1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

Magic Bullets? Why Value Capture Should Be Kept Simple

The House of Commons Housing Communities & Local Government Select Committee Land Value Capture Inquiry report is great, but dangerous. It is a welcome reminder that the planning system can, and should, do more to capture the cost of the infrastructure required to support development. It is also problematic because it suggests a range of new “toys”, including a review of CPO compensation provisions, that is politically unworkable, a distraction and unnecessary.

Right Price

The report is clear that landowners, and developers on their behalf, already make significant contributions towards infrastructure and affordable housing. The combination of planning obligations and CIL can work effectively. With more local authority resource, greater transparency and a stronger emphasis on the local plan, even more can be achieved. As the report indicates, proper planning requirements should be viability tested and reflected in planning policy and a reformed and simplified CIL. Those needs will then, perhaps slowly, be “hardwired” into land prices. Land will be “right priced”.

No end to hope

A number of witnesses, and the evidence, emphasise that using planning policy is not a panacea. It will not fund all infrastructure requirements.  It will not solve the housing market problem.  Markets in different parts of the country are very different. The planning system can be used to secure a full contribution to infrastructure in parts of the South East, in a way that is simply impossible in parts of the North West.  Local planning processes can reflect those differences better than any sweeping national change.  Similarly, right pricing also requires some market sensitivity and testing. The aim should be to maximise the contribution that landowners make to infrastructure, whilst still allowing the land market to function. That means developing policies in a way that still leaves a sensible market value.

In urban areas that market value will, often, reflect the existing use value plus a sensible margin and an incentive to bring land to the market. For greenfield sites, the market value will need to reflect an amount needed for landowners, or promoters, to bring forward development and recycle value themselves into infrastructure delivery and place-making. However, landowners need to recognise that any existing “hope value” is not a permanent or fixed part of market value. As the market, planning policy and CIL levels change hope value necessarily also has to adjust. Any balancing exercise should diminish, but not dash, hope.

Thin Ice

Perhaps the more important Select Committee issue is the suggestion that the 1961 Land Compensation Act should be changed. In broad terms, the Committee recommend that land being compulsorily acquired should be acquired at existing use value instead of market value. That would be resisted. It would create a two-tier land market – with different values applying to adjacent plots depending on whether it is being sold on the open market or being publicly acquired. How would that work? Would that meet one of the tests that the Committee set for itself – fairness?

It is also unnecessary. The Committee attributes the success of the first generation of new towns to there being a different CPO compensation code, and suggests that the same result would not be achieved today. That is just wrong.  If a site for a new town is compulsorily acquired, the valuation will disregard the “scheme”.  In most cases, that will mean the land is acquired at something close to the existing use value – most sites would not be developed in the absence of the new town proposal. Even if, in the absence of the new town proposal, there would a development value to the site then a properly constructed planning policy framework will require any new development to fund the necessary infrastructure and the cost of doing so will be reflected in the land value.

Keep it simple

Why is there a need to change legislation to do something that can, largely, already be achieved without burdening the system with more complexity and change? It should be a fundamental principle of CPO compensation that landowners receive a proper market value for their land. The Parkhurst Road case has made it clear, quite rightly, that market values should reflect planning policy. If that happens, then the hope value component of market value will, properly, be adjusted by the proper attribution of infrastructure costs.   If, after the proper deduction of those costs there is still a margin and a residual hope value, what is the justification really, for amending the compensation code to take that?  If there is a justification for taking that capital gain then the tax system should be used to do so rather than playing games with compulsory purchase compensation which are ultimately likely to slow down development and unhinge investment.

Muscular Authority

A late amendment to the Neighbourhood Planning Act 2017 amended the New Towns Act 1981 to allow locally led new towns to be designated and for development corporations to be set up to deliver them. Kept to a single section, the 2017 legislation needed regulations to put flesh on the bones. The regulations arrived yesterday. They are supported by guidance that sets out when the Secretary of State will be willing to designate a locally led new town.

In very broad terms if a local authority wants to promote a new town then it will normally do so through a local plan process, securing an allocation. A request will then be made to the Secretary of State who, after consultation, will consider whether it is in the national interest for a new town to be designated. He will need to be persuaded about issues of community participation, deliverability, potential alternative delivery vehicles, and the adequacy of controls on design, sustainability and stewardship. If the application is successful then the Secretary of State will appoint the local authority or authorities as an oversight authority whose primary responsibility will be to control the designated development corporation and make sure that it delivers a high quality sustainable community with proper stewardship arrangements.

The development corporation will promote masterplans and Local Development Orders, both approved by the oversight authority, that set the planning framework. It will have CPO powers, to be confirmed by the Secretary of State, to acquire land within the new town area. The board of the development corporation has to be majority non local authority members. The emphasis, as with the old generation of new towns, is on delivery, this time however with an additional statutory focus on community participation and stewardship.

There has been a long campaign to update the 1981 Act to make it fit for purpose. The government has done a large part of the necessary work, and local authorities now have a powerful new mechanism to help deliver, and control, large scale development. There are some interesting future challenges and opportunities. How will future development corporations work alongside landowners and developers?  How will Local Development Orders be framed to secure consent for a masterplan in a way that can be properly environmentally assessed?  What approach will be taken to CPOs, where development corporations may want the security of early ownership of the entire new town area from the outset? An anticipated update to MHCLG guidance on CPOs may address this latter point.

The government has moved quickly and efficiently to put new powers in place. Local authorities now need to rise to the challenge.

Note: Dentons are advising the North Essex authorities who are promoting three new garden communities through their local plans, and are considering the possibility of a locally led new town development corporation as a delivery vehicle.

Capital Gains

Dentons, together with URBED and Gerald Eve, were instructed by the Greater London Authority to look at international land assembly practices, to feed into recommendations on those conditions that would best support land assembly for house-building in London.  On 14 May the Deputy Mayor, James Murray, published ‘Capital Gains: A Better Land Assembly Model for London’ which brings together the research evidence and sets out 10 recommendations to support a shift in land assembly practice.

In London, the assembly of land is often seen as one of the main challenges to increasing build-out rates. The report identifies several barriers to land assembly in London, ranging from factors inherent in the sites, such as contamination, to factors associated with ownership, such as the extent of fragmentation and compensation expectations. The research evidence focussed on three European case studies – ZAC Claude Bernard in Paris, Freiburg in Germany and Amersfoort in The Netherlands – and a North American case study focussing on Toronto, Canada and Oregon, USA. The research identified policies, strategies and procedures that have been applied positively to facilitate land assembly and accelerate the pace of delivery. Those measures that we consider are the ‘best fit’ for London form the basis of the 10 recommendations.

A core recommendation is the introduction of a new planning designation termed ‘Land Assembly Zones’ (recommendation 1). These are strategic sites or areas where land assembly will be supported, through interventionist measures if required. The aim is to provide a focus and to encourage land owners to self-assemble, with a designation as a LAZ being accompanied by an ‘in principle’ resolution to exercise compulsory acquisition powers (recommendation 2). This would be a clear signal to landowners, and also an invitation to developers to bring forward proposals in the area.  The measures recognise that limited resources are available for public intervention and we expect the zones will be focused on those areas where housing density can be significantly increased if land is assembled into larger development parcels, where fragmented ownership is a real development constraint and, initially at least, in areas with good transport connections.  We recommend that land values are frozen for CPO compensation purposes on the date of designation, to crystallise the ‘hope element’ of the CPO compensation (recommendation 8).

The second core recommendation is the introduction of statutory land pooling. We recommend that the GLA prepare template documents to support the voluntary bringing together of land, drawing on the Dutch Building Rights model of sharing value uplift. In the longer term we recommend that this voluntary approach be underpinned by a new statutory mechanism (recommendation 7). We see that mechanism covering two scenarios: a private sector model, driven by landowners and a public-sector model led by the GLA or local authority.  In both scenarios the compensation paid to landowners would include part of the marriage value of the assembled site. Although not a formal recommendation in the body of the report we explore the possibility of “density bonuses” where land is masterplanned and assembled, potentially also delivering additional value and an incentive to self assemble.  We see this type of land pooling having application on all scales of site. We suggest the creation of a multi-disciplinary team to support boroughs and developers in tackling strategic and difficult sites, with the devolution of additional finance to support this (recommendation 10).

The report makes further recommendations regarding the acquisition of land, including allowing the confirmation of CPOs in the interests of ‘good planning’ ahead of planning consent being granted. Developers of large strategic sites need certainty at the start of a project that the entirety of the land will be available, even though it may not be built out for several years. Against that backdrop it is unrealistic to expect there to be a fully worked up scheme. We suggest that weight be given to the LAZ designation (which itself will be the subject of scrutiny) when considering whether the confirmation of the CPO is in the public interest (recommendation 4). In order to facilitate this we believe the power to confirm borough CPOs should be delegated to the GLA (recommendation 5).  This would assist in embedding ‘innovative’ approaches to the exercise of CPO powers. For example the introduction of a ‘use it or lose it’ approach to CPO land. If development on land which has been acquired compulsorily does not proceed the GLA or local authority should step in to hold that land, and any other land owned by the proposed developer, to ensure it is brought forward for development.

Value Capture: Holding Fortunes to Hostage?

There is a confetti of paper being produced on value capture. Think tanks are embracing it as a panacea to the housing crisis, infrastructure delivery and reducing inequality. Two parliamentary committees are considering the issue. Ministers are making regular reference to the subject.

The abundance of comment suggests we need to be careful. Part of the reason so many are embracing it is that it means very different things to different people. At one end of the scale there are the flat-earthers – those who believe that any increase in the value of land belongs to the community unless it is a direct consequence of personal blood, sweat and tears. At the other end of the spectrum are the apostles of the night watchman state – who deny the right of anyone even to regulate the use of land in a way which diminishes value.

Three separate value components need to be treated differently:

  • If a development is asked to pay for the infrastructure needed to support it some people call that value capture. Land value increases and part of it is then “taken”.   This is not really value capture. It is simply development paying the full cost of development. In the same way that landowners pay for bricks when they build, payment should be made to cover the cost of any necessary infrastructure. Any proper residual calculation of the value of land should reflect these costs. The exercise is more “right pricing” land, rather than value capture.
  • Land increases in value as a function of many factors. If there is specific public investment that increases the value of land then that value can, potentially, be captured to pay for the cost of the infrastructure. This might be called a “repayment value capture“. Where land values increase, in total, by more than the cost of infrastructure there is a more interesting question about whether all of that value increase should be captured, a “pure value capture“.
  • Finally, there are increases in the value of land that are not attributable to any particular cause or investment. The value might rise because of third party investment in the area – an investment as simple as a coffee shop or restaurant opening up. It might reflect changes in working patterns or simply changing demography, with greater demand for the land or property in that location. This is the most difficult tranche of value increase to address. Some of the historic discussions have called this the “unearned increment“. It underpins a large part of the house price increases.  To date, that residential value increase has been left in the pockets of the lucky owners.  In any honest debate about value capture, the value captured by these owners would be under consideration using fairer and less disruptive tools than SDLT and moving on from the sole focus of capture on developers and the point of development.

In broad terms it seems unarguable that land should be “right priced” to reflect the cost of the infrastructure needed to support it. Similarly, it is difficult to argue against cost recovery (repayment) value capture. Indeed, equitably, it is hard to argue against a pure value capture if the land value increase can genuinely be attributed to public infrastructure investment. There is a bigger question about what should happen to the unearned increment.

The next blog will cover some of the ways in which land could better be right priced, and value captured, using the planning system without abusing it. It being a relatively pragmatic world, we will leave the “unearned increment” to the tax system.

Who GOVErns Planning?

Michael Gove has published a 25 year plan to improve the environment. It is wide-ranging, comprehensive and aspirational. If delivered, and the lack of a real delivery programme is problematic, the plan aims for us to leave the environment a better place than we found it.

The plan contains three themes that might lead to a profound change in planning. The first is a principle that development should have a net environmental gain. On a project by project basis this could mean a development having a natural capital account setting off the environmental costs against a compensating balance for either on-site or off-site benefits. If so there will need to be a proliferation of environmental land banks and habitat improvement schemes that development can use to ensure a net gain.

The second theme involves looking at how to improve the environment. Much of the plan focuses on managing, maintaining and enhancing the natural environment.  It is clear that we should be seeking opportunities to remedy past mistakes.  It might be worth thinking about how this could change attitudes to, for example, brownfield sites. It might lead to a move away from the lazy assumption that brownfield sites in the countryside can simply be replaced by less ugly development.  It might, instead, just mean saying “no” to the replacement of development that would never be permitted nowadays and a focus on sites that, although green, can make a better contribution to sustainable growth if carefully planned, designed and developed.

The final theme relates to the Green Belt. The language of the plan talks about making these areas more accessible, almost envisioning them as country parks. That has never been a Green Belt purpose.  With changes due to the NPPF it might, however, become a future factor when changing Green Belt boundaries or when designating new Green Belts.  Tying back to the first theme it might lead on to a scheme where, in exchange for planning permission, new development has to secure rights of access to Green Belt land as part of the environmental benefit offer.  And where that increase in accessibility is itself part of the balance to be struck in release of other Green Belt land.

If the plan follows through on these themes it could reshape the foundations of the planning system.

The new New Towns Revolution

In May we wrote about Lord Matthew Taylor’s clause in what became the Neighbourhood Planning Act 2017 introducing provision for locally led new towns. The clause provided a skeleton framework.

Flesh is now being put on the bones. Draft regulations have been published by DCLG setting out the way in which local authorities will step into the place of the Secretary of State and oversee locally led new towns. With the exception of the power to confirm CPOs, local authorities will be responsible for guiding and monitoring the new New Towns.

Building on the experience of the old New Towns, local authorities will be required, from the outset, to plan for the long term stewardship of the assets of the new town for the benefit of the community. As described in the consultation paper this should ensure that the powers are used to create places “that are sustainable for the long term, with the resources to reinvest both in the renewal of the physical place and support a thriving and diverse community“.

The only false note in the draft regulations is a requirement for Treasury consent if the outstanding borrowing of a development corporation is in excess of £100 million. Almost any genuine new town will, at least potentially, need more debt than £100 million. The “risk” that the Treasury may refuse consent or impose conditions on it makes it far less likely that the development corporation model will be used. Having committed capital to acquire the land and provide infrastructure, no sensible local authority would want to take the risk of not being able to complete the development and secure a return on that investment.

Since the Chancellor explicitly endorsed the idea of five new towns, without financial recourse to the Treasury, it is assumed that this “hangover” from the old New Towns will be lifted.

The new New Towns Agenda

The third reading of any Bill in the House of Lords is normally fantastically dull. That was not true of what is now the Neighbourhood Planning Act 2017. Lord Mathew Taylor introduced a new and apparently innocuous clause that allows a completely new and parallel way of bringing new towns forward. It authorises the rewriting of the existing new town legislation, by regulation, to allow local authorities, or groups of local authorities, to ask the Secretary of State to designate an area as a new town and for a development corporation to be set up.

If agreed by the Secretary of State, then the local authorities will, effectively, step into the role that the Secretary of State occupied in the old new towns. They will control the way in which their new town development corporation is governed, operates and delivers new communities.  They will be accountable for successes.  They will be responsible for failures. Some powers will, inevitably, be retained by the Secretary of State, at least in the short term – the power to confirm CPOs and to authorise Local Development Orders. In time, with true devolution, even these powers could be left to the parent authority.

What will this mean? Many authorities are already exploring the possibility of new towns and particularly garden communities. One of the real difficulties is educating landowners that the cost of developing the necessary community and social infrastructure up front is significant, and that the legacy costs of stewardship will eat into land values, as much as if not more than the traditional enabling costs. This means that the normal landowner model of a minimum land value + a share of net proceeds or overage does not really work.  There is also a need to ensure that all land is bound into the same broad vision and programme. If that is not the case then the allocation of costs can be unfair.  The first phases will have to bear significant infrastructure costs that then increase the value of the land in later phases. If the later phases choose to develop independently then it may be problematic making sure that they bear their fair share of the initial place-making investment. A development corporation model helps to solve this. It allows early and extensive acquisition. It also ensures that the underlying “scheme”, the new town, is more completely disregarded for valuation purposes.

In practice, development corporations should rarely be necessary. Local authorities already hold most of the appropriate powers. However, the use of, or the threat of the use of, a development corporation may well be a helpful bargaining tool. It should allow local authorities to reach agreements with reluctant landowners. It should ensure that all parties contribute and benefit equally. It should be a weapon of last resort.

Planning TV – Spotlight on the Housing White Paper

In this episode of Planning TV, Ian Fletcher, Director of Policy (Real Estate), British Property Federation, Richard Crawley, Planning Advisory Service and Stephen Ashworth, Partner, Dentons discuss the implications of the Housing White Paper released by the government in February.

Dentons Planning TV is a new and innovative platform for engaging in and reacting to the latest developments in the dynamic world of planning. Its mission statement is simple: to provoke debate and facilitate engagement at all levels in the planning process.

Brought to you by Dentons and We Plan London, and Alice Lester MBE from Brent Council, it draws on the knowledge of a core panel of experts from across the sector, supplemented with special guests hand picked for their particular expertise. From Greenbelt to Brownfield, national planning policy to local plan-making and everything in between, Dentons Planning TV provides a unique insight into the thoughts of those involved at the sharp end.

Developer contributions – which way next?

We look at the government’s CIL review, and put forward alternative ideas for fixing a broken system.

The Housing White Paper promises a new approach to developer contributions, to be announced in the Autumn Budget. But the government’s parallel review of the community infrastructure levy (CIL), published in February 2017, is illustrative of a confused regime. The future for developer contributions deserves a clearer path, so planning can focus on place-making, not value capture.

Read full article

This article was first published in Estates Gazette (February 2017) and is also available at https://www.egi.co.uk/legal/developer-contributions-which-way-next/

Property Owner Business Improvement Districts

There are now over 200 business improvement districts (BIDs) in the country.  BIDs are democratic, business-led vehicles with an ability to raise a mandatory levy, based on rateable values, to invest in their areas.  They focus on issues of importance to local ratepayers, and the levy is paid by ratepayers.  Since BID legislation first emerged in 2003, there has been a lobby for a levy to be charged on property owners as well as on the payer of business rates. In many places property owners are able to bring a different perspective on, and longer term funding for, the changes necessary for a place to be successful.  After 14 years of waiting the Local Government Finance Bill now brings forward the right for property owners to start their own BIDs.  This builds on the experience of three London BIDs who, because of a happy coincidence back in 2009 of the business rate supplement and Crossrail, have been able to bring forward property owner BIDs earlier than anyone else.

The note, prepared by Dentons and the BIDsBusiness, sets out some of the challenges and opportunities that the draft legislation offers.  Most importantly it argues that it would be helpful to be able to separate ratepayer and property owner BIDs.  In many areas they will overlap but there should be an ability for a property owner BID to come forward without a ratepayer BID.  Separately there are issues in relation to BID set up, information requests and governance that need to be settled for both ratepayer and property owner BIDs.  The legislation could be used to address those issues.

With some refinement the Bill could genuinely help BID areas and provide a new energy for BIDs, an encouragement of long term vision and significantly deeper pockets to fund change.  Let’s hope that the opportunity is seized.