The capture for the public purse of land value increases generated by planning permissions and government infrastructure investment is the subject of an ongoing House of Commons select committee inquiry. With government finances squeezed, a number of public bodies – and both main political parties – are increasingly interested in ways of better recouping their infrastructure investment and the profits from development generated by their planning approvals. Last week, mayoral adviser Transport for London confirmed that the possibility of charging property owners near stations on the proposed Crossrail 2 rail link between southwest and north London was being considered.
Many in the sector argue that the current system of land value uplift capture from planning permissions is ineffective. The amount developers are charged under the Community Infrastructure Levy (CIL) and section 106 agreements are fixed as part of the legal agreement required before work can start on the development. "You need the money to pay for the infrastructure at the start, but the land value uplift and development gains come at the end," says Ian Fletcher, director of policy at the British Property Federation, the trade association for real estate companies. "Putting a stonking big charge at the start adds risk to projects and can discourage development."
As a result, most local authorities attempt to set CIL levies and section 106 contributions at a level that does not put off developers from applying for planning permission, with the knock-on effect that the amount currently raised is usually insufficient on its own to pay for the roads and other infrastructure required to support the development concerned. Government grants are often needed to help get large developments off the ground, according to experts.
In an attempt to improve the system, chancellor Philip Hammond’s 2017 autumn Budget made a number of proposals. These included speeding up the process of setting and revising CIL to make it more responsive to changes in the market, and to allow for the setting of higher charges where the biggest uplift in value is likely – on agricultural land and around train stations. Hammond also proposed allowing city-region mayors to introduce a new strategic infrastructure tariff across their areas.
However, Simon Jeffrey, policy officer at think tank Centre for Cities, says changes to CIL, although welcome, are not going to be adequate for the public sector to fully capture land value increases arising from development. "CIL only raises an insubstantial amount and, because section 106 agreements are negotiable, developers are often able to push down their contributions due to viability concerns," he says.
Meanwhile, in February, the Labour Party launched an alternative – the creation of what it called "an English sovereign land trust". It says this would enable the public sector to buy land more cheaply than at present, and thus capture more of the land value uplift resulting from planning approvals. The party says it would do this by reversing the rules established by the 1961 Land Compensation Act, which mean that landowners are entitled to the "hope" value of the land – the price the market might pay for the land in the hope that planning consent is given for a more valuable use.
Labour hopes that restricting this compensation to closer to existing use value would enable the public sector to better capture the value accruing through development. However, the not-for-profit Compulsory Purchase Association maintains that such proposals are based on a misunderstanding of the current law. Its submission to the select inquiry says: "The current statutory compensation framework ensures that compensation is very rarely paid to reflect the value of land with planning consent where that consent does not actually exist."
At the administrative tier below national government, new city-region mayors are busy working up their own proposals for land value capture (LVC) to fund new enabling infrastructure. Jeffrey says: "These are new bodies tasked with promoting growth without being backed with independent funding. The government has shown an appetite for at least engaging with them on some of their proposals."
One of the most significant studies by city-regional government on LVC was a report published for the Treasury last year by mayoral adviser Transport for London. One of its most significant recommendations was the introduction of a development rights auction model, which is used in Germany and Singapore. This would involve local authorities acquiring land around a transport hub, obtaining planning permission for it and then auctioning off the sites, with the public sector’s profits funding infrastructure improvements.
However, representatives of developers are unconvinced that the model would translate to the UK. Fletcher says: "In Singapore the majority of land is in public ownership. I don’t think it translates particularly well to the London situation where the majority is in private ownership. It would require time-consuming and expensive compulsory purchase orders. We would prefer to stick with tried and tested models like the mayoral CIL, which helped pay for Crossrail."
In a submission to the select committee inquiry, the Cambridgeshire and Peterborough Combined Authority (CPCA) outlined a proposal for a "planned infrastructure zone" that would capture the uplift in value that occurs when permission is granted for housing development. In each zone, which would be in place for 40-50 years, agricultural land could not be sold for more than ten times its agricultural value. On the sale of the land, a debt to the combined authority would be created for every home planned, to be repaid by the developer when the home is sold.
Ian Cole, professor of housing studies at the Centre for Regional Economic and Social Research (CRESR) at Sheffield Hallam University, points to one of the hurdles in implementing the model. "A number of authorities are interested in LVC but are hamstrung by the legislation," he says. He points to the CPCA, which has acknowledged that it does not have the authority to introduce a land value cap, and would need parliamentary regulation to gain it.
Elsewhere, Solihull Metropolitan Borough Council and the West Midlands Combined Authority last year created the Urban Growth Company (UGC), a special-purpose vehicle to promote development. The body has produced a toolkit for LVC that largely relies on powers already available, including the pooling of CIL receipts from local authorities.
Huw Rhys Lewis, managing director of the UGC, says the development of the toolkit is a key part of his negotiations over cash with central government. "Part of our devolution agreement was a pot of money," he adds. "We are using the toolkit to move the dial by saying to government that we do need some money, but not as much as we would otherwise ask for. The Treasury is open to having that discussion, but they need to be assured about viability of future income streams."
Simon Warburton, transport director at local government body Transport for Greater Manchester, suggests that estimating the income for future land value uplift can be an inexact science. "We were able to deliver our Metrolink network partly by borrowing against future fares. They are easier to estimate," he says. "We are not rushing forward too quickly with LVC. It may play a role but it is not the single silver bullet to the problems of providing infrastructure."
The select committee has its work cut out. Some experts warn that new mechanisms for LVC could fail unless landowners believe the system would not simply be overturned by the next government. Tom Archer, a research fellow at CRESR, says: "A proper LVC system would therefore require crossparty and long-term commitment, and support for building by local authorities, housing associations and other community-led bodies." At a time of such political polarisation, this seems a forlorn hope.