Developers face cuts to land value uplift payouts

Payouts to landowners around new infrastructure could be slashed, and existing property owners taxed, if proposals from the parliamentary Housing, Communities and Local Government Committee are adopted. The government has been keen to tax increases in land value that occur as result of new infrastructure, to help pay for projects and stop landowners receiving windfalls from the public purse. Around proposed HS2 and Crossrail stations, the government has watched land speculators and developers make large profits from huge public investments. The report says: “It is not fair that such significant profits, arising in the main from public policy decisions, should accrue to a small minority of landowners, and that those who are disadvantaged by development generally do not receive some element of compensation.” Scroll down to read the committee’s proposals As a result, future infrastructure schemes are having to look for new ways to raise funds. Both the proposed Crossrail 2 scheme and the Bakerloo line extension in London have been told they will not be fully funded by government. The Land Value Capture report lists a number of reforms and legislative proposals that would allow the government to take more profit – in both a financial and social sense. Key reforms include slashing Compulsory Purchase Order (CPO) payments and stop reflecting the “hope value” of land (assuming a future uplift once planning permission is granted); improving Community Infrastructure Levy (CIL) and Tax Increment Financing (TIF) models; and a consultation on taxing existing building owners who profit from new infrastructure. Could reform deter investment? Developers and lobbyists, including the British Property Federation (BPF), have argued that developer contributions are already £6bn annually – some of the highest of any OECD member nation. Against this, however, it is worth noting this is a proposed – not collected – amount and around a third of planning permissions are not implemented, with contributions falling relative to development value. Ian Fletcher, director of real estate policy at the BPF, says: “Land values vary significantly across the country and there will be many locations across the Midlands and the North, and on brownfield land, where there is no value to capture. “Crudely applied reform imposed in these locations will deter much-needed private sector investment into housing delivery and our town and city centres. “Where there is significant land value uplift, there is substantial private sector investment available for new public infrastructure.” The government has struggled with finding functional models of land value capture, and the report is critical of the current CIL S106 payment combination. However, the report stops short of proposing any new methods of land value capture, and says that other new methods being explored – such as the Development Rights Auction Model – are not practical. It says: “Julian Ware [of TfL] explained that, while this approach had attracted some initial interest from the government and the mayor [of London], further work by the GLA and TfL found that this model was unlikely to work in London, or be an effective way to pay for transport projects there.” As a result, its proposals are mostly based around modifying existing mechanisms and taxes. How much do developers make? The report tries to quantify how much developers make on average – though there was no agreement between contributors. The Centre for Progressive Capitalism estimated that landowners currently retain an average of 75% of the uplift in land values arising from the granting of planning permission. Barratt director Philip Barnes said to the committee that, while he would caution against estimating a figure, “I do not think the landowner ever gets more than 50% of that from the Barratt perspective”. What the committee proposes Government can get more money – reforms to taxes, charges, better CPO powers and mechanisms of land capture should be used to invest in new infrastructure and public services. CPOs are important in enabling development – the process needs to made faster and less expensive. Local authorities need up-to-date Local Plans – objectives and clear payments for developers would create lower market land values. Reform the Land Compensation Act 1961 – allow authorities to CPO land at a fairer price. The current “hope value”, which includes speculative future planning, distorts land prices. Compensation should reflect the cost of cost affordable housing, infrastructure and services. Public land put forward for development should capture the maximum amount for infrastructure and public services – not necessarily as a cash sum. Continue National Planning Policy Framework (NPPF) reform – stop developers skipping payments through viability assessments, and give councils more resources to enforce it. Local authorities should use CPO powers to enforce Local Plan policies – stop developers using viability assessments to avoid their obligations. Consider Local Infrastructure Tariffs and Strategic Infrastructure Tariffs Reform the CIL Commission a cross-departmental project considering how to capture land value increases on existing properties The full report can be viewed here. To send feedback, e-mail alex.peace@egi.co.uk or tweet @EGAlexPeace or @estatesgazette