For many years, those in housing and planning have grappled with the issue of “development gain”. How can the substantial uplift in land value, resulting from the granting of planning permission, be captured in way that shares the wealth with the community but does not discourage development?
As Kate Barker pointed out in her recent book, “Housing: Where’s the plan?” the scale of the uplift illustrates why this is an issue demands attention. Around Cambridge, agricultural land with no planning permission was worth around £18,500 a hectare in 2010; residential land was worth £2.9m. Around Belfast, agricultural land was assessed at an average value of £24,000 per hectare, compared with residential at £1.25m.
Of course, the windfall will not always be so large – and a proportion does goes towards the cost of development. But it makes the point that planning permission granted by the state can reap big financial gains for developers.
There are two reasons why it’s important that this gain is captured (a friendlier way of saying ‘taxed’). Firstly, the rise in the value of land is usually a result of public investment in the surrounding area: it’s therefore a windfall the landowner has done little to earn.
Secondly, new homes will increase the demand on the surrounding infrastructure. Improving and expanding it should be at least part-funded by the gain, or it will fall on the state to do so. Even in times of plenty, this isn’t the ideal situation.
New homes must be accompanied with the development of social and economic infrastructure. Schools, hospitals, public spaces, transport, energy and communication links and more are all essential to create places where people want to live and can reach their full potential. And as we’re in the middle of an affordability crisis (the average house price is now 10 times the average wage; in London, it’s 14), it’s also crucial to build genuinely affordable homes.
Recent attempts to ensure this happens have come in the form of Section 106 agreements and the Community Infrastructure Levy (CIL). Both have drawbacks; councils that have introduced the CIL have seen a 49 per cent drop in planning applications for new homes. Section 106 has been criticised for failing to provide infrastructure investment and social housing proportionate to levels of private development.
They can also produce a clash between the aims of local authorities and those of developers. The former are keen to secure a level of affordable homes, the latter keen to maximise return (generally speaking) – and with stretched budgets, it is the local authorities that usually cede ground. Furthermore, the lack of transparency in the deal making process, and the ultimate failure to deliver affordable housing and the investment needed in the right type of infrastructure, is leading some councils to take legal action.
In our latest report, Devo Home, we argue for the creation of a set of new local bodies dedicated to housebuilding and place-making. What we call “Local Place Partnerships” will be coordinated by local authorities and bring together all the parties involved in this process: private developers, housing associations, residents, civil society and local business. We think this will speed up the building process by offering a single point of delivery, and act as a forum within which the competing and often opposing interests of the parties in the development process can be resolved.
Under this model we propose a new mechanism to capture the value of land, one that can be instigated by local authorities through the use of Local Development Orders (LDOs).
Using LDOs, councils can unlock sites and support developers in securing planning consent by establishing the parameters for housing on brownfield sites. They can relate to the size and numbers needed, as well as the design and the provision of infrastructure, thus helping developers work up suitable schemes to get work started in brownfield sites quicker.
Local authorities know how many affordable homes are needed, as well as the location of essential infrastructure services; they know the potential value of new development.
If they were to introduce LDOs on specific sites that require infrastructure, or a specific level of affordable housing, they would be able to capture the value of that site and set a bespoke levy, paid by the developer, which would contribute to the cost.
A major issue with Section 106 and the CIL is that they can create an atmosphere of uncertainty between those involved, as the terms of the agreement are not laid out at the start of the process. By empowering local authorities through LDOs, which can form part of the plans laid out in Local Place Partnerships (LPPs), the costs and requirements will be clear for all to see upfront.
Offering a bespoke and flexible alternative to Section 106 and the CIL, local authorities could enact this new mechanism together through LPPs. As the parties involved would already be working under the same roof, local authorities could work with their fellow LPP members. And when this involves more than one council, they can formulate cross-boundary development plans and raise funds in a more sophisticated, clear and flexible model than is currently available.
This empowers local authorities to tell developers the value of sites. It will enable them to take a more strategic approach to infrastructure planning, making sure that communities are developed alongside new homes.
A one-size-fits all answer to the challenge posed by development gain won’t work. But we think this one is worthy of a try.
David Fagleman is the project manager of the prosperity programme at ResPublica.
