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How should increases in land value be captured? The sector responds
In January, the Housing, Communities and Local Government Committee launched an inquiry into land value capture. Jenny Messenger reads through the sector’s responses to find out what it thinks should happen next. Illustration by Mark Long
In January, the Housing, Communities and Local Government Committee launched an inquiry into land value capture. Jenny Messenger reads through the sector’s responses to find out what it thinks should happen next #UKhousingThe Labour government is looking to use every lever at its disposal to make sure it builds 1.5 million homes, including its approach to land value capture.
Public policy decisions, such as granting planning permission for residential development or building infrastructure, can have a dramatic effect on the value of land. The price of agricultural land could rise by five to 40 times once it is permitted, according to a December 2024 study by the Centre for Cities thinktank.
Land value capture refers to policies and taxes which seek to share some of that value created by planning decisions or public investment with local communities and national government.
Around London, the Centre for Cities calculates there is £29bn in lost land value capture, which could fund 166,000 social homes. Currently, local authorities charge fees and taxes on land that has become more valuable and redistribute these funds to pay for public infrastructure, such as transport, GP surgeries and schools as part of the planning application process.
Evidence submitted to an inquiry into land value capture in 2018 suggested that between 25% and 50% of the land value uplift was captured by the state.
In this inquiry, the Housing, Communities and Local Government Committee explores whether “alternative mechanisms” of capturing land value, such as a tax, might work better with the government’s planning reforms and its ambition to deliver new towns.
But any policy decisions have to strike a careful balance. If they are too stringent, they might block land sales altogether. There is also the risk that if landowners perceive a policy as punitive, they will bank the land until the next government changes the rules.
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Another issue is how to create revenue across regions in England with lower average land values. Here, developments generate a lower surplus, or even a deficit, for affordable housing.
A flawed but effective system?
Responses to the committee suggest that many organisations think the current system should remain. They suggest tweaks to Section 106 agreements and the Community Infrastructure Levy (CIL), rather than a complete overhaul.
Numerous ways of capturing land value have been tried in the past – seven since 1945, according to Transport for London’s submission to the committee.
For the British Property Federation (BPF), the problem is that mechanisms have to “be sensitive to different locations, different land types (greenfield, brownfield) [and] different asset types, which makes it extremely difficult to design something which does not impinge on the viability of some development projects”.
The CIL came into force in 2010. It provides a fixed formula per square metre of land, determined by local authorities. Section 106 obligations in the planning permission for a development require developers to provide scheme-specific benefits, such as affordable housing, agreed through viability assessments.
The submission from the G15 group of large London landlords warns that coming up with new methods for land value capture would “distract from more pressing issues in the sector”, particularly its financial vulnerability.
House builder Vistry recommends improving existing mechanisms, rather than creating an alternative, to avoid creating uncertainty, which has the potential upshot that less land will be sold for development and fewer homes delivered.
The Northern Housing Consortium (NHC) told MPs that mechanisms such as Section 106 agreements provide fewer of the homes being built in the North: 30%, compared with 50% in the rest of England. This means the region is more reliant on grant funding to supply new affordable homes.
Despite this, the NHC concludes that, given the pressure to increase housing supply, “we would advise the government to not make disruptive, large-scale changes to land value capture mechanisms, or introduce any major alternative”.
Potential reforms
For Southern Housing, Section 106 and the CIL are “imperfect”, but “working reasonably effectively”. The 80,000-home landlord suggests the government should reform these two mechanisms further.
This would include making sure local authority planning and legal departments have the “resources, skills and expertise to negotiate planning obligations with developers” for Section 106.
For the CIL, it could require “all authorities to introduce a levy, but with local discretion to set rates”. This could include a zero rate if there might be a “risk of deterring development”, Southern says.
The National Housing Federation (NHF) raises the 2021 Stonewater vs Wealden District Council case, in which Stonewater tried to deliver 100% affordable housing on a site it had acquired that had planning permission for 35%. The housing association was required to pay a £3m CIL bill after the High Court rejected its claim that it was exempt from the levy.
The NHF says: “Members in some areas report that this decision, and the desire for a local planning authority to maximise the capital receipts from development, can mean schemes delivering 100% (or a large percentage of) affordable homes are viewed unfavourably in planning terms.”
These levies generated £7bn in 2018-19, 67% of which was spent on affordable homes, according to the Town and Country Planning Association (TCPA), although it calls the current system “ad hoc and opaque”.
Suggestions in the consultation responses
● Standardising Section 106 agreements
● Intervention if collected funds are unspent
● Annual summary published of CIL/Section 106 monies collected and spent
● ‘Social capital return’ that landowners would pay when planning consent is granted
● Future income from development used to pay back loans for upfront infrastructure investment
● Value captured when land is actually sold
● Changes to viability
So what reforms do the submissions suggest?
The Chartered Institute of Housing argues for involving all interested parties in the process early on; making sure developers build homes that meet housing providers’ needs on quality, tenure and sustainability; and having a clear understanding of expected costs.
The BPF and others point to standardising Section 106 agreements as “low-hanging fruit” to speed up the process. To address criticisms that CIL contributions are not being spent, the BPF recommends “some form of supervisory function to intervene” if funds are “genuinely unspent for no good reason”.
Places for People proposes requiring local planning authorities “to clearly publish a summary of CIL/Section 106 monies collected and spent annually”.
Stafford Borough Council suggests a “social capital return” that landowners would pay when planning consent is granted. The rate would be set at 20% on every £1 paid to landowners up to £1m, rising to 45% on every £1 above £5m paid to landowners.
London Councils and the BPF also call for a tax-increment finance approach. This was used on the redevelopment of the decommissioned coal-fired Battersea Power Station into a mixed-use neighbourhood, where business rates were used to extend the Northern Line on the London Underground.
Future income from development, including business rates and stamp duty uplifts, could be used to pay back loans for upfront infrastructure investment.
While most organisations think that reshaping the land value capture system would do more harm than good in the short term, Paul Fiddaman, chief executive of Karbon Homes, disagrees.
He calls for an overhaul of the current system so that value is captured when the land is actually sold, noting that “the current methods of land value capture are implemented after a land value has been negotiated”.
“The cost of providing affordable homes and infrastructure is, therefore, not part of the discussion at the point of land sale.
“This distorts the system and allows developers to argue that schemes, based on the value they paid for the land, would not be viable with the addition of Section 106 obligations,” he says.
The solution could be to allow local planning authorities to be more prescriptive, so that they can “designate the number, type and tenure of homes on different tracts of land through the local plan”, he adds.
The viability question
Criticism of the current system often centres on the fact that developers can negotiate over viability. If they have paid more for land, it is possible to negotiate down the amount of affordable housing that is delivered.
The G15 says “fast-track routes” should be expanded to incentivise a minimum percentage of affordable homes without detailed viability assessments.
The NHF calls for reducing the scope of viability negotiations, saying “there are genuine cases where viability negotiation is needed for development to come forward. Where viability negotiations must occur, and contributions below the level set in policy are agreed, development should be subject to a further viability review to ensure profits on a development site translate into cross-subsidy for social and affordable housing where appropriate.”
The NHF also supports capping residual land values at around 10 times existing-use value. “We think a cap is more likely to achieve the government’s policy aims than a more prescriptive measure,” it says.
In numbers
£29bn
Amount of lost land value capture around London
2010
Year the Community Infrastructure Levy came into force
50%
Percentage of homes provided through Section 106 in the rest of England
30%
Percentage of homes provided through Section 106 in the North
The submission from the Ministry of Housing, Communities and Local Government (MHCLG) makes it clear that the government will improve the developer contributions system, not bring in a new mechanism.
It notes that the government will be considering benchmark land values on green belt land and circumstances in which site-specific viability assessment may be undertaken in relation to large sites and previously developed land.
While hope value – what the land is estimated to be worth if developed in the future – has been covered by a different inquiry, several submissions air views on it.
Some organisations, including the G15, say the Land Compensation Act 1961 should be reformed “to enable local authorities to compulsorily purchase land at a value closer to its fair market price (excluding any speculative hope value)”, to facilitate the development of new towns.
Currently, the act means the price paid for land bought via a compulsory purchase order (CPO) must reflect potential future uses – the so-called hope value.
Compulsory purchase orders
Although the Levelling Up and Regeneration Act 2023 enabled the secretary of state to abolish hope value in individual cases, Southern says this adds a layer of bureaucracy and is not likely to be used widely.
MHCLG says in its submission that the government intends to include other reforms in the Planning and Infrastructure Bill to make sure landowners do not “receive excessive compensation where compulsory purchase powers are used to assemble land for the purpose of delivering benefits in the public interest”.
The TCPA says all the land value capture measures require a “well-resourced and effective mechanism for the compulsory purchase of land”, which is a “vital backstop where developers argue, whether legitimately or not, that proceeding with development is unviable”.
The BPF advocates for a more “collaborative” approach than the use of CPOs, such as allowing “landowners to not get the full capital receipt of their land instantly, but to be able to share in the future income streams generated by development”.
Karbon’s Mr Fiddaman suggests Homes England could use CPO powers to support affordable housing. “This would have the effect of depoliticising the process and reduce the backlash for local decision-makers.”
In its submission, the Centre for Cities supports the use of development corporations, set up by combined or local authorities, to assemble land and prepare plots for development. It suggests the government could mitigate the risks this would pose to private developers by working with them “to enable them to acquire land for close to existing use value”.
Dr Edward Shepherd, senior lecturer in planning and development at Cardiff University, also calls on the government to “explicitly define” whether land value capture policy is to be aimed at correcting injustice, increasing economic efficiency, funding infrastructure or delivering affordable housing. All of these will “have different implications for policy design and the politics of policy change”, Dr Shepherd says.
Overall, the consensus is that while the current system is good, it can be better.
The Royal Town Planning Institute sums it up: “Any review of land value capture should make development more popular, increase the quality of new development, and improve infrastructure for nearby existing residents.”
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