Local Authorities Doing Land Capture – Great but not Easy or Risk Free

This election will be the first in which all major parties propose some form of land capture in the housing market.  It is also historic in the sense that the generational interests of boomers owning homes are deemed less important than millennials shut out of the housing market.  The Conservative Party in particular no longer the ‘alliance of landed and business interests’ that Peel founded, landed interests take a back seat.

The Conservative proposal is essentially the same approach adopted in most European Countries such as the Netherlands, France and Germany, as well as in China and Singapore.  Local authorities buy land at close to existing use value, parcel it up some for social housing some for sale to housebuilders.  Housebuilders become more like car builders than land speculators.

Although this, at least in high value areas, can at a stroke resolve and replace the complications of CIL and planning gain for affordable housing it is not an easy process to set going, and carries considerable risks that must be mitigated.

1. The Initial Land Purchase must be funded  

Once a system of land purchase and resale becomes established it becomes self funding as land sales fund new ones.  It is difficult to set these up without initial funding.  LAs are constrained as to how they can use RTB receipts (mainly because of land costs and this constraint is now removed) and of course in their borrowing.  A way forward could be through issuing of equity – similar to the 19C housing copartnership schemes as set up by the Liberal and Conservative parties.  Those seeking an affordable home could purchase an equity share in a development corporation and in return have a right to a shared ownership plot or a plot where the land is owned by the corporation and a right of development is sold (known as usufruct) separating land speculation from home ownership.  This works especially well with custom build plots and with reducing barriers to entry to small housebuilders who could also provide equity for land development rights.  Similarly an increase in ‘back to back’ arrangements with eventual developers is likely.

2. Some form of risk sharing is necessary

If LAs are to get into the housing market big time they bear considerable risks when the market crashes.  In the Netherlands in the Great Recession many municipalities were exposed left with part sold or developed large land holdings.  for this reason the liberal governments Treasury tried to clamp down on it to the resistance of the housing ministry, municipalities and the housebuilding industries, citing the success of the policy and for housebuilders its risk reduction.  Of course the Treasury might have born in mind how much worse the crash could have been if the Netherlands had had the low housebuilding rates of England.  None the less it is a risky business and it is not one for very small rural authorities alone unable to bear large financial shocks.  Those getting into it need to share and pool risks and there needs to be a ‘land buyer of last resort’ who can step in and purchase surplus plots at times of financial crisis.  Ireland offers a highly successful model here which has largely paid for itself after the economic recovery.

3.  LAs have to get into Masterplanning

Ok you have a large site after CPO.  You need to start selling plots to make a return on your initial investment. What do you need to do in between?  The shift towards a zoning system through permission in principle is welcome.  Through local plans the future land bank for housing is immediately set and enables LA to value their future worth.  There is a step missing however in the legislation, between a site and a parcel you need a masterplan to define the ROW, streets, Parcels and undevelopable ,and (green space, community facilities and utilities plots).  Also be having a clearer understanding of permitted heights and bulk LAs can more accurately predict revenue streams from land.

4.  Be bold CIL and Section 106 Affordable Housing are history

The theory is that CIL, section 106 and planning gain affordable housing should not add to the price of land as taken off the economic rent – as should land value capture.  So in theory once rolled out there would no longer be any need for CIL or S106 affordable housing it could all be covered through value capture.  CIL and S106 would be relegated to deal with old sites bought and permitted but not implemented under the old system.  Even there developers would need to get a move on to avoid unimplemented sites being CPO’d.  If the government was bold they would announce the ending of CIL and section 106 affordable housing, with affordable housing being defined as part of the zoning decision.  This would incentive use of land value capture.

5. The valuation and compensation rules have to be totally unambiguous 

If as seems likely valuation is based on existing use rather than permitted or alternative use valuation should be relatively easy.  However if not clear cut, and with at least some compensation to incentivise release cases could get bogged down in the land tribunal.  The easiest way to do this is to value all land and map it as part of taxation reforms replacing council tax.  Even if agricultural land contained partial or full exemptions this would be worthwhile.  Such a mapping exercise would also be essential to post Brexit agricultural support payments and avoiding deadweight loss of public funding.  Some landowners will now be worried about undeveloped land being CPOd, they rush to commence – which would be a good thing.  The cannier developers will be seeking to do deals, offering parts of sites at existing use value, or a reduced markup over existing use value, in return for equity investment in development corporations, giving them the seedcorn capital they crave.

6.  Shared Expertise over CPO and Land Assembly is Needed

Very few local authorities have legal expertise over CPO in their legal department.  LAs need to pool this and develop expert specialist teams.  LAs could also ‘twin’ with municipalities in other European countries to learn best practice in land assembly, development and land capture.

7.  Land Pooling/Redistribution is Needed 

This is less obvious. Any CPO practitioner will tell you that once you introduce the prospect of CPO at less than market value any rational owner will seek a sale and no CPO will be necessary.  The incentive for developers to bring forward their own schemes with high proportions of affordable housing is therefore strong.  What however about the hold out owner who thinks that their land holding isn’t getting a fair share of the value pie.  In Germany and Japan there existing land pooling/redistribution powers whereby the newly masterplanned and suvdivided plots are distributed amongst the various landowners in an equitable way.  Such powers are also useful where there is a major change in market conditions and a project needs to shrink or grow and the mew or left out owners need to share in the risks or rewards respectively.

8.  Common Spaces need to be Defined and Managed

If LAs are to become primary developers selling land on to secondary developers the issue arises as to the management of open spaces and shared public realm. Las need to return a proportion of returns to management companies designed to fund the public real in perpetuity.  The Olympic Park is a good example of this.

9.  It needs a proper system of subdivision control and Cadastre

If an LA is creating a parcel this immediately becomes a title for land registry and taxation – in most countries this is done in a single step in the LAs parcel fabric database.  In England unlike most countries operating Torrens based cadastre systems there is no requirement to register and only around 2/3rds of land is.  The Conservative Manifesto contains a quite radical proposal to combine the land registry and Ordnace Survey and make land data open source.  This really should be combined with legal reforms to create a proper land cadastre system as the basis for all land tax charges and subsidies.  Again this only makes sense if there is a proper legal framework for subdivision.  If a buyer of two LA parcel decides not to combine them but build single houses on each parcel, or even to build say three houses in a new subdivision – why should they need a fresh planning application if this is within the subdivision rules of the original masterplan?  Without subdivision rules it becomes impossible to keep accurate data on the number of available parcels and their taxation status.  Planning law should be reformed to make subdivision development with wide permitted development exemptions such as where subdivision rules are met within a masterplan implementing PiP.