TfL and GLA get serious about capturing the value of new infrastructure
When London’s Jubilee extension line was completed in 1999, there was huge boost to land and property values along the South Bank.
This was the intention: it was built to help regenerate areas of the capital through infrastructure provision.
But a problem arose: despite costing the taxpayer millions, much of the financial windfall went straight into the pockets of those who had nothing to do with its development, and merely owned land along its route.
Don Riley, a landowner on the South Bank, saw a huge rise in the value of his property and wrote a book on the subject, Taken for a Ride. Its premise is that government should have collected some of this wealth to fund development.
“Two of the stations were located close to office properties that I own. Those two stations raised the value of my properties by more than all the taxes that I had paid into the public’s coffers over the previous 40 years,” he later wrote in the foreword to Fred Harrison’s Wheels of Fortune.
Now the government is actively looking into a new land value capture mechanism to fund infrastructure, but it could cost developers and landholders.
Devolution opportunity
Now, a memorandum of understanding that accompanied last week’s Budget is looking to change this, not only in London, but also, potentially, nationally.
Ostensibly looking into the continuing devolution of power between national and London governments, it included a clause that explores options to a trial a new form of infrastructure value capture.
Through the collaboration of TfL, the GLA, London councils, HMT, DfT and the DCLG, it would look into a development rights auction model on a major infrastructure project in London.
It said: “Should a pilot of DRAM be agreed, it will be jointly evaluated by London and the government to review its effectiveness and determine whether a similar model could be applied to other infrastructure projects.”
What is a DRAM?
Essentially what it proposes is bundling all the land around a transport hub into a single ownership, getting joined up planning for it all, then auctioning it off, with shares of the profit paid to the various stakeholders, including TfL.
The TfL land value capture report says the DRAM would be used around the zone with high development potential and multiple landowners.
The report says its key features would be:
- Joined-up planning, permissions and development of land around a transport node, in parallel with the scheme itself [which would mean landowners with no experience could profit]
- The introduction of a high zonal CIL around the site for those landowners who wish to self-develop
- The USE of reformed Compulsory Purchase Order powers to deal with holdouts who threaten to stall development
- The introduction of a periodic auction, in which development rights of land put forward voluntarily is sold, provided it reaches a reserve price, with gains shared
- No CIL or S106 is paid for those in the DRAM
- All non-operational but developable public sector owned land is entered into the auction as part of a public sector land pooling arrangement.
Why now?
As authorities and government become more cash strapped, there is more need for new ways to fund the development of significant infrastructure.
“Without alternative funding sources, there is no obvious way of paying for major network upgrades and extensions, other than increasing the burden of general taxation,” TfL‘s February report on land value capture said.
Estimates in the report, by Savills and KPMG, said that eight prospective TfL projects, including Crossrail 2 and the Bakerloo and DLR extensions, would cost £36bn. However, they would produce land value uplifts of £87bn.
But capturing this is easier said than done.
Crossrail used business rates supplements, CIL and S106 contributions to fund about £4.1bn of its £16bn cost. But there was nothing in place to capture the increase in land values for landowners around stations. The same applied for the Overground revamp and Northern Line extensions.
Other methods of taxation have been tried before. Development Land Tax was first attempted in the 60s and 70s, but is generally considered to have stymied development. In 2001 there was a concerted look at tariffs, before policy turned to Optional Planning, then the planning gain supplement. This eventually turned into CIL.
“CIL is a levy set on your site set by the local authority not to deter development but make a contribution to the infrastructure,” says a government advisor, who asked not to be named.
“The issue is none of this solves the problem for large, complicated, cross authority or national projects,” they add.
TfL’s Land Value The Land Value Capture report recommends a form of CIL still be used for smaller sites, but for larger sites look at the DRAM.
Why DRAM?
According to Chris Brigstocke, a regeneration partner at Winkworth Sherwood, it’s a model that looks for the middle ground between a development land tax, which can stall development, and direct development by an authority which has a high upfront costs.
The advantage is the authority does all the legwork, while developers have no land assembly risk.
But it’s not all plain sailing.
“The potential flaw in the scheme is that there clearly needs to be a major financial benefit in entering into such a collective agreement,” says Brigstocke.
Local authorities, as well as developers, will also have to be won over, and rules established around whether the land allocated for development comes out of their own local plan.
TfL’s report references the partnership between TfL and Capital and Counties at Earl’s Court, but it may not always be the case where two land owners have their interests substantially aligned.
The densification the pilot proposes needs to be done successfully for the pilot to be adopted on a wider scale.
Tony Devenish, planning spokesman for the GLA Conservatives, said: “Densifying areas of our city is an inevitability but, if it is done the right way, it can provide a socially and aesthetically pleasing solution to the current shortage of housing stock.
“With these new powers, the Mayor has an opportunity and he must now step up and deliver the infrastructure London needs to support future development and population growth.”
Future implications:
Inevitably, the model could mean less speculative profit for developers and investors along new transport routes, which could deter investment. Of course, it could also mean less ransoming of land and more sustainable development.
And the need to find a way to capture the value, and thus pay for new infrastructure, is greater than ever.
Crossrail 2 is not the only major infrastructure project in the offing, and how the new HS2 stations will be paid for has not been decided. There are reports due, looking at how to capture any increase in land values.
Whatever happens in London will undoubtedly have significance nationally.
Unlocking value through transport investment
Simon Burnett, director – development at Deloitte Real Estate.
Philip Hammond’s budget brought back into sharp focus in London the drive to capture the increases in land value which result from transport investment at a local level devolving new powers to the GLA and London boroughs.
This is a hugely positive step and one which will no doubt attract questions and discussion in Cannes. The timing of this trial will be a particularly hot topic in the current market and caution will need to be exercised in selecting the project so as not to stifle the very development upon which the value will be created.
More specifically, TfL has been asked to bring forward proposals for financing infrastructure projects from land value uplift. A recent study undertaken by TfL suggests that eight prospective TfL projects which cost around £36bn (including Crossrail 2, Bakerloo line extension and the DLR extension) could produce land value uplifts of about £87bn.
This figure illustrates the potential size of the prize and the study suggests that the package of reforms relating to land value capture (including new mechanisms, plus increased CIL, DRAM, SDLT and business rates) could potentially generate £29bn-£44bn towards the financing of the projects.
MIPIM should also provide a chance to celebrate some of the recent successes.
Graeme Craig from TfL will discuss at MIPIM how the Property Partnerships Framework has been used to speed up development around existing transport hubs and generate future revenue streams to reinvest in the system. Earlier in the month TfL announced a consortium of U&I and Notting Hill Housing as the preferred bidder for a site next to Kidbrooke station in south-east London. The scheme will deliver 400 residential units and 50% affordable housing and is the first of many TfL sites which both unlocks additional value and delivers wider benefits such as housing and jobs.
MIPIM provides the forum for further discussion on these success stories and how future investment in transport can be used to unlock development value and intensification of land use.
To send feedback, e-mail alex.peace@egi.co.uk or tweet @egalexpeace or @estatesgazette
