disappointing outcomes.

A brief history of post-war legislation on land value capture (LVC)

The development charge imposed by the 1947 Town and Country Planning Act, sought to capture 100 per cent of the increase in value from planning permissions, and conferred powers of compulsory acquisition of land. The development charge was abolished in 1953, and the powers of local authorities to acquire land at existing use value were scaled back in 1959. The requirement for local authorities to pay the full residential value for undeveloped land was consolidated by the 1961 Land Compensation Act, which has set the framework for compulsory purchase to the present day. This Act enshrined the right of landowners to include ‘hoped for’ value in any calculation of compensation – that the possibility of residential development in the future should be included in the settlement value. Given that the current value of land for residential purposes is (on average) several hundred times that for agricultural use, this makes a significant difference to the calculations involved.

Other initiatives, such as the betterment levy introduced in 1967 and a development land tax in 1976, were introduced and then abandoned. The calculation of values before and after development was problematic and many landowners withheld land while awaiting the repeal of the legislation and its replacement by a more favourable regime (Bentley, 2017). There are key lessons from these efforts for future policy making.

Different forms and mechanisms for capturing value

Efforts to secure LVC in the UK have tended to focus on taxing uplifts in value, backed by compulsory purchase powers, or by requiring developer contributions. In fact many approaches to capturing land value are possible, and some are more widely used in other countries, from which lessons can be learned. Some of these approaches are set out below, on a spectrum from those requiring minimal changes in legislation to those demanding more substantive changes, and a more interventionist emphasis. The pros and cons of different approaches would merit close examination by the Select Committee.

Potential Approaches to Land Value Capture

Mechanism	Explanation
Active land acquisition by local authorities	Local authorities could be pressed or incentivised to operate more pro-actively in land markets, acquiring or securing options on, development land. Many major housing associations are moving in this direction and local authority housing companies could focus heavily on acquiring and bringing sites forward.
Tax increment financing	Local authorities could promote the development of sites by focusing on future tax revenues, raising finance against these revenues to fund the initial infrastructure required to unlock sites.
Improve s.106 / CIL to ensure maximum capture of value	One approach, as has been suggested for London, is to develop a fast track planning process for proposals meeting a set threshold for affordable housing contributions (and a longer process for those falling below this threshold). Other improvements might include a simpler tariff system for CIL to be used on wider infrastructure issues.
Land pooling	In other countries public bodies can set/zone an area for development, pooling the rights and claims of individual owners of plots. Land is designated for streets, public space etc, and the remaining land is returned to the original land owners according to their share of the original value or area. If allocated by land value then the landowner has to pay any resultant uplift in value to the municipality, so it can recoup the costs of infrastructure
Change compulsory purchase rules	Changes could be made to the rules concerning CPOs to enable local authorities, combined authorities and development corporations to purchase land at current use value (excluding hoped-for considerations). Any landowner wanting to sell their land must offer it first to the local authority at existing land use value. There is potential to recompense the landowner through payment of a premium or through a negotiated share of any value uplift on resale. CPO would only be used as a last resort, to avoid protracted processes. This type of system has been used for many years in the Netherlands
Land Value Tax	Introduce a new taxation system premised on existing use value, so that any changes in use (and any consequent uplift in value) are captured through this mechanism.

Key questions

How should the difference between existing use value and the end value after planning permission be calculated?
Will LVC mechanisms and stronger CPO powers be a sufficient incentive for landowners to settle at (or just above) existing use value?
What scale of premium (above the compensation offered through CPO) will incentivise land owners to sell before a CPO is applied?
How politically viable are the changes required to the 1961 Land Compensation Act? Amendments may be required to Section 14 of the Act to disregard prospective planning permissions on land designated for strategic development, and to Section 17 to restrict the use of certificates of alternative development on land designated for strategic development.
How will the differing responsibilities of local government be separated, and conflicts of interest avoided? This could arise when local authorities are trying to acquire land for development, whilst also arbitrating on applications for development from other private owners, or allocating land for development in local plans.
What mechanisms can be used to ensure the captured value from land affects the pricing of housing developed on that site?
How will any strengthening of CPO powers meet Human Rights requirements, and account for future legal challenges?
Finally, what measures are most likely to command cross-party support and a long-term commitment, to discourage land holders from sitting on land until the legislative environment changes?

References

Bentley, D (2017). The Land Question London: Civitas

The Centre for Progressive Capitalism (2017). Estimating land value capture for England – updated analysis [online]. Accessed at: http://progressive-capitalism.net/2017/03/estimating-land-value-capture-england-updated-analysis/

DCLG (2010). Table 563 Housing market: Average valuations of residential building land with outline planning permission [online]. Accessed at: https://www.gov.uk/government/statistical-data-sets/live-tables-on-housing-market-and-house-prices

DCLG (2015). Land value estimates for policy appraisal [online]. Accessed at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/407155/February_2015_Land_value_publication_FINAL.pdf

DCLG (2016) A New Approach to Developer Contributions A report by the CIL Review Team (chair Liz Pearce)

Jefferys P and Lloyd T (2017) New Civic Housebuilding London: Shelter

Knoll, K., Schulanck, M. and Steger, T. (2015) No Price Like Home: Global House Prices 1870-2012 CESifo Working Paper No 5006

http://www.cesifo-group.de/DocDL/cesifo1_wp5006.pdf

McAllister, P., Shepherd, E. and Wyatt, P. (forthcoming). Policy shifts, developer contributions and land value capture in London 2005-2017. In Bentley, D. (2017) The Land Question, London: Civitas

Shelter (2017). Financing the infrastructure and new homes of the future [online]. Accessed at: http://england.shelter.org.uk/__data/assets/pdf_file/0003/1377714/2017_05_16_Shelter_Memo_-_Financing_the_infrastructure_and_new_homes_of_the_future.pdf?_ga=2.38259562.816850985.1516308038-2015615799.1516308038

April 2018