We are all aware that local authority purses are stretched. Councils have been forced to trim budgets and find efficiencies wherever they can. At the same time, they are under pressure to deliver higher volumes of quality housing and new community facilities.
This has prompted government at all levels to think creatively about how they can fund development – particularly of significant infrastructure. This infrastructure is vital as it not only underpins the new housing schemes which are in such high demand, it also has the potential to unlock previously inaccessible and unattractive sites – acting as a catalyst for regeneration and further investment.
Recognising the opportunity
Councils must be alive to the opportunities to capture the significant uplift in land value that these projects often stimulate. Land value capture – mechanisms used to monetise the increase in land values as a result of public infrastructure projects – is something that national and local government has been grappling with for a long time.
And in today’s environment, it’s one we need to get to grips with. With regeneration across the country; the impetus to build homes; and a number of significant transport plans in the pipeline, councils are currently missing out on billions of pounds of potential revenue. The Land Value Capture Final Report, commissioned jointly by the Mayor of London and Transport for London (TfL), which was published earlier this year and based on research by KPMG and Savills, found that that eight prospective TfL projects costing £36bn, including Crossrail 2 and the Bakerloo line extension, could generate a land value uplift of £87bn. Existing land value capture mechanisms, such as business rates, council tax and Stamp Duty Land Tax (SDLT) are not particularly responsive to increases in values so would only extract a small proportion of this potential uplift. Alternative options are needed to enable councils to take full advantage of these opportunities.
In the run-up to the General Election, both the Labour and Conservative manifestos included measures aimed at boosting local government revenue. Labour proposed to ‘initiate a review into reforming council tax and business rates and consider new options, such as a land value tax’. This echoes the Greater London Authority (GLA) which earlier in the year proposed a comprehensive review of not only land tax, but potentially replacing council tax, business rates and SDLT.
While these existing mechanisms do need to be revisited, it is highly unlikely that the government – especially a minority government with a precarious mandate – would have the stomach for such a radical solution and such reforms need a strong political will to drive them forward. But is a radical solution what’s needed?
The DRAM: a viable option
Any new measure has to encourage development, rather than saddle councils with high upfront land assembly costs. One of the most attractive mechanisms that attempts to find this middle ground is a Development Rights Auction Model (DRAM), which was included in February’s Housing White Paper and is already being considered by TfL, the Department for Transport (DfT) and the Department for Communities and Local Government (DCLG) to be piloted on major infrastructure projects in London.
The DRAM is based on the concept of land pooling, which is used successfully by public authorities in Germany to plan urban extensions, providing local housing and infrastructure. Under the DRAM, the local authority would parcel up land around a transport hub and obtain planning consent for it. It would then auction off the site, with profits going to the various stakeholders. For example, TfL would use its share to reinvest back into the transport network.
This model is attractive for developers and landowners as the authority does all the legwork and the land assembly risk is removed. Meanwhile, the council can capture the uplift in value, not only as the public authority that organises the pooling of the interests, but also as a landowner.
Whereas a pure land value tax would primarily seek to raise revenue, the DRAM is also an effective regeneration tool. It would enable local authorities to assemble land in a different and more efficient way compared to the use of Compulsory Purchase Orders (CPO) – especially as there is widespread consensus that CPOs are far too rigid and long-winded and policies need to be overhauled.
In addition, if the local authority and its partners can capture the uplift in value, it can also reap benefits for communities by stimulating further regeneration. Profits can be reinvested back into the transport network to enable extensions, increasing connectivity and unlocking new housing sites, as well as attracting further investment. It is important that regeneration delivers for all, and by increasing council funding streams, land value capture can also support the delivery of more affordable housing, helping to ensure that local needs are met.
So this begs the question whether DRAM can be brought forward using existing powers of local authorities or whether additional powers will need to be obtained from Parliament. The Land Value Capture Final Report considered this issue and concluded that at this stage no change in primary legislation is required to implement this model. A high zonal Community Infrastructure Levy (CIL) around transport hubs, for instance, to encourage participation in DRAM could be introduced under existing regulations as a component of a Mayoral CIL.
There is flexibility in CIL to provide for exceptional relief from the charge on grounds of viability and, the report argues, could be used to exempt landowners who participate in the auction. Although this argument may be flawed it is worth exploring further and certainly with some relatively minor modifications the existing CIL regulations could be adapted to suit the DRAM model.
Crossrail 2 and HS2: immediate opportunities
Crossrail funded around a quarter of its cost through the Community Infrastructure Levy (CIL), S106 contributions and business rates supplements. However, there were no mechanisms in place to capture the increase in land values around the stations. Government should learn from this: there are clear opportunities – and a need – for authorities to capture the uplifts that will be created by Crossrail 2 and HS2. With the latter planned to extend to Leeds and Manchester, it will bring these issues into sharp focus for authorities across the country – up to now, land value capture has primarily gained traction in London where new housing and the supporting transport infrastructure is continually under scrutiny.
But if the government’s devolution agenda continues, and if the GLA takes forward its pilot proposals for the DRAM and can demonstrate its potential as a valuable revenue stream for local authorities while benefitting wider regeneration aims, the DRAM could become a practicable and real solution in regional hubs like Manchester and Birmingham.
In London, the need for TfL to have a range of funding options for major infrastructure projects will remain high on the agenda for the foreseeable future, regardless of political uncertainty and implications for policy progress.
We certainly haven’t heard the last of the DRAM, or indeed land value capture.
Christopher Brigstocke is a partner in Winckworth Sherwood’s real estate team, specialising in large scale urban regeneration and infrastructure projects.