Land Value Capture: a ‘win-win’ for transport investment?

Last month on this blog, my KPMG colleague Ian Clarke alluded to the role of Land Value Capture (LVC) in supporting investment in urban transport infrastructure to boost productivity and re-balance the economy. He pointed to the windfall gains on land and property that are generated by growth-focused investment, which potentially represent a (largely) untapped well of funding for our major projects.

A couple of days later the sentiment was echoed by the Chair of the Communities and Local Government Committee (presumably soon to have "Housing" added to its title), Clive Betts MP, as he launched a call for evidence for the committee's inquiry into the subject: "Private landowners can take advantage of rises in land prices arising from public investment in infrastructure and the granting of planning permission for housing. Should they benefit from this public investment and these decisions of public policy?"

The attention of the CLG Committee is just the latest example of how those at the top table are beginning to take a serious interest in the potential of LVC as a distinct category of public funding, deserving systematic consideration of its objectives and tools, and how it can be integrated with project governance and broader tax systems.

If we really want to address the crunch on traditional funding and still deliver projects that can lead to substantial productivity growth, it seems the penny is dropping that our current system of tax and spend is not going to cut it.

In London, the case for further investigation of LVC approaches has for some time been advocated by the GLA, TfL and the London Finance Commission. Civil servants in Whitehall are actively working on it, including a London task force looking into a development-focused LVC instrument, the "Development Rights Auction Model". Elsewhere, the Department for Transport has been openly receptive to LVC ideas in the context of new rail infrastructure, such as East-West Rail. LVC-related initiatives are also part of the funding narrative for projects that support the integration of HS2, and an emerging theme for Network Rail, Highways England and Transport for the North. The National Infrastructure Commission has called for a nationwide review.

To date, London is the only place to have published detailed bottom-up LVC analysis. This indicated that an investment programme of major TfL projects (including Crossrail 2) could be almost self-funding in the longer term if London were able to capture one third of the estimated land value uplift (subject to addressing shorter term financing challenges). Other (unpublished) studies across England have generated findings that – while perhaps not at London-levels – have kept LVC high on the agenda.

So the size of the prize is mouthwatering. But the path to converting the potential into pounds is far from straightforward.
To be be accepted, a LVC regime needs to be fair, and to be fair, it should only ever seek to capture a reasonable share of those specific land value gains actually created by the project. Contributions from beneficiaries should be in proportion to – and never in excess of – the benefits that they receive, leaving some uplift 'on the table'. In other words, the impact of a proposed project should still be (net of any contribution made) to create value for those making the contributions.

But demonstrating this is not easy, and therein lies the key political challenge. It involves working out how, where, when and – crucially – how much value uplift is expected to be generated, and if it isn't, how we respond. And that's before we even think about the mechanics of capture.
Historic trends are useful. Take the Jubilee Line Extension in London, for example. Over the last two years of construction, it has been demonstrated that residential values within 500m of the station locations grew significantly faster than those between one and two kilometres away, resulting in a premium of approximately 30% when the project opened in November 1999. Growth continued to be much faster compared to the control areas for the next five years.

But when this evidence leads us to the conclusion (as it did in TfL's recent study – the only of its type to be published) that the majority of benefit accrues to the owners of existing residential stock adjacent to new stations – as opposed to developers or commercial occupiers – this raises some difficult questions.

The challenges – political and practical – of asking homeowners to pay are, of course, considerable. But those who have invested time in considering LVC in detail are beginning to come up with feasible solutions. These might involve, for example, delaying payments until the next sale of a property to align contributions with the realisation of value uplift. Or tapering charges the further you get from a station. Or using a programme-wide view to address the timing challenge and mitigate the risk of revenues that will rise and fall with property market cycles. And back to the communications task – effectively persuading the community that a proportional contribution is the only pathway to securing investment and generating value uplift.

Ultimately, public authorities invest in projects to create benefit for the community. Funding, therefore, should be seen as an enabler of growth, and not an impediment. But the reality is that – if the projected costs of schemes such as Crossrail 2 and HS2 are a guide – then sustaining our growth is becoming increasingly expensive (and usually most of the money is needed upfront).

Which is why creative thinking is needed. By coordinating investment decisions to align policy objectives (transport and housing being a prime example) and recycling some of the ensuing economic value back into spending programmes, in theory we can create a virtuous cycle of investment and growth to the benefit of many. But as with all cycles, identifying the entry point is the hard bit.

In the immediate term, it may be that easy targets, tweaks and quick wins will be needed to satisfy politicians whose memories of the Poll Tax riots prevent them from putting their name to wholescale tax reform. But we should also be putting the effort now into considering a more systematic approach for the future to ensure the growth that we all aspire to can be delivered, and funded in a fair and sustainable way.