Land value capture – How will it be extracted?

09 / 10 / 2018

The groundswell of opinion that landowners and developers are unfairly profiteering from the planning system at the expense of public infrastructure such as affordable housing and essential transport improvements appears to be growing.

The Housing, Communities and Local Government Committee (HCLG) (which is a cross-party committee) has reinforced this notion in its report “Land Value Capture” (published 13 September 2018) where they state that “Increases in the value of land arising from the grant of planning permission and the provision of infrastructure are largely created by the state. It is fair, therefore, that a significant proportion of this uplift be available to national and local government to invest in new infrastructure and public services”. They recommend:

“There is scope for central and local government to claim a greater proportion of land value increases through reform to existing taxes and charges, improvements to compulsory purchase powers, or through new mechanisms of land value capture.”

One should not assume that because the discussions relating to land value capture have long been in the ether (from Betterment Levy to Development Land Tax) that it will not come to fruition in one shape or another in the current political climate. It appears to be generally accepted that the changes to the Section 106 regime necessitated by the introduction of Community Infrastructure Levy (“CIL”) have not had the desired result for the public purse as the revenues received have been far short of estimates and lower than those previously secured. These changes together with the financial crash which resulted in the need to review and reduce promised affordable housing provisions on various sites appear to have reignited the land value capture debate. The recommendations of the Government appointed CIL Review Group in November 2015 to improve the existing CIL regime have however been largely ignored.

It must be self-evident that in a Brexit laden parliamentary timetable any primary legislation to introduce a new land tax is unlikely. Changes however to the Compulsory Purchase Order (CPO) regime being promulgated in this report, a regime which relatively few people are totally familiar with, are likely to result in an unexpected double whammy for landowners and developers whose land may be acquired without their consent and for which they are likely to receive a much lower market value if the recommendations of the HCLG are progressed.

The HCLG recommends changes to the CPO regime and states that local authorities should have the power to compulsorily purchase land at a “fairer price”…intimating that the market value currently paid under the CPO regime is not a fair system. This should ring alarm bells to all landowners, as it is impossible to know in advance which landowner will face that unwelcome CPO. The report recommends that landowners should not receive “hopevalue”, which is described as being a value reflective of speculative future planning permissions and that the process should be easier, allowing local authorities to confirm CPOs.

Those involved in the CPO regime and CPO valuations will find it surprising that what is effectively market value of land (here described as “hope- value” ) will be reduced if these proposals came to fruition. Few people who have experienced public acquisition by the exercise of CPO would say that they have unfairly benefitted financially from compulsory acquisition (not least as many would have preferred to have kept their land in the first place).

The changes proposed should cause alarm to landowners and they should look out for changes to regulations which may follow. If the change is effective in lowering land value more landowners and developers will have to begin to understand the complexities of CPO and CPO valuation as its use is increased. Whilst it is unlikely to affect all involved in the development industry, those it does impact are likely to come off worse and as it is impossible to identify those likely to be affected in advance, all should note the changes which have been recommended.