Part 2: The capture of hope

Part 1 of this two part post can be seen here.

By Dave Treanor

How much of the profits arising from public investment and planning decisions should go into the pockets of landowners and how much should be captured for the benefit of the community? Parliament held an inquiry into Land Value Capture as part of its consultation on changes to the National Planning Policy Framework (NPPF), the new version of which has just been published. (Note 1)

This paper is the second in a series on the issues being examined by the Inquiry, looking at the impact of ‘hope value’ arising from potential future uses of a site on compensation for compulsory purchase. Part 1 examined the effectiveness of s106 and CIL.

In the thirty years following the war the majority of new homes were built by the public sector. By the mid-fifties the UK was building more than 350,000 homes a year, and this rose during the sixties, peaking in 1968 at more than 450,000.  Public sector involvement in housing construction fell dramatically under the Thatcher government of the eighties and has never recovered since. The volume of new homes being built fell by a corresponding amount and has rarely reached 200,000 a year since.

Local authorities bought brownfield sites at slum clearance prices and developed modern housing mostly for rent as council housing. New Town Corporations purchased land at a small margin over agricultural prices, developed schools and community facilities, built homes and industrial estates and contributed to the cost of developing the transport networks.

This was explained in evidence to the Land Capture Inquiry by the Town and Country Planning Association (TCPA) who said ‘The new towns programme, using development corporations, paid back its entire borrowing for the delivery not just of infrastructure but the whole of the towns, 32 communities and 2.8 million people.  It paid back the debt to Treasury at £4.75 billion in 1999 and has gone on yielding, since that time, about £1 billion to what is now Homes England and Treasury through a land value capture model.  The original development corporations were so profitable that they were lending money to other people’.

The Land Compensation Act 1961 set the terms of compensation to be paid to a landowner where their property was compulsorily purchased, consolidating principles established by legislation and refined through the courts over the previous 100 years. A Compulsory Purchase Order (CPO) should not leave the property owner in any better or worse position financially.  ‘The value of land shall […] be taken to be the amount which the land if sold in the open market by a willing seller might be expected to realise’.  Under a ‘no scheme world’ rule the valuation should ‘exclude any increase or decrease in value which is entirely due to the scheme underlying the acquisition’.

At the time this was interpreted as meaning that land would be acquired at a price based on its Existing Use Value (EUV), subject to current planning consents, with an amount in compensation for disturbance, plus a premium to be paid to the landowner to incentivise release of the land for development. This is now known as Existing Use Value Plus (EUV+).

EUV can be assessed in two ways.  The first is an analysis of market evidence of the prices achieved in sales of comparable sites subject to similar planning constraints. The second is to calculate a ‘residual value’ as the net present value (NPV) of future revenues the site would generate based on its current use. In practice both methods are usually applied as a cross-check on each other.

The development of Milton Keynes would raise the value of all land in the vicinity, but that should be ignored in any compulsory purchase.  That view held until a court case in 1974 determined otherwise.

In 1970 Milton Keynes Development Corporation acquired just over 300 acres of land from Bernard Myers, offering £230,700 – just over twice agricultural values. However, Myers challenged the compensation award on the basis that his land might, in the absence of the Milton Keynes scheme, have been used for housing development and so was in fact worth £636,070. In 1974 the Court of Appeal upheld the principle that he was entitled in law to this additional ‘hope value’.

Ever since then CPO valuations have included the hope value arising from market expectations of potential future uses of the site, which in practice brought it into all valuations. It closed the door to self-funded new town developments. It also added to the cost of infrastructure developments such as roads, railways, and airports.

The case against amending the 1961 Act to exclude hope value was put to the Inquiry by a leading CPO barrister (Barry Denyer-Green) (2) who argued that acquiring land at less than its open market value might contravene Article 1 of the European Convention on Human Rights (ECHR) (3). This required the public interest to be measured against the rights of the individual. Public interest can justify expropriation of a person’s assets at below full market value, as happened under the Leasehold Reform Act 1967. But the greater the loss to the landowner the more this has to be justified by a strong public interest reason. An individual may have bought the property at a price that reflects hope value.  If the property was then compulsorily purchased at less than they paid for it, they would have a case that this was not compatible with the Convention.

The counter argument is that planning policy can be used to drive down land value to such an extent that there is precious little hope value left.  In written evidence to the enquiry Daniel Bentley (Editorial Director, Civitas) and Thomas Aubrey (Adviser, Centre for Progressive Policy) explain how this should work (4).

‘The trade in land takes place at values that reflect public policy constraints, including above all the use to which it may be put. This is why the market price of a hectare of land limited to agricultural use in a remote location may be, for instance, £20,000 per hectare, while land in the South East with residential planning permission and no planning obligations may be worth £5 million per hectare. If that land with residential planning permission is subject to a Section 106 agreement requiring a certain amount of infrastructure and affordable housing, the market value will fall, perhaps to £3.5 million. All of these values are market values, reflecting the planning conditions in each instance that are underpinned by legislation … This approach would bring England and Wales in line with the compensation arrangements in Germany, France and the Netherlands, which largely operate under a principle of non-compensation: market values are paid, as is often pointed out, but those values reflect the fact that compensation is not awarded for potential development value’.

Under proposals drawn up by John Healey, the shadow housing secretary, the 1961 Land Compensation Act would be amended to specifically exclude hope value arising from the potential for future planning consent. He suggests that would cut the cost of building 100,000 council houses a year by almost £10 billion to around £16 billion. “Rather than letting private landowners benefit from this windfall gain – and making everyone else pay for it – enabling public acquisition of land at nearer pre-planning-permission value would mean cheaper land which could help fund cheaper housing.”

The Inquiry recognised that a considerable proportion of the uplift from infrastructure development is on existing property, so mechanisms are needed that potentially capture value from existing property as well.  Some of that will come through things like capital gain or stamp duty. Wider mechanisms should form part of a comprehensive system. Land Value Taxation was mentioned as one way of tackling wider issues.

The price of housing is largely determined by the market in existing properties. The absence of taxation on the rising value of owner-occupied housing fuels the growth in house prices higher up the housing ladder. It also makes owning a home the most profitable investment a household can make. CIL and s106 do nothing to capture any of that. These issues were not addressed, being outside the scope of the Land Value Capture Inquiry.

All Parties recognise the need to build more housing. The Conservatives have sought to achieve it by lowering mortgage costs and helping more first-time buyers into the housing market.  The effect was to increase demand: house prices have risen dramatically in London since Help to Buy was introduced, while construction has fallen. They also reduced the burdens on private sector developers by allowing them to renegotiate s106 agreements making marginal sites more profitable, and permitting the conversion of offices, shops and light industrial properties to housing without the need for planning permission.

Labour’s approach is different. They recognise the vital role of the public sector in housing construction. Under John Healey’s proposals a Labour government would establish an English Sovereign Land Trust working with local authorities to buy land at prices close to existing use value. With the ‘hope value’ removed, the cost of building a two-bed flat in Wandsworth, south-west London, would be cut from £380,000 to £250,000.  In Chelmsford it would fall from £210,000 to £130,000 (5).

The former Conservative planning minister Nick Boles acknowledged that the huge windfalls gained by some landowners were inequitable and that the current system of capturing the uplift in land value through section 106 agreements was “incredibly inefficient”, because private developers could afford to outwit planners with expensive lawyers and consultants.

One witness pointed out that there are three parties to any planning decision: the landowner seeking the best value for the site, the planning authority looking to finance affordable housing and infrastructure from the planning gain, and the developer acting as midwife between them, unable to build unless they can get a profitable deal acceptable to both.

Landowners often take a very long-term view. In a rising market, why sell today if it will fetch more tomorrow? In a falling market they will only sell when the time is right. If they believe planning gain is being too tightly applied they will bide their time.  Where a developer secures a site based on optimistic forecasts the holding costs are relatively low, so it is usually in their interests to delay building until market conditions are more favourable.

Consequently, the business model on which housing construction operates is highly dependent on rising house prices, and grinds to a halt at the first sign of a downturn. No builder will release more properties into the market than the current price level will sustain, which is why large sites take ten to fifteen years to build out.

The Inquiry recognised that Public sector development of housing for rent is relatively unaffected by such constraints.  It can have an important counter-cyclical impact on the construction industry.  Since the decline in public sector involvement construction has failed to meet demand arising from demographic changes.  The Inquiry did not discuss the wider impact of land banking and speculation in potential building sites, which it may have considered to be outside its remit.

We can only hope these concerns lead to a consensus on sustainable long-term solutions to the housing crisis, addressing both the supply of housing, and escalating costs. The issues were thoroughly debated at the Inquiry into Land Value Capture.

In response the revised NPPF has reduced the scope for developers to wriggle out of affordable housing obligations under s106. But it does nothing to help local authorities assemble sites at existing use value to make new housing more affordable. That would require revision of the 1961 Land Compensation Act to remove the ambiguities that make CPOs so slow and cumbersome to use, and the introduction of fairer property taxes.  What hope is there for that?

NOTES

[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/728643/Revised_NPPF_2018.pdf

[2] Q225 of http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/housing-communities-and-local-government-committee/land-value-capture/oral/85154.html

[3] Article 1 of ECHR: Protection of property

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

[4] http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/housing-communities-and-local-government-committee/land-value-capture/written/85910.html

[5] https://www.theguardian.com/politics/2018/feb/01/labour-plans-landowners-sell-state-fraction-value