Land value capture
The future of planning / Part 5
We tend to think of the creation of the planning system as a pretty radical piece of statecraft. And it was. It was created in the same breath as the National Health Service and the modern welfare state. But in another sense, it was also oddly limited in its scope. Attlee didn’t create a national framework for the overall use of land (in hindsight a strange omission, given that the UK has a relatively large economy on a collection of islands in the North Atlantic). He also stopped short of introducing land reforms such as a Land Value Tax, as had been proposed by his political opponent, Winston Churchill a few decades earlier, and by Ebenezer Howard.
At the time, that probably didn’t feel like a problem. Attlee probably felt he could rely on a large-scale building programme of public housing, underpinned by public land ownership to ensure the supply of affordable homes. But over the subsequent century, as house prices have spiralled out of control, this has locked the planning system into a destructive relationship with the land market — and in particular, land speculation.
Planning uplift
As I described in the first post in this series, the moment we grant planning permission for a piece of land, its value goes up from a few thousand pounds per hectare (its value as, say, farmland) to potentially a few million. This value is, ultimately, not created by the owner, but by the community at large — nonetheless we allow the owner to capture most of it.
This free gift effectively creates a land speculation industry; companies whose core business model is to buy potential development land, sit on it, ‘win’ planning permission, then sell it at a higher price. In some cases, they will construct build-to-sell homes on it, which they then release slowly onto the housing market to keep prices high. Others won’t build at all — they’ll just sell the land (with planning permission) to a downstream developer. Their entire business model is predicated on capturing as much of that planning uplift as possible.
Planning obligations
In recent decades, the main legislative tools we have had for getting some of that uplift back are ‘planning obligations’ (or ‘developer obligations’). (In England, these are ‘Section 106 agreements’ and ‘Community Infrastructure Levy’ (CIL)), where the developer provides either community infrastructure, affordable homes or cash.
Planning obligations aren’t working
Except here’s the problem.
In our negotiated, consent-based planning system (and especially thanks to a loophole introduced in 2012 called ‘viability assessments’) developers have been able to negotiate-down their obligations by claiming that it would not be ‘viable’ (profitable) for them to meet them.
They’ve been able to do this because, to be blunt, not enough people understand how the land market works, and how it interacts with the planning system.
At the centre of the problem is a muddled myth that planning must somehow respond to the land market — as if land values are a given and the planning system has to accommodate them. It seems reasonable. But in fact the opposite is true. Land value is shaped by planning decisions.
Consider, for example, two squares of land in Mayfair.
One is in Hyde Park. Planning determines that it cannot be used for any use other than as a public park — its market value is therefore around £0. Yet just a few metres away, another square of land has planning consent to be used as an 8 storey hotel. As a result, it is worth millions.
The same principle applies everywhere. If you want to work out the value of a piece of land, you have to start at the end — that is, with what someone might be willing to pay for the property when it is built, and that depends on its permitted use.
Let’s take a typical home, worth say, £280,000 on the property market. Subtract from that the cost of developing the building itself and, in the case of a private developer, a 20% profit margin, and the figure left over is the amount the developer can afford to bid for the land. This is called a ‘residual land value calculation’.
So if the planning obligations are higher, the land value should be lower. The property price hasn’t changed, the construction costs are the same, and the money has to come from somewhere. So the developer can’t afford to bid as much for the land.
Similarly, if planning determines that the homes must be of an affordable tenure, the financial value of the final property is lower. So that squeezes the land bid too.
For sure, if it got to the point where the land value is £0 (so landowners refuse to sell), or unexpected remediation costs, rising construction costs or falling property values make it impossible develop the site without incurring a loss, then one might argue that development genuinely isn’t viable. But that’s not what’s happening. Most large schemes in England are avoiding planning obligations, even though the land price and profits are high.
What’s happening is this: a clever developer will bid more than they should for the land, in order to win it. They can then use this fact to renegotiate their obligations by claiming that development is no longer ‘viable’. Their 20% profit is guaranteed – in effect underwritten by the public. It’s the obligations that have to give.
If a planning authority refuses to grant planning consent for this worse development, the developer can then publicly accuse them of blocking the delivery of new homes, and win the case on appeal.
To make things worse, most viability assessments are not made available for the public to view, on the grounds that they contain commercially-sensitive information.
To be clear, again, none of this is because developers are somehow bad people. They’re doing it because the system incentivises them to. If they didn’t, another developer would. What we’ve created is a race to the bottom. Whoever bets that they can negotiate the worst quality development, the lowest number of affordable homes, and the least community infrastructure wins the land. This creates an unfair playing field, pricing-out other potential developers, in particular social housing providers, community developers, self-builders or smaller developers who want to build better, more sustainable places.
The more often this works, the more developers are emboldened to bid even higher next time.
Planning obligations in the UK have only ever captured a fairly small percentage of the uplift created — and that percentage has been getting less and less in recent years. As Thomas Aubrey calculated, in 2016/17 they only captured around 27% — a public shortfall of £8.4bn —and it has fallen further since. Research by Rose Grayston for Shelter estimated that ‘viability’ assessments cut the provision of affordable homes by 79%. Last year just 13% of new homes in England were delivered through Section 106 obligations, and only around 4,000 of those were social rented homes (that’s just 1.7% of new homes). Much of this money hasn’t even gone to developers, but to landowners and speculators, while communities have been left begging for crumbs under their own table — whilst wearing a blindfold.
Problems that result from them not working
Quite aside from the question of whether this is fair (it’s clearly not), this failure to capture and reinvest planning uplift also presents some really big practical problems.
First, the obvious one: it means money that should be being reinvested into creating community infrastructure, such as cycle lanes, parks, public transport and schools, or foregone to create affordable tenure homes, is instead being captured by private speculative investors and landowners.
That in-turn has the effect of increasing communities resistance to new development, because they (often rightly) see it as putting additional load onto public services and infrastructure (like schools and GPs), without adding to it.
Third, it fuels the land speculation industry, which crowds-out other builders, because they can’t get their hands on land. As the Letwin Review explained, one of the problems of large-scale speculative development is that it acts as a brake, slowing-down new housing supply to a trickle in order to keep prices high.
Fourth, one of the problems with developer obligations is that, if they are paid in cash, they come too late. We end up with a situation where although money for infrastructure comes into the public purse, by that time the neighbourhood has already been built (often with minimal infrastructure). This makes the money quite difficult to actually spend. So instead of good neighbourhoods with good infrastructure, we end up with bad neighbourhoods, and a load of money we can’t do anything with. Recent research estimated that councils in England and Wales may have as much as £2.8bn in unspent developer obligations.
So how can we fix the relationship between the planning system and the land market? There are a few ways.
Infrastructure-first development
The most effective way to do it is the way the Netherlands and Germany do it (It is also how Edinburgh’s New Town was created in the late 1700s, and Milton Keynes in 1967). It is sometimes referred to as ‘infrastructure-first’ development or ‘proactive planning’.
In this approach, a public or community development corporation buys the land at its pre-planning value, develops a masterplan, installs the infrastructure then sells or leases plots to a range of developers, social housing providers, community organisations or self-builders. A key factor here will be forthcoming reforms to Compulsory Purchase laws, which were started by the last government – and have been promised to be completed by the new one. This will allow the public to scrub-off any ‘hope value’ added to the land by speculators, so the community can capture the full uplift of land, and use that money to invest in community infrastructure or affordable tenure homes.
However, the compulsory purchase process is likely to be a slow and expensive legal process, so might be best suited to large projects.
Another way to achieve a similar result might be by using ‘community land auctions’, an idea proposed by economist Tim Leunig, whereby landowners bid to offer their land to the community development corporation as part of the plan-making process.
This ‘infrastructure first’ approach to planning and development is what has allowed the Netherlands to capture an extraordinary 90% of planning uplift to spend on infrastructure. An archetypal example is the city of Almere, where the municipality purchased land, installed infrastructure, and sold serviced plots directly to groups and families (with clawbacks written into the agreements to prevent speculation) to build their own homes. Each plot comes with simple rules written into a ‘planning passport’. Provided they stay within the rules, buyers are free to just get on and build.
Imagine a UK where there was a continuous supply of such plots near railway stations and schools. Where it was that easy to buy a serviced plot and build a home — or homes. Imagine the innovative green construction industry that could grow, and flourish in such an environment, competing to provide ever-better homes for less (instead of what we get today: worse homes, for more).
Rules-based land value capture
Another way, which may be more suited to smaller sites, is to apply again the straightforward concept of rules-based planning.
In this case, planners and the community would make open viability assessments themselves as they plan, then set reasonable planning requirements upfront that align with public policy. These cannot be negotiated-down (or overturned on appeal).
These requirements might include cash obligations (CIL) to pay for local infrastructure, or a percentage of affordable tenure homes or community assets to be delivered as part of the scheme. But they will also, increasingly, involve pre-designating sites at the plan-making (or ‘land allocation’) stage to different types of group, such as self-builders or community-led housing groups as a way to ensure that all housing needs are met, and all sectors get the opportunity to build (planning authorities in fact already have legislative tools and obligations to do this).
This would keep land prices low, deter speculation, create a fairer land market with more certainty, and fund much-needed infrastructure, to the tune of billions of pounds every year. That in turn will also result in more money being spent in the real economy (construction), boosting growth.
In this case, there is some legislative change required. For example, removing the economically-illiterate concept of ‘viability assessments’ from the National Planning Policy Framework (NPPF). Developers might push back against this in public, but in private, they know it’s fair. A few years ago, I found myself in a conversation with the CEO of a very large UK developer. I expected him to be fiercely opposed to the idea of rules-based obligations, but he was actually remarkably candid. He put it something like this: “Really you don’t want to be negotiating with us. If the planning system lets us negotiate our obligations, I have a duty to my shareholders to try to negotiate them down. And I have more money to spend on negotiators than planning authorities. So I’ll win. But if the rules were just set up-front, we’d just have to price them in when we acquire the land in the first place, and instead of spending all that money on planning consultants we’d be spending it on the development instead.”
(Added note In recent days, Greg Fitzgerald, CEO of Vistry has publicly argued a similar point: “As soon as you have any grey areas, we [housebuilders] are fantastic at finding ways [of] building less affordable”…”If you absolutely know that you are going to have to provide X per cent for affordable, with no grey area, no ifs or buts, land [prices] will come down. And we will be able to build more affordable… “[because] we and our competitor group can only offer so much for the land”)
Here, perfectly-captured is the great paradox of planning reform. You might think that in order to build more and better homes, and to make homes more affordable, we need to ‘liberalise’ or ‘deregulate’ planning rules. But in fact the exact opposite is true. Clear, robust requirements are exactly what is needed to keep land prices low, and make land available as a platform for society and the economy.
An open viability calculator
Here too there is a key role for technology to play, and in particular data. Planners and communities need to have access to the same kind of market and site data that developers can see, and vice versa— to be able to quickly and roughly model financial viability for themselves during the plan-making process.
Imagine if, as we plan, we could see approximate estimates of typical current property values and build costs, so planners could see for themselves if a set of planning requirements are likely to be viable or not. (Added note These rules could also be ‘parametric’ (based on dynamic formulae) so they can accommodate changes in costs etc)
The cost of building that tool, and buying the data, would be minuscule in comparison to the billions of pounds it would generate for communities and the wider economy.
If we made that kind of information openly available to all, planners and communities would quickly see how much more development is possible and how much power we truly have to meet our climate goals and to create beautiful, affordable, prosperous places — simply by deciding to.
This is Part 5 of a series. The first part is here.
