What is land value capture? Broadly defined, it involves mechanisms to transfer or use (capture) uplifts in land value for public benefit and purposes rather than for private gain.
Across east Asia, society-specific institutional models of effective direct public land acquisition, development, and commercial release have comprehensively captured land value increases for public benefit.
South Korea, Singapore, and Hong Kong, in different ways have used state ownership and management of development land to help finance the provision of mass housing and transit systems, allowing direct tax burdens to be kept low, a combination that over recent decades have been integral to their wider, cumulative, and transformative sustained economic development outcomes.
Western European countries, including France, Germany, and the Netherlands, allow greater scope for public authorities to finance sub regional and local regeneration projects and supporting infrastructural investment through land adjustment and pooling mechanisms embedded in their planning systems.
These tend to deflate the component of development cost taken by land acquisition allowing sponsoring public authorities to at least partially recover public infrastructural investment that then unlocks further future predominately private investment in housing and employment-creating enterprises with local self-sustaining multiplier effects.
Previously in the UK, the post war New Town Development Corporations were able, using long-term fixed rate public loans (initially at 3%), to purchase mainly agricultural or other land at or close to their existing use values to develop them for housing and commercial purposes.
That made it possible, according to a 2006 government-commissioned evaluation of the programme and its transferable lessons, to reduce the unserviced land cost component of houses in Harlow and Milton Keynes only about one per cent of housing costs at the time.
Through subsequent disposal of property assets and rising nominal real rental income rolls some of the early New Towns, including Harlow, Bracknell, and Stevenage accumulated surpluses sufficient not only to repay their Treasury loans but to remit substantial sums back to the public purse.
However, their sensitivity to the wider economic performance of the local sub-regional economy they were situated, as well as to the higher interest rates less buoyant national economic environment that shrouded the stagflationary seventies and recessionary early to mid-eighties, led to growing financial deficits for others. Runcorn, for instance, was still in deficit in 2006.
Land value capture mechanisms in their broadest sense can include land, property, and capital taxes covering all landowners. These tax increases in land value or real estate (combined land and property value treated as an imperfect proxy for land value) are taxed recurrently or on transfer.
Such treatments possess the potential advantage of horizontal equity – all owners benefiting from a similar increase in value are taxed (subject to thresholds, allowances, and exemptions) on the same basis and progressive to the extent that liability is increases with property values.
In the UK no recurrent pure land tax – the most economically efficient tax – is levied. The main property tax in England, council tax, is calibrated to 1991 dwellings valuations that do not separate but combine dwelling and land values. It is levied on a demonstrably regressive basis, poorly or negatively related to current values and household income.
Business rates, currently revalued every five years, are partially but imperfectly calibrated to changes in underlying land values. Capital gains tax is also payable on land transaction profits, but a lower and less progressive rate than is income.
As the fiscal austerity ushered-in by George Osborne in 2010 dragged on well into the decade, an overlapping technical and political consensus on the need for increased land value capture grew.
Self-imposed constraints on public infrastructural and housing investment, political unwillingness to levy salient taxes directly on income and expenditure, declining levels of owner occupation within younger age groups (Generation Rent) amid wider concerns on wealth and generational inequalities, provided political drivers. Studies, such as Griffiths of the Institute for Public Policy Research (IPPR) in 2011, helped to provide evidential foundations.
The emerging consensus increasingly interlinked rising land values to housing market imperfections and malfunction, to housing unaffordability, and to falling levels of, and access to, owner occupation, as well as to infrastructural shortfalls relative to national housing and economic needs.
Given the undeveloped and limited role that general land and property taxes play in the current UK taxation system and the political problems and obstacles involved in increasing their scope, land value capture mechanisms of greater specificity attracted most of the available policy attention.
S106 accidently had become a de facto tax on development value and betterment, while the Community Infrastructure Levey (CIL) was introduced in 2010.
The London CrossRail project was partially funded from 2010 onwards by a Business Rate Supplement, followed in 2012 by a dedicated Mayoral Community infrastructure Levy. Both additional levies helped to forward finance this piece of strategic regional infrastructure, which did not come on stream until 2022.
In the short time CrossRail has been operating, usage rates have surpassed expectations. Ample grounds for confidence exist that its future total economic (taking account of not only fare income, but of wider external economic impacts on reduced journey times, congestion, and increased connectivity) benefits will exceed costs.
On the other hand, the linkage between individual contribution of the levies and benefit from the project was delayed; some business owners subject to the additional rate faced increased contribution costs and went of business (for a variety of reasons) before the project was completed. No direct link between contribution and benefit existed, whether derived from increased business profits or capitalised higher land and business premise capital values.
Attention on land value capture peaked across 2017 and 2018. In the wake of the June 2016 Brexit referendum vote, the resulting ouster of David Cameron and George Osborne from 10 and 11 Downing Street, followed by the installation of Theresa May as prime minister, the government’s political commitment to fiscal austerity waned as it became more outwardly sympathetic to an interventionist approach to housing policy, extending beyond the demand-price-and profit-augmenting Help-to-Buy scheme.
May’s government, in February 2017 published a Housing White Paper (HWP). Its title – Fixing our Broken Housing Market – spoke volumes on the sea change on Conservative party thinking that had taken place since the eighties on the private operation of the housing market. Much of its diagnosis echoed that of Griffith earlier in the decade.
The 2017 Conservative manifesto committed a future Conservative government to “work with private and public sector house builders to capture the increase in land value created when they build to reinvest in local infrastructure, essential services and further housing, making it both easier and more certain that public sector landowners, and communities themselves benefit from the increase in land value from urban regeneration and development”.
Policy changes that followed either side of the June 2017 general election included tightening up on the central definition and monitoring of new local housing targets; the setting of a national annual new housing target of 300,000 dwellings; an increased affordable housing budget; and making it easier for councils to self-fund new council housing again.
Shelter earlier in 2017 had published New Civic Housebuilding. Its core argument was that the speculative market model incentivises developers to squeeze development costs to maximise what they can bid and pay for land sites and thus not lose them to rivals.
They then trim back affordable and other planning obligations, development quality and space standards, and project build out rates to maximise or at least maintain their expected profit levels.
The illustration was made of a developer providing 500 homes comprising 15% affordable housing, no school, a smaller park, and a slow build out rate, paying twice as much (£40m cf. to £20m) for the underlying land than a rival one offering 50% affordable obligations, a school, a larger park, and a faster build out rate. In Shelter’s reading, the additional £20m paid for the land meant a corresponding loss in community and public benefit.
It proposed, in response, a new ‘Civic’ housebuilding model that by “bring(ing) in land at a lower, fairer cost” and channelling competition between firms to raise “the quality and affordability of homes, would be supplemental and in preference to the existing speculative market and directly funded public delivery models.
New Home Zones should also be introduced as “an exceptional planning tool to deliver very high-quality schemes in addition to what the speculative market is building”, covering large scale developments (over 500 units).
Land assembly and acquisition and planning consent for such zones should be both fast tracked and combined through the Nationally Significant Infrastructure Project (NSIP) planning process, compressing development profiles to 12–15 months.
Another key proposal was that the 1961 Land Compensation Act should be amended to take no account of prospective planning permissions; certificates of appropriate alternative development would also cease to apply.
Later that year, Thomas Aubrey, then Director of the Centre for Progressive Capitalism (now the Centre for Progressive Policy) and Derek Bentley of Civitas likewise argued for the 1961 Land Compensation Act to be amended to exclude prospective planning permission from being taken into account for compensation purposes.
Changing the CPO rules, according to Aubrey would allow public authorities to capture the rise in land values resulting from expected or permissioned change to residential use, estimated at c £9.3bn per annum (over £185bn over 20 years).
The land so acquired could then be serviced with supporting infrastructure, thereby unlocking its potential for residential or commercial development. It could then be either sold back at its new enhanced market development value to private developers and/or retained in public ownership (in full or part) to generate a permanent revenue stream.
In August 2018 a public letter to the Communities Secretary, the late James Brokenshire, signed and supported by a diverse range of campaigning organisations, public stakeholders, and MPs, co-ordinated by the centre-right Onward think tank (subsequently republished on-line, as per link), encapsulated the overlapping technical and political consensus that had emerged.
“The root of England’s housing crisis lies in how we buy and sell land. When agricultural land is granted planning permission for housing to be built, the land typically becomes at least 100 times more valuable.
We, the undersigned, believe that more of this huge uplift in value should be captured to provide benefits to the community. If there was more confidence that more of the gains from development would certainly be invested in better places and better landscaping; in attractive green spaces; and in affordable housing and public services like new doctors surgeries and schools, then there would be less opposition to new development and much better infrastructure. The Government should think radically about reforming the way we capture planning gain for the community.
First, they should monitor the implementation of their welcome changes to Section 106 to ensure that councils deliver and developers do not continue to wriggle out of their commitments.
Next, they could give local government a stronger role in buying and assembling land for housing, allowing them to plan new developments more effectively, share the benefits for the community and approve developments in places local people accept.
Most importantly, they should reform the 1961 Land Compensation Act to clarify that local authorities should be able to compulsorily purchase land at fair market value that does not include prospective planning permission, rather than speculative “hope” value”.
The Conservative parliamentarian, and former Head of Policy for David Cameron, Sir Oliver Letwin, who had been commissioned in Autumn 2017 to: “explain the significant gap between housing completions and the amount of land allocated or permissioned in areas of high housing demand, and (to) make recommendations for closing it”, published his draft report in June 2018.
It reported that there were then approximately 107 sites in England with permission for approximately 393,000 units, associated with an average build out rate of 15.5 years, or 6.8% per year.
Letwin’s analysis and prescriptions shared similarities with the Shelter Civic Housebuilding report, focusing on slow build out rates inherent within the existing speculative market business model. Its core3 commercial driver was to limit releasing dwellings for purchase to a level (market absorption or build out rate) commensurate with them maintaining target sales prices and hence their target capital return.
Although accelerating that build out rate could significantly increase housing supply, the “homogeneity of the types and tenures of the homes on offer on these sites, and the limits on the rate at which the market will absorb such homogeneous products, are the fundamental drivers of the slow rate of build out”, according to Letwin.
In September 2018 a Housing Communities and Local Government Select Committee Report on Land Value Capture was published.
One of its central conclusions was that as the value of land arising from granting of planning permission and of new infrastructure was largely created by public action, then a “significant proportion of this uplift (should) be (made) available to national and local government in new infrastructure and public services”, through reforms to existing taxes and services, to compulsory purchase powers and compensation arrangements, or through new mechanisms of land value capture.
The committee had considered evidence (as did Barker) that practice in some other European Union (EU) countries can involve the freezing of land values when land is vested for housing use by a local authority.
It noted that across these countries, compared to the UK, land accounts for a smaller proportion of total residential development value, build rates are much higher, and they exhibited much more steady house price trends: outcomes all supportive of the wider macro-economic ends of steady, balanced non-inflationary growth.
The committee also noted (para 105), however, that during its visits to Friberg in Germany, and to Amsterdam in Holland, local municipalities did not acquire land at either existing or full use value but instead at a value “that offset the cost of providing the infrastructure and services associated with making a development viable”.
In October 2018, Letwin published his final report. It recommended that planning policy for sites providing over 1,500 units in high demand areas should be revised.
LPAs should be given the power to designate areas within their local plans to be developed only as single sites in conformity with a masterplan and set quality design codes, designed to diversify the mix, size, and type of units provided.
Such diversification would then allow LPAs to capture more land value and secure faster build out rates.
Government funding support would be made conditional on S106 conformity with such principles.
LPAs should also be provided with clear statutory powers to compulsorily purchase the land designated for such large sites at prices “which reflect the value of those sites once they have planning permission and a master plan that reflect the new diversity requirements …. to the point where they generate a maximum residual development value for the land on these sites of around ten times existing use value rather than the huge multiples of existing use value which currently apply”.
Their exercise would involve either use of a Local Development Corporation (LDC) or Local Authority Master Planner (LAMP).
LDCs would have a remit to set a masterplan and design codes(s) for designated sites and then obtain private finance to pay for the land and infrastructure through a specially established special purpose vehicle, before then “parcelling-up” the land to sell to different builders in accordance with its masterplan and design code(s).
A Local Authority Master Planner (LAMP) would sell the land to a privately financed Infrastructure Development Company (IDC), which would then provide the infrastructure and promote the same diverse housing offer.
The government response to his recommendations was lukewarm. In March 2019, the late James Brokenshire, the Communities Secretary, in a ministerial statement agreed that the “increased costs of diversification should be funded through reductions in residual land values” but cautioned that the report’s recommendations had been received with some scepticism within the housebuilding industry.
He went on confirm that while the government was committed “to improving the effectiveness of the existing mechanisms of land value capture, making them more certain and transparent for all developments”, his focus was “on evolving the existing system of developer contributions to make them more transparent, efficient and accountable”.
UK politics by then had long been dominated by Brexit, which now, to all intents and purpose, took over the entire show. Since May’s botched 2017 general election campaign, she had struggled in vain to secure a parliamentary majority for her compromise exit deal.
Her failure to do so culminated in her long-anticipated resignation and replacement by the opportunist Boris Johnson in July 2019 on a promise to ‘get Brexit done’, whatever.
Sir Oliver, old Etonian and former Thatcherite who had evolved into a Conservative ‘one nation’ Remainer grandee in manner and conviction, had the party whip taken away from him by Johnson in September 2019 and then retired at the December election that Johnson and his key advisor, Dominic Cummings, had engineered.
Johnson was returned with an eighty-plus mandate to get, indeed, ‘Brexit done’. Letwin’s report remained on the library shelf as he receded into principled retirement.
The growing overlapping technical and political consensus that had grown for the need for land value capture and wider housing market reform was discernible enough for commentators to note that the Communities Secretary, Sajid Javid, appointed by May when she became prime minister in July 2016 and in that post until April 2018, sometimes sounded more like a ‘Labour Housing Minister’. Toby Lloyd, the author of the 2017 Shelter report, had become May’s housing advisor.
The actual housing minister from July 2016, Gavin Barwell, who after losing his Croydon seat in the June 2017 general election became Theresa May’s chief of staff, in a subsequent book, identified delays and problems that Javid and himself faced progressing the HWP, noting that long-awaited Treasury and 10 Downing Streets responses to departmental policy submissions were “often contradictory”.
May’s chancellor, Philip Hammond, was a fiscal conservative wary of housing policy actions that could increase the deficit and undermine fiscal rules.
And, in any case, the HWP was more well-meaning rhetoric than a base for concrete policy change consistent with the refashioning of the housing system and market it desired – at least without overarching political and institutional drive and commitment. That was absent, whether due or not to the on-going all-consuming Brexit hiatus.
Public policy action in practice was largely limited to changes to the S106 viability process – again led by judicial decision – and to the compulsory purchase legal framework.
S106 viability methodology and process
After the introduction of CIL, the next major landmark in planning policy and practice was the publication in March 2012 of the National Planning Policy Framework (NPPF).
The original 2012 NPPF commendably consolidated 44 previous central government policy or guidance documents into one 65 page document.
It confirmed that the commercial viability of a development was a material consideration, which LPAs could take account of when setting, or, in the case of stalled schemes, when reviewing planning obligations.
Paragraph 173 advised LPA’s “To ensure viability, the costs of any requirements likely to be applied to development, such as requirements for affordable housing, standards, infrastructure contributions or other requirements should, when taking account of the normal cost of development and mitigation, provide competitive returns to a willing landowner and willing developer to enable the development to be deliverable“.
Paragraph 205 went on to advise that where obligations were being sought or revised, LPAs should take account of changes in market conditions over time and, wherever appropriate, exercise flexibility sufficient to prevent planned development stalling.
Further dedicated guidance issued in 2014 on viability (2014 viability guidance) further noted that “Where an applicant is able to demonstrate to the satisfaction of the local planning authority that the planning obligation would cause the development to be unviable, the local planning authority should be flexible in seeking planning obligations.
This is particularly relevant for affordable housing contributions which are often the largest single item sought on housing developments. These contributions should not be sought without regard to individual scheme viability. The financial viability of the individual scheme should be carefully considered in line with the principles in this guidance”.
A site was viable if the value generated by its development exceeded its total cost and offered sufficient incentive for the land to come forward and then for the development to be undertaken.
The most common way of measuring project viability was (and is) to subtract its expected Gross Development Cost (GDC) from its Gross Development Value (GDV), leaving its Residual Land Value (RLV).
If its RLV was positive and greater than the Benchmark (or Threshold) Land Value (BLV) – defined as the price at which a reasonable landowner would be sufficiently incentivised to sell – the scheme was deemed viable: (GDV-GDC=RLV)>BLV.
The 2014 viability guidance advised that in all cases, estimated land or site value should meet three policy requirements:
- Reflect emerging policy requirements and planning obligations and, where applicable, any Community Infrastructure Levy charge;
- Provide a competitive return to willing developers and landowners;
- Be informed by comparable, market-based evidence wherever possible.
Their order of priority was left open, however. Should local Plan-set S106 and CIL requirements override evidence adduced from past market sales of comparable sites? And what was an ‘acceptable’ return for landowners and developers?
Developers and their advisers could over- and under-estimate expected values and costs, respectively.
Different assumptions to determine BLV that could include current use value, a premium above that value, alternative use value, as well as market values extrapolated from, say, average sale values for comparable sites, could be applied.
Local S106 and other policy requirements could also be set at different points across the economic and housing cycle not necessarily coincident with conditions prevailing at the time of viability consideration at either Plan or individual scheme level.
The heterogeneity of sites and their associated development value potential also do lend themselves to the application of standard assumptions or requirements.
The 2014 guidance also encouraged the use of scheme-based development viability appraisals to assess the impact of affordable housing obligations on the overall commercial viability of previously agreed section 106 affordable housing obligations, as well as planned new developments, undermining the principle that viability should be assessed as part of the Plan-making process.
These issues and problems remain, but developers (despite many of them receiving substantial public support) during the post GFC years exploited them.
They continued to overpay for land. By reducing site RV to below or close to its BLV they made the argument that LPA enforcement of local policy-defined section 106 obligations – often previously agreed- would now make their scheme(s) unviable. Averaged market values of (sometimes) comparable sites that did not reflect S106 or other planning requirements was also used to the same purpose.
Indeed, the inference many developers took from the 2014 viability guidance was that affordable housing obligations should be considered a variable parameter (their incidence in scale and timing was conditional on not making a development inviable), whereas the need to provide a(undefined) competitive return to a willing landowner and developer was the fixed primary parameter that must be achieved regardless of context, history, and circumstance.
Such entrenched circularity (overpaying for land made developments unviable, with the resulting unviability then used to justify to reduce the level of housing and other obligations: a process that then further encouraged developers to over pay for land, and so on) provided the backdrop to the April 2018 Parkhurst Road High Court judgement.
This provided a judicial review of earlier 2015 and 2017 planning inspector inquiries convened to consider previous refusal(s) by the London Borough of Islington Council (LBI) of planning applications from the developer, Parkhurst Road Ltd (PRL). The refusals were primarily on the ground that insufficient affordable housing had been offered consistent with LBI published and approved Plan policies.
LBI further contended that the price which PRL had paid for the ex-Territorial Army site was excessive, since it did not properly reflect the policy requirement to maximise the affordable housing component on the site in the context set by LBI’s 50% borough-wide strategic affordable housing target.
The borough suggested that a viability assessment should look at comparable sites that had been recently granted planning permission in accordance with relevant policies. The prices paid for such land, suitably adjusted, could then be compared to EUVs for those sites to ascertain an appropriate premium or uplift additional to EUV for the Parkhurst Road site.
That approach aligned with that adopted Mayor of London’s Affordable Housing and Viability Supplementary Planning Guidance (2017 SPG), incorporated into the 2021 London Plan that stated that a market value approach should only be accepted where it can be demonstrated to properly reflect policy requirements and take account of site-specific circumstances.
LBI assessed the BLV value of the site on that basis as £6.75M – around a half of the £13.25M paid by Parkhurst, but still significantly above the site EUV.
The judge, Mr Justice Holgate, concluded that LBI’s assessment of the BLV site value was correct, based as it was on its set affordable housing policy requirements. These, he added, could not be ignored nor set aside by a developer claiming that ‘comparable’ site valuations were higher, where such valuations did not take account of the borough’s affordable housing requirements.
In short, he concluded, LPAs when determining site BLVs, should “reflect“, and not “buck,” relevant planning policies (including those for the delivery of affordable housing); on the other hand, the proper application of those policies should also be “informed by,” and not “buck” an analysis of market evidence reflecting those policies.
On the other hand. an “arbitrary” EUV plus valuation, Justice Holgate went on to say, should also not be applied, where viability evidence of comparable market values that did reflect relevant planning policies and requirements was presented. One or more planning requirements or objectives could then be relaxed where if they would render a development non-viable, according to a viability case “which uses (inter alia) land values which have adequately taken planning policies into account”.
It may be noted in passing that Justice Holgate – understandably, concerned as he was with the law rather than with economics – did not delve further into the extent that ‘market’ evidence could reflect imperfect rather than efficient housing market operations.
Subsequent published 2019 Viability Guidance confirmed that “under no circumstances will the price paid for land be relevant justification for failing to accord with relevant policies in the Plan”.
LPAs should apply existing use value plus’ (EUV+) as a calibrating mechanism to measure BLV with any hope value disregarded, save, apparently, where an alternative use value (AUV) when fully compliant with up-to-date development plan policies could be implemented on the site in question including evidence for market demand for such use.
Specifically, BLV should:
- be based upon existing use value, “not the price paid and (it) should disregard hope value” (but note AUV rider above)
- allow for a premium to landowners (including equity resulting from those building their own homes) that “should provide a reasonable incentive for a landowner to bring forward land for development while allowing a sufficient contribution to fully comply with policy requirements”;
- reflect the implications of abnormal costs; site-specific infrastructure costs; and professional site fees.
Such BLV appraisal values then should fully reflect all relevant policies, local and national standards, including the cost implications of the Community Infrastructure Levy (CIL) and section 106 obligations.
Compared to the 2014 version, this latest 2019 iteration of the viability guidance also appeared to reduce the ‘required return’ to a ‘minimum return’ which was ‘reasonable’ rather than ‘competitive’.
It suggested that 15-20% of gross development value (GDV) should be taken for plan viability purposes as an assumed presumably ‘reasonable’ return to developers (profit parameter). This could vary, however, according to the type, scale, and the risk profile of planned development(s).
Specifically, a lower return may be more appropriate “in consideration of delivery of affordable housing in circumstances where this guarantees an end sale at a known value and reduces risk”.
Developers should also account for and price potential risk within their assumed return: it was for them, not plan makers or decision makers, to later mitigate these risks.
Noting that there may be a divergence between benchmark land values and market evidence the guidance, plan makers “should be aware that this could be due to different assumptions and methodologies used by individual developers, site promoters and landowners”.
LPAs, consistent with the revised 2018 national planning policy framework, should set out the contributions expected from development(s), including the levels and types of affordable housing provision required, along with education, health, transport, flood and water management, green and digital infrastructural requirements. These should be supported by evidence for their need and not undermine their deliverability.
The guidance reiterated that viability assessment should occur primarily at the plan making stage, although it recognised that “in some circumstances more detailed assessment may be necessary for particular areas or key sites on which the delivery of the plan relies”. The onus was put upon developers to justify the need for any further viability assessment at the application decision-making stage.
LPAs were charged at the plan-making appraisal stage to use ‘site typologies’ to set different requirements for different types of development and locations consistent with their deliverability.
This could involve plan-makers making use of average historic land values and costs to allow them to “come to a view on what might be an appropriate benchmark land value and policy requirement for each typology”.
In summary, it took government many years to catch up with abuse of the appraisal process by developers who demonstrated their willingness as profit-maximising organisations to adopt ‘take a mile, if given an inch’ approach to public policy adjustment to the impact of the GFC on the housing market and construction industry.
It is likely that such practice helped to fuel the overlapping political and technical consensus in favour of increased land value capture that that grew last decade.
The 2019 appraisal policy practice government guidance remains extant. Recently republished RICS guidance interprets and operationalises its application as a professional standard for surveying practitioners.
Tension, and a degree of uncertainty, remains concerning the application of EUV+ valuation of Benchmark Land Value and the related issue as to extent that hope value should be eliminated in its computation. The distinction between hope and alternative use values appears unclear and possibly contradictory.
The premium element of EUV+ and its ranking and ordering relationship to the developer profit and set policy requirements remains indeterminate, and, perhaps, inevitably so given site heterogeneity and changes to the wider economic and housing market environment.
The experience of CIL suggests that a focus appraisal undertaken at Plan-making will be reliant on local capacity, while the use of average historic market value data and their shortcomings could result in misspecification of viability and/or a worst-case assumption applied. In any case, most LPA’s do not have an up-to-date Local Plan, which are seldom refreshed at the expected five-year intervals.
Compulsory Purchase Order (CPO) reform
To begin to understand policy development and issues across this devilishly difficult and confusing area, some history is needed.
The 1947 Town and Country Planning Act nationalised both the private right to develop (undertake construction and/or change its use) sites and to profit from any increase in their development value (betterment).
Development henceforth could only proceed subject to planning permission. A 100% development charge would also be levied on betterment. Owners could now only realise, net of the charge, the existing use value of their land.
But in 1954, Winston Churchill’s successor Conservative government abolished development charges. Local authorities, however, retained the right to acquire land at its existing use value thus facilitating continuing council house building at manageable public cost, as did New Towns.
As the demand for land suitable for development rose in response to the government’s wider housebuilding drive, its market value, when traded, increasingly took account of its future prospective use, while land acquired publicly did not.
The resulting dual or ‘two-price’ system threw up the horizontal inequity that landowners with similar plots could get different values depending on whether their land was subject to public acquisition or not.
The 1959 Town and Country Planning Act ended that dual system by making provision for CPO compensation at what it termed ‘fair market value’ in conformity with the principle of ‘equivalence’: requiring the forced seller to be placed in the same position as they would have been in the absence of the CPO acquisition.
In practice, local authorities acquiring land for new council building schemes now had to pay prices reflecting its future perspective or ‘hope’ residential value.
But, as was pointed out at the time and subsequently, the 1959 Act did not address other horizontal inequities resulting from a system where development control and rights continued to vest with the state, but land value uplift or betterment could be realised by private actors.
Some landowners could benefit and realise betterment from the granting of planning permission. Others could not because their land was not zoned for development or because permission was refused. This remains the case.
The 1961 Land Compensation Act (1961LCA) then consolidated statutes dating back to Victorian times and codified case law.
But by common consent it did so in a confused and conflicted manner. That was, perhaps, inevitable insofar that the case law that it tried to codify was sometimes contradictory and the statutes that it attempted to consolidate, rather than to reform or replace, reflected changing circumstances and assumptions occurring over a century.
In Victorian times, for instance, compulsory purchase powers were generally sought and obtained by private competing profit-making operators, such as railway and water companies by privately sponsored specific Act of Parliament, and local juries decided compensation on that basis.
A 2003 Law Commission review of Compulsory Purchase compensation arrangements, in that light, noted that the “The current law of compulsory purchase is a patchwork of diverse rules, derived from a variety of statutes and cases over more than 100 years, which are neither accessible to those affected, nor readily capable of interpretation save by specialists”.
Nevertheless, 1961LCA remains the principal source statute governing the assessment of CPO compensation, notwithstanding that many of its provisions have been amended significantly by subsequent pieces of legislation, sometimes substituted then back into it.
Its Section 14 (s14) gave statutory status to the ‘no scheme’ principle, whereby for compensation purposes any impact on plot value attributable to ‘the scheme’ subject to the CPO was to be disregarded as if no such scheme existed or it was ‘cancelled’ on the valuation date (the date when compensation was determined or when it was taken in possession, if earlier).
It went on to provide for the payment of compensation at market value to reflect permissible and prospective planning use (hope value) and in respect to appropriate alternative development (AAD), “in (the) circumstances known to the market at the relevant valuation date”.
At first glance, interpretation of the ‘no scheme’ or the project disregard rules seems straightforward. If land is to be acquired, compensation should reflect its fair market price “taken to be the amount which the land if sold in the open market by a willing seller might be expected to realise” after applying the assumption that the ‘scheme’ subject or giving rise to the CPO requiring the acquisition was ‘cancelled’ – in effect, did not exist.
Assessing potential hope value is inherently problematic, however. To do so also involves postulating what uses the subject land in question could have been put to in the absence of ‘the scheme’.
For instance, some or all of it could have been zoned for housing or other alternative uses sometime in the future, even though its existing use was agricultural and there was no current planning provision for its future use for housing.
The wider the scope that ‘the scheme’ is in area and purpose, the more difficult it is likely to become to isolate what might have happened in its absence: a wider regeneration scheme possessing sub-regional importance with multiple underlying purposes is likely to affect many more owners, take longer to bring to fruition, and have much more extensive and varying impacts over time.
In the words of the Law Commission, especially when the scheme has a long life, this “may involve a speculative exercise of rewriting history”. Or, put another way, gazing into a crystal ball.
This issue arose in a 1974 Court of Appeal case (Myers v Milton Keynes Development Corporation, MKDC) presided over by the then Master of Rolls, Lord Denning.
In short, MKDC had acquired 324 acres of Myer’s land (designated as part of a New Town scheme to provide housing) at twice agricultural value.
A lower court held that the assumed planning permission was a direct result of the acquiring authority’s ‘scheme’ that must therefore be ignored when assessing compensation.
The Court of Appeal decided, however, that the landowner was rather entitled to 20% of residential value. This it deemed as fair representation, in essence, of hope value pertaining to the assessed likelihood that in the absence of the CPO ‘scheme’ – in this case an extension to Milton Keynes New Town – planning permission for residential use would have been granted sometime in the future.
Such continuing uncertainties provided the backdrop to a consultation on compulsory purchase reform that the former Department of Communities and Local Government (DCLG) and HM Treasury conducted in March 2016 (following an earlier one in March 2015).
Predicated on a central premise that the application of the ‘no scheme’ application as interpreted by case law had in practice become more complex and uncertain over time and that it needed to be made “clearer, fairer, and faster”, it sought views on government proposals to establish the principle of the ‘no scheme world’ fairly and effectively in the valuation process by codifying it in statute, involving a:
- clearer definition of the project or scheme that should be disregarded in assessing value;
- clearer basis for assessing whether the project forms part of a larger ‘underlying’ scheme that should also be disregarded;
- more consistent approach to the date on which the project is assumed to be cancelled;
- broadening of the definition of the ‘scheme’ to allow the identification of specified transport infrastructure projects that are to be disregarded within a defined area, over a defined period of time – meaning that where land is acquired for a wider regeneration or redevelopment scheme that is directly linked (facilitated or made possible) to a ‘relevant’ transport infrastructure project, the definition of ‘the scheme’ should include that project.
The uplift in values caused by the public investment in the transport project, regardless of whether it is carried out before, after, or at the same time as the regeneration or redevelopment, should, therefore, be disregarded for compensation purposes, the consultation proposed.
In its published response to that 2016 consultation, the government acknowledged that extending the definition of ‘the scheme’ to exclude the impact of specified transport infrastructure on land values could result in claimants receiving less compensation than they might otherwise have done, but nonetheless noted that “it is right that the public purse, rather than private interests, should benefit from increases in land values arising from public investment”.
These proposed changes were largely enacted in Section 32 of the Neighbourhood Planning Act 2017 (NPA2017) inserted into 1961LPA, replacing former ss6-9 with new ss6A to 6E.
The current legal position is where land is acquired for regeneration or redevelopment facilitated or made possible by a relevant transport project, the definition of ‘the scheme’ will include that project, regardless of whether it is carried out before, after or at the same time as the wider regeneration or redevelopment.
Where different parts of the works comprised in such a transport project are first opened for use on different dates, each part is then to be treated as a separate relevant transport project but only where “regeneration or redevelopment was part of the published justification for the relevant transport project”.
All subsequent development across the whole areas covered by Mayoral Development Corporations and designated New Town or Urban Development is now to be disregarded for the purpose of assessing CPO compensation.
The amount of compensation payable in respect of the compulsory acquisition of the ‘original’ or ‘subject land’ can also be reduced by the quantum increase in the value of the same person’s interest in any adjacent or contiguous ‘other’ land at the relevant valuation date resulting from ‘the scheme’.
However, if the revised ‘no scheme’ assumptions do not apply, the new ss6A-E limit still allows compensation for prospective hope value to be assessed in accordance with s14LPA61.
New powers were also given to the Secretary of State to create Locally-led New Town Development Corporations (LNTDCs) that a local authority, or more than one local authority, would be responsible for, and for Transport for London and the Greater London Authority to jointly acquire land through compulsory purchase on behalf of each other for mixed-use transport, housing, and regeneration purposes.
The Housing Minister, Kit Malthouse, subsequently told the 2018 Select Committee on Land Value Capture (see previous reference link) that he considered the revised ‘no scheme’ principles that NPA 2017 enacted had rendered any further reform of LCA1961 unnecessary.
The published report of that Committee, nonetheless, concluded that (para 111) “the Land Compensation Act 1961 requires reform so that local authorities have the power to compulsorily purchase land at a fairer price (and that) the present right of landowners to receive ‘hope value’—a value reflective of speculative future planning permissions — serves to distort land prices, encourage land speculation, and reduce revenues for affordable housing, infrastructure and local services”.
It went on to propose (para 112) that such a ‘fairer price’ should be set by an “independent expert panel”, before noting (para 113) that enhanced CPO and land assembly powers, alongside further reform of LCA1961, “would provide a powerful tool for local authorities to build a new generation of New Towns, as well as extensions to, or significant developments within, existing settlements”.
Within two months the government published its November 2018 response to the Committee’s report.
This confirmed its commitment to capture increases in land value for the benefit of local communities while cautioning (para 11) that “changes to land value capture systems can have profound impacts on the land market in the short term, even where they are sensible for the long term”.
Compensation for hope value (i.e., value based on the land’s development potential) should be limited to values (para 30) reflecting “the prospects of obtaining planning permission for an alternative development in the absence of ‘the scheme’, taking into account the risks, uncertainties and costs associated with implementing such a development, including the costs of providing the affordable housing, infrastructure and supporting facilities required to make the development acceptable in planning terms, as well as any Community Infrastructure Levy liability”.
Previous government policy guidance, including the 2018 ministerial statement earlier referenced, that developer S106 contributions provide the primary mechanism for LPAs to capture land value uplift, was reiterated.
The government wanted to let recent reforms, including the NPA2017, to ‘bed-in’ while it continued “to monitor their practical application and (to) remain open to considering practical improvements to the (CPO) framework”, including “bespoke mechanisms of land value capture”. The “Oxford-Cambridge Arc and Housing Deals” were mentioned specifically in that regard.
Indeed, the changes made alongside the greenfield amendment recorded below, appear designed to facilitate a strategic project, such as the Oxford and Cambridge Growth Arc promoted by the National Infrastructure Commission in 2017.
It has suffered from recent policy uncertainty, however, culminating in Michael Gove, reportedly, ‘flushing it down the toilet’, and dismantling the responsible civil service team, although government lip service to its progression still surfaces.
More fundamentally, the respective roles of central government, local authorities remain unclear: it covers too wide an area for a top-down New Town Development Corporation approach, but little evidence exists that constituent LPAs possess either the willingness or capacity to drive progress either at individual LPA or collective sub-regional level. Accordingly, the new 2017 NPA CPO compensation arrangements accorded to New Town Development, whether nationally or locally-led and Mayoral Development Corporations, still may not be applicable across much of the area.
While the government accepted the principle that a greater proportion of land value should be captured for public benefit, it also continued to reiterate that its reforms did not change the bedrock legal principle that compensation should be based on the market value and were made to simply make the CPO process clearer and simpler.
After a four year pause in CPO reform, the Levelling-up and Regeneration Bill, introduced into the Commons in May 2022, put forward further provisions to ensure that where greenfield land is acquired for development that is facilitated or made possible by a relevant transport project, then that any uplift on land values resulting from that that and any linked transport scheme would likewise be disregarded for compensation purposes.
Further government amendments incorporated into Clause 175 of the Bill put the onus and cost of applying for a Certificate of Alternative Development (CAD) under s17 of the LPA1961 onto the landowner/developer.
Compensation will still be payable for ‘hope value’ on the basis that the LPA would have granted planning permission for the alternative use “more likely than not” in the absence of the scheme subject to the CPO.
These amendments also empower LPAs to define planning conditions that it would have attached to any such ‘more likely that not’ hypothetical permission. These, presumably, could include infrastructural and affordable housing obligations impacting on potential compensation values.
In March 2023, the government tabled further amendments at the House of Lords Committee stage, that included 412D to clause 175.
This goes further, insofar – if passed and enacted – it would allow a Minister confirming a compulsory purchase order to direct, in certain cases involving affordable housing, health or education, that compensation should be assessed on the basis that no new planning permission would be granted for the land (and thus eliminate hope value from any compensation payable).
To make the order in the case of affordable housing, the acquiring LPA must state the number of affordable homes to be created and be satisfied that the direction is justified in the public interest.
The effect of that direction could be subsequently reversed if the acquired land is not subsequently used as planned or if a statement of commitments accompanying the CPO was not fulfilled within ten years of the order becoming operative.
In April 2023, the government indicated that it intended it to make changes to the compensation arrangements where valuation takes into account prospective planning permission but directions eliminating or capping hope value should be on a scheme-by-scheme basis and be limited to carefully defined circumstances, but where directions are made they should remove hope value entirely from compensation.
It concluded that certain public sector authorities (eligible acquiring authorities) such as LPAs, Homes England, Development Corporations, and the Greater London Authority (GLA) will be able to seek directions from the Secretary of State that CPO compensation should take no account of the prospects of prospective planning permission (hope value) or establishing appropriate alternative development via a Certificate of Appropriate Alternative Development (AAD) in relation to affordable (including social housing), education provision, and health facilities.
Should hope value be eliminated?
Since the mid-fifties, real land prices (adjusted for inflation) have exhibited bouts of greater volatility within a wider secular medium to long term trend for them to exponentially outpace real house prices (see Figure 1).
Real house prices, in turn, have outpaced average earnings and real disposable incomes, especially and concentrated across the economically buoyant areas of the country.
These trends were accelerated by the financial liberalisation of the eighties that enabled easier mortgage availability at higher income multiples and the secular trend fall in real interest rates that started in the mid-nineties (only recently arrested) that reduced the cost of servicing a mortgage of constant value, which also allowed homebuyers to borrow more relative to their income and price of the home they were purchasing.
Both acted to increase effective monetary demand for housing and hence the demand for residential land.
The supply of developable land, subject to both planning restriction and developer market behaviour, is much more inelastic (less sensitive to price change) than is housing demand, as authors, including Griffith and Letwin, have demonstrated and reported.
The relationship between land and house prices is a complex one that acts both ways. In practice, as described above, market residential land values reflect both market failures and public policy choices.
Construction (C) or build costs increased far less – driven largely by material, labour, and regulatory costs – than did land (L) values that consequently accounted for increased proportions of the total residential plot value.
If C is taken to include other development costs, including financing and marketing, and P for developer profit: H = L+C+P; it follows that the share of combined land and profit share of a dwelling speculatively sold means that L+P=H-C.
By 2020, according to the most recent ONS data, land underlying dwellings accounted for 86% of the total estimated value of land.
Some hard facts can help to paint the real picture. This chart researched and produced by BuiltPlace – an independent group of housing analysts and researchers – highlights how the listed housebuilders have managed to capture the majority of the uplift in house prices in their profit rather than land values.
Staggeringly, average gross profit per plot built by Persimmons in 2022 exceeded £76,000. That year, profit and land costs combined accounted for 43% of total sale price, compared to c38% back in 2010.
Essentially, landowners and developers have been able during the last decade to capture progressively larger windfall gains from changes in land use values in the form of land values and profits.
Such gains are crystallised by planning permission but can also include prospective hope values based on the expectation of future such permissions. They, in effect, represent income transfers from purchasers.
It is that tendency that helped to give rise to the growing pressure documented earlier for hope value to be removed entirely as a potential component of compulsory purchase compensation.
Opponents of such a shift, such as the Compulsory Purchase Association riposte that compensating owners at less than market value is inherently unfair and potentially incompatible with the European Convention on Human Rights, that it would risk inciting opposition to new developments involving compulsory purchase, and it would slow down the process, increase costs, and thereby self-defeat any purported intention to increase infrastructural and housing supply.
Private property rights to windfall and/or super profit gains need to be balanced against competing public interests, such as promoting sub-regional and national economic growth, shared prosperity, and increasing the supply of, and access to, affordable housing, as well as against competing private individual rights to access housing suitable for their needs consistent with their wider effective economic and social participation in society.
The ’human rights’ angle can therefore sometimes be used as a red herring diversion motivated by special pleading or political preference. Governments restrict individual rights for wider economic and social ends for a variety of reasons and purposes: to weigh the confiscatory and deadweight effects of taxation levies against the need for collectively financed services that they can finance, for instance. Such balancing is the meat and drink of democratic politics.
The real issues revolve around balancing competing degrees of fairness, which tend to merge into shades of grey rather than demarcate into black or white, and the likely effectiveness of interventions in achieving their purported objectives.
In that light, Richard Harwood KC and others argue that CPO compensation is already based on the value of land either in its current use or on the prospect of a planning permission, with that prospect taking account of set planning policy design, size and other quality standards, of infrastructural provision and support, and affordable housing requirements.
In any case, they add, the CPO compensation code does not determine market prices. And, crucially, landowners and developers need to be incentivised to release and use land for housebuilding. Accordingly, further change to the CPO compensation arrangements is neither needed nor desirable.
They recognise from a legalistic perspective that a potential case under European human rights legislation is only conceivable where the gap between compensation and market value is especially large, likely to be confined to greenfield sites. Those are the sites, however, where the landowner windfall gain is likely to be largest providing greatest scope for land value capture for public benefit.
Isolating and attributing land value uplifts specifically to the impact of schemes and their facilitating public investments is inevitably going to be an imprecise exercise subject to contestable assumptions, especially where it involves the delineation of when and to what extent prospective hope value – derived from the prospect of a future planning permission – should be compensated.
It has been a refreshing feature of recent debate on the topic largely has attempted to accommodate that nuanced reality through informed discussion, eschewing polarised and entrenched ideological-based political positions.
On the other hand, it can get a bit circular and semantic, namely that it is OK to compress market values by public policy requirements and interventions but not to cap compensation (even at a premium above existing value) for the same purpose.
In that context, a case can be made that elimination of compensation for hope and alternative use value would further simplify the process and discourage rent-seeking speculative behaviour by developers and land agents.
The core principle of social democracy is to focus on securing the effective and sustainable outcomes – the best that can be achieved in invariably messy ‘present imperfect’ conditions, using individually fair and accountable processes.
The line of least technical and political resistance – following on and progressing on what Harwood describes as a “new consensus on land value capture, which emphasises the effective working of the planning system” would appear to embed design, infrastructural and affordable and housing obligation requirements in a more certain manner.
This means both definitionally and in meshing them to and within future viability assessment and local plan-making process and practice.
Such greater planning certainty should help to deflate land values generally, as well encourage voluntary sales at a premium above existing values at a fair and effective level, consistent with closing local infrastructural and affordable housing provision requirement funding gaps and with providing a reasonable incentive for voluntary land sale.
Letwin’s proposal of a maximum residual development value for the land of around ten times existing use value rather than the huge multiples of existing use value that can sometimes apply seems a reasonable starting point to assess at least the allowable premium for voluntary sale of greenfield sites.
It would also be consistent with using CPO as a last resort and help also to limit the extent of horizontal inequities between landowners where values are uplifted by prospective development.
Aligning property taxes more dynamically to changing values would dilute such horizontal inequities more effectively, but that involves practicability and political feasibility issues, as discussed in Time for a Modern Land Tax?.
On the other hand, certainty of requirements can conflict with site heterogeneity: one size cannot fit all.
Much more clarity is required as to the respective future roles of public and private sectors and their capacity to effectively fulfil them and on associated changes needed to their respective business/provision models to that end, discussed in Affordable_Housing_Partnership_Planning.
At the end of the day, more effective land value capture would expand access to affordable housing through reducing market prices, helping to finance necessary supporting infrastructure conducive to local and sub-regional housing and economic development, this contributing to the future uplifts in economic growth that the nation’s economic and social future depends upon.
But that requires overarching central government policy clarity and certainty connected to a steadfast commitment to securing increased infrastructural investment in line with local affordable housing requirements and economic development needs as part of a wider economic mission to uptick the sustainable growth rate.
This was, and remains, a key public policy failure of omission that unless addressed and reversed will invariably render any land value capture mechanism ineffective, whatever its label.
Things won’t happen by themselves. The Oxford-Cambridge Arc is a case in point.
This extended post is one of a series concerning housing and planning policy development that will be published during spring and summer 2023. Comments on this one should be made to email@example.com