Written evidence submitted by Daniel Bentley (Editorial Director, Civitas) and Thomas Aubrey (Adviser, Centre for Progressive Policy) [LVC 096]
We welcome the committee’s inquiry into land value capture and its hearings into the issue so far. We, along with various other organisations, have supported efforts to capture significantly larger proportions of land value uplift than is managed currently and have advocated in particular the reform of the Land Compensation Act 1961 in order to achieve this.
We appreciate the interest that the committee has shown in this reform up to now. However, we are also concerned that various objections have been raised by interested parties in both the oral and written evidence that appear to be based on a misunderstanding of the scope for reform in this area. Here we hope to bring some clarity to the debate by dealing with some of the objections that have been raised and what we believe to be the misunderstandings they are based on.
Purchasing land at ‘less than market value’ is incompatible with
the European Convention on Human Rights
Various written submissions and a number of the questions during oral evidence have queried whether acquiring land at less than its open market value might contravene Article 1 of the European Convention on Human Rights (ECHR). This is the subject of some debate, but it only arises where the policy is to acquire land at existing use value. While opponents of reform have tended to seize on this in order to invoke ECHR concerns, we wanted to emphasise that a policy of acquiring land at existing use value is not the only solution and, indeed, the proposal we have set out is not for the state to buy land at less than market value at all. It is instead to remove consideration of prospective planning permission from compensation awards in the case of compulsory purchase (including the removal of the clauses on Certificates of Appropriate Alternative Development in the 1961 Act). The effect of this would be to reduce the market value of land where there is currently ‘hope value’ attached, not to pay less than market value. This is a crucial distinction, particularly with regard to any ECHR concerns.
The trade in land takes place at values that reflect public policy constraints, including above all the use to which it may be put. This is why the market price of a hectare of land limited to agricultural use in a remote location may be, for instance, £20,000 per hectare, while land in the South East with residential planning permission and no planning obligations may be worth £5 million per hectare. If that land with residential planning permission is subject to a Section 106 agreement requiring a certain amount of infrastructure and affordable housing, the market value will fall, perhaps to £3.5 million. All of these values are market values, reflecting the planning conditions in each instance that are underpinned by legislation.
We do not talk of agricultural land being traded at ‘below market value’ – even though if it was granted planning permission it would be worth a lot more. We do not say that the Section 106 and CIL obligations on a piece of land reduce it ‘below its market value’. Moreover, we do not say that the No Scheme World provisions in the compulsory purchase rules reduce land values ‘below their market value’: the No Scheme World is part of the current primary legislation framework that helps define what market values are. The planning constraints are embedded in the market value.
It is also possible that a piece of land in agricultural or other non-residential use attracts hope value – an essentially speculative value placed on it by investors in the hope that it will at some point be granted residential planning permission. This value is also a market value that reflects the policy framework.
Our proposal is to change this policy framework in a way that would all but extinguish this hope value by removing the potential for compensation for planning permissions which have not been granted. Market value would be paid by the state – as indeed it should be – but a market value that takes into consideration the policy constraints in exactly the same way that the No Scheme World reduces market values. This approach would bring England and Wales in line with the compensation arrangements in Germany, France and the Netherlands, which largely operate under a principle of non-compensation: market values are paid, as is often pointed out, but those values reflect the fact that compensation is not awarded for potential development value.
The reform isn’t necessary – most of the new towns, including Milton Keynes,
were built within the legal framework created by the 1961 Act
It is true that many of the new towns were designated after the 1961 Act, including Milton Keynes. But this is because, in the years immediately following the legislation, most of the land designated for new towns did not have – or was not thought to have – hope value. It was thought that the No Scheme World provisions in the 1961 Act eliminated all hope value as without the town there would be no additional value above agricultural land. The Myers case in 1974 proved otherwise.
In 1970 Milton Keynes Development Corporation (MKDC) acquired just over 300 acres of land from Bernard Myers, offering £230,700 – just over twice agricultural values. However, Myers challenged the compensation award on the basis that his land might, in the absence of the Milton Keynes scheme, have been used for housing development and so was in fact worth £636,070. This sum – the hope value – was equivalent to around 20% of residential value. The principle on which Myers challenged the lesser award, that he was entitled in law to the hope value, was then upheld by the Court of Appeal in 1974. The then Master of the Rolls, Lord Denning, said:
In assessing the value, it is important to consider what would have happened if there had been no scheme… Instead, [the valuer] must let his imagination take flight to the clouds. He must conjure up a land of make-believe, where there has not been, nor will be, a brave new town, but where there is to be supposed the old order of things continuing…
This recourse to the ‘land of make-believe’ – to a parallel universe in which the policy constraints and planning permissions granted were something else – is what is enshrined in the 1961 Act. It is what renders truly plan-led development, of the kind that has not been managed since the new towns programme, vulnerable to landowners desirous to receive a greater share of values they have not created. Although this did not derail the overall development, it provided a very clear precedent to landowners, investors and developers that the 1961 Act provides the opportunity to benefit from rises in land values outside of the scheme.
In addition, the ratio between agricultural and residential values has widened considerably from 35 in 1969 to 100 today. This has meant, in turn, that potential compensation awards – even if landowners are paid only a proportion rather than the full residential value – have moved much further apart too. Hence, the potential liabilities for a local authority or a development corporation are of a different magnitude today. Even in those cases where the landowner might only expect a portion of the potential residential value to be recognised because the prospect of planning permission remains several years off.
There is not much more land value available to be collected
than is already recouped via Section 106 and CIL
Analysis by the Centre for Progressive Capitalism found that, in 2014/15, in the region of £9bn in land value uplift arising from planning permissions had been captured by private firms, investors and individuals. This was based on the most complete set of land values data, created by MHCLG officials, that exists for England. It also took into account official data on receipts from Section 106 (S106) and the Community Infrastructure Levy (CIL), amounting to £2.794bn figure in 2014/15.
Attention has been drawn by developers and landowners to more recent research into S106 and CIL, which put the annual figure for these ‘developer contributions’ at £6.007bn in 2016/17. Superficially, this data suggests that significantly more land value is being captured already than the 2014/15 estimate might indicate. However, further analysis indicates that this would be a misleading conclusion to draw, for a number of reasons.
First, it should be noted that the £6.007bn figure is not the sum that was actually collected in 2016/17 – it is the sum that was agreed under the terms of the planning permissions granted in that year. Given that a significant proportion of planning permissions are never implemented, and given that S106 agreements are frequently re-negotiated later, it seems highly unlikely that anything close to this figure would in fact be collected. Lapse rates are estimated by the government at 30-40 per cent: 10-20 per cent never result in a start, while a further 15-20 per cent are recycled into a further application. Given that roughly one-third of planning permissions are not implemented, it is not unreasonable to think that the sums agreed on schemes that went ahead might be in the order of something more like £4bn. And this figure is before those sums are renegotiated on many schemes, as occurs (MHCLG notes) ‘frequently’: 65 per cent of planning authorities renegotiated a planning agreement in 2016/17.
Second, the amount agreed in developer contributions has been falling relative to development values. The contributions agreed rose from £3.989bn in 2011/12 to £6.007bn in 2016/17, but this only reflects the increase in units granted residential planning permission over the same timeframe. Per house approved by local planning authorities, the value of developer contributions has – based on these figures – remained the same at about £19,000. So has the portion of that going towards affordable housing provision, at about £12,000. Meanwhile, however, the average price of a new-build house in England has risen from about £208,000 to about £282,000. Some of this 36 per cent increase may have been absorbed in construction cost inflation, but it is implausible to suggest that this has not resulted in a significant increase in the residual land value – whether that has been captured by the original landowner, the developer or somebody else in between. Indeed some recent analysis suggests that land increases remain the main driver of profit growth for housebuilders.
This suggests that there is still a substantial opportunity to increase public revenues from rising land values.
 Compulsory Purchase Association, written evidence to the Housing, Communities and Local Government Select Committee, par 24, http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/housing-communities-and-local-government-committee/land-value-capture/written/79378.html; Barratt Developments, written evidence to the Housing, Communities and Local Government Select Committee, par 3.7, http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/housing-communities-and-local-government-committee/land-value-capture/written/79249.html; Barry Denyer-Green (Falcon Chambers), oral evidence to the Housing, Communities and Local Government Select Committee, Q225, http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/housing-communities-and-local-government-committee/land-value-capture/oral/85154.pdf
 One witness, Barry Denyer-Green, made clear that there was in fact precedent for governments to acquire at less than open market value. The Leasehold Reform Act 1967, under which tenants of long leases of houses can expropriate the freehold was cited, as was the Planning (Listed Buildings and Conservation Areas) Act 1990, under which the Secretary of State can, in any compulsory purchase of a building, direct that compensation disregards the hope value of being able to develop that building. However, in instances where the difference between existing use value and open market value is more substantial, then it becomes more important to justify, on public interest grounds, why financial equivalency is not being paid. Q225, http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/housing-communities-and-local-government-committee/land-value-capture/oral/85154.html
 Germany’s Federal Building Code defines the market value (the Verkehrswert) as ‘the price which would be achieved taking into account the existing legal circumstances and the actual characteristics, general condition and location of the property’ (Section 194). On compensation for compulsory purchase in order to enforce local plans, it states: ‘The assessment of compensation is based on the state of the plot at the time at which the expropriation authority adjudicates on the application for expropriation.’ (Sections 93-103) Article L 160-5 of the French Code de l’Urbanisme states that ‘regulations and norms that result from this code… do not open a right to compensation’. The Dutch Readjustment Act has enabled municipalities to acquire land for large-scale projects at around twice agricultural values. These rules have meant that market transactions at levels close to use value are the norm, while CPO is seen as a last resort and rarely used.
 Philip Barnes, oral evidence to the Housing, Communities and Local Government Select Committee, Q170, Q174, http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/housing-communities-and-local-government-committee/land-value-capture/oral/84164.pdf
 Paul Brocklehurst (Land Promoters and Developers Federation), oral evidence to the Housing, Communities and Local Government Select Committee, Q124, http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/housing-communities-and-local-government-committee/land-value-capture/oral/84164.pdf
 This estimate was based on 75% of contributions were for residential, although Lord et al, 2018, (see n.7) suggests that this is likely to be closer to 100%.
 Alex Lord et al, ‘The Incidence, Value and Delivery of Planning Obligations and Community Infrastructure Levy in England in 2016-17’, MHCLG, March 2018, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/685301/Section_106_and_CIL_research_report.pdf
 MHCLG makes this observation in its consultation on developer contributions: ‘However, not all planning permissions are built out, and planning obligations can be renegotiated, meaning the amount ultimately collected will likely be lower than the amount committed.’ See ‘Supporting housing delivery through developer contributions’, MHCLG, March 2018
 ‘The role of land pipelines in the UK housebuilding process’, Chamberlain Walker, September 2017, p.6, https://cweconomics.co.uk/wp-content/uploads/2017/10/CWEconomicsReport_Land_Banking.pdf
 ‘Supporting housing delivery through developer contributions’, MHCLG, March 2018, p.13, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/691182/Developer_Contributions_Consultation.pdf
 As MHCLG notes, the current system of developer contributions ‘may only have captured a small proportion of the increase in value that has occurred since 2011’. p.13, ‘Supporting housing delivery through developer contributions’, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/691182/Developer_Contributions_Consultation.pdf
 The property analyst Neal Hudson has illustrated the importance of land to the rising profits of Taylor Wimpey and Persimmon; see https://twitter.com/resi_analyst/status/968809794944618496 and https://twitter.com/resi_analyst/status/968423151532208129. In addition, see Berkeley Group’s warning in June 2018 that its profits are set to fall as it runs out of land cheaply acquired in the aftermath of the financial crisis: https://www.thetimes.co.uk/article/bb7858cc-745c-11e8-a95e-4d8f3c5d626c