Land Value Capture (LVC) is defined as a set of mechanisms that can be used to monetise the increase in land values that arise from being in the catchment area of public infrastructure projects.
Put simply: if you live near a railway station which has a direct link into a nearby town or city, there’s a fair chance that your house will be worth more than a similar house in an area where there’s no such facility. And if you decide to sell it, then you’ll be able to realise that uplift in value.
Of course, no one is suggesting that you’ll have to surrender part of that profit, aside from having to pay Capital Gains Tax if you’re not buying another house.
Now, consider if you live in an area where there are plans for a new station. You have some land next to your house, and you decide to build on it and then sell the new dwelling. The prospect of the new station might mean an increase in the price of that new house, but only when it’s fully funded and work starts will you see the full increase in value.
In short, LVC agreements effectively help to determine and then capture a percentage of the additional increase in value, which is paid once the station is built and you have permission to build the new house.
Those behind LVC agreements work with local landowners and secure a percentage of this additional value, thereby creating the opportunity to build the station much earlier - to the mutual advantage of the transport provider, the landowner, and the people who will use the railway.
LVC agreements aren’t new. They’ve been used in the UK and around the world for many years to capture payments from private sector developers. Indeed, in some places they’ve also been used for transport projects.
We’ve all heard of the Metro-Land marketing brand created by London’s Metropolitan Railway back in the early 1900s, as it expanded its network out to places such as Harrow, Wembley, and even Amersham in Buckinghamshire.
Unlike other railway companies, the Metropolitan had an advantage over others who had to sell surplus land when construction was completed. The Metropolitan was able to retain it and, realising the potential for an uplift in land values because of the extended lines, set up an independent company - Metropolitan Railway Country Estates Limited.
Hundreds of acres of land along its tracks were available to sell and then to house future customers. It meant a further source of funding for it to continue the rapid expansion.
Fast forward a few decades. In Hong Kong, faced with a rapidly growing population, the Mass Transit Railway (MTR) Corporation was established to mastermind the expansion of the then-colony’s mass transit system. It developed and built more than 150 miles of new lines and 168 stations. It would also actively develop mixed-use retail, residential and commercial properties.
This later became known as the ‘Rail + Property’ revenue model, with leasehold payments or sales generated from MTR’s expansive property portfolio, complementing the farebox revenue from its railway business.
Income from property is now thought to account for as much as 50% of MTR’s revenue. This is now the source of working capital to invest in new infrastructure.
Speaking to RAIL earlier this year about his experience in Hong Kong, MTR’s UK CEO Steve Murphy said: “The most profound characteristic to stick with me was the realisation that whenever you improve railways, you do dramatic things to land values. What I realised quickly in Hong Kong was that this was an implicit part of their business model, with the property and operational sides mutually supporting each other.”
Like most places, the COVID pandemic has hit MTR’s farebox income, but Murphy maintains that the property arm performed well: “You end up with this virtuous circle that railway investment increases land value, creating an income stream to support and help build more railways.”
Back in the UK, local councils have often preferred to use traditional methods for raising funds from developers, including Section 106 agreements and community levies.
Now, with less money available for things such as rail improvements as a result of greater levels of government borrowing during the COVID pandemic, there’s renewed interest in LVC agreements as a way of bridging (what are perceived to be) an ever-growing number of projects where a funding shortfall is preventing them from progressing as quickly as had originally been planned.
Back in the 1990s, a report by Don Riley of the Centre for Land Policy Studies calculated that the uplift in land and property value along the route of the Jubilee Line extension to London’s Docklands was likely to be around £13 billion.
The capital cost of the scheme was around £3bn, but it’s thought that only a small contribution to the cost of the line was secured from developers - including at Canary Wharf. Most of the uplift in values from the new line was never captured.
Although those on the route of the Jubilee Line might not have contributed to the profits gained from land uplifts, when it came to other London projects things were different.
Crossrail (now the Elizabeth line) did manage to capture funding from some developers. Based on land value uplifts, developer contributions of up to £3bn were extracted through a special levy as part of the business rates regime.
The levy needed primary legislation and permission from the Treasury to hypothecate the proceeds back into the new line. It meant that the Greater London Authority could borrow against future income from the levy.
Further funds were captured through the Mayoral Community Infrastructure Levy (MCIL) charged against both commercial and residential property developers. The two levies are thought to be raising between them around £400 million per year across London.
But some suggest that it’s a blunt tool when it comes to raising money for specific infrastructure, because it’s charged across the whole of the capital and not specifically along the line of the route.
However, Julian Ware, Head of Corporate Finance at Transport for London and one of the architects of the funding mechanisms used, says: “Because the Elizabeth line passes through some of the most valuable parts of London real estate, quite a lot of the revenue is raised along the line of the route. We also argued the new line would move London’s economy as a whole and create employment, so everyone benefits.
“Even if you’re a shop owner in Kingston, actually more people will get jobs in the city and Canary Wharf, because the economy has improved and because of the Elizabeth line. Then, at the weekend, those new workers will go and spend their money in a wide variety of places across London.”
On another major project, the extension to London’s Northern Line to Nine Elms and Battersea (like the Elizabeth line) used two mechanisms to raise additional funds.
Again, one was based on developer contributions and the other a business rates increase. But crucially, the income here paid for the whole scheme, rather than just part of it.
The income also comes directly from the area that’s benefiting from the extension, rather than the whole of London. It’s thought that around 30% of the funding has come from developer contributions, related to the buildings that have gone up as agreed with the local councils. The remaining 70% comes from the area being declared an Enterprise Zone.
Within the zone, the growth in business rates is diverted away from conventional spending and instead goes straight to the Mayor of London. That in turn allows the Mayor to borrow against what could be a 25-year stream of income, which is then handed to TfL to build the new line.
Ware explains: “If you can imagine the power station building ten years ago. It was derelict and there wasn’t much in the way of business rates being collected. If you look at it now, with the shops open and the offices coming next year, the tax revenues are increasing dramatically and most of that extra is going to the Mayor.”
What works in London doesn’t necessarily work elsewhere in the UK. However, one place where a transport-related land capture deal is working is in Northumberland, which has pioneered an LVC agreement on a rail project.
Northumberland County Council has become the first authority in the country in modern times to strike an LVC agreement with landowners.
In 2014, it began working with Edinburgh based E-Rail to ascertain whether the company’s LVC method could be used to help fund the reintroduction of passenger services to the Northumberland Line between Newcastle and Ashington. The deal has been struck with landowners at more than 20 sites along the line.
E-Rail’s method of quantifying the uplift concentrates on land and property within 1km (0.6 miles) of the construction of a new transport project.
The company reckons that existing housing stock increases in value by around 20%, and maintains that by sharing this generated increase in value, the transport provider gains significant funds that do not have to be paid back and the landowner/developer secures a considerable rise in property value. The earlier that contribution agreements are reached, the earlier scheme certainty can be achieved, and the more the LVC can generate.
Unlike Community Levies or business rate increases, such agreements (using E-Rail’s method) do not require any new legislation. They can be put in place relatively quickly, by any council or transport agency in the UK promoting a project.
And experts have been quick to applaud what’s been done in Northumberland. Transport Consultant Stephen Joseph says: “Previously, land capture deals were targeted at developers or based on business rate supplements around the stations. This is rather different, in the sense that it’s a charge on the land. I think people have forgotten about this one. Letchworth Garden City was built around this stuff. So too was Metro-Land.”
E-Rail Director George Hazel maintains the concept is ideal where there is a funding gap that’s stopping the scheme from progressing: “Landowners don’t pay upfront. They only pay when the value uplift occurs, and we find they’re still interested even though a scheme may or may not happen and they may or may not get planning permission.
“They take the view that if they sign the contribution agreement, they will only have to pay (say) 50% of the uplift that will happen, as calculated by property agents. They still retain some of the profit and, ultimately, they might get a better planning permission because their development is now close to a railway station.”
But unlike the levies used in London, LVC contributions along the route of the Northumberland Line are based on voluntary participation until the contribution agreement is signed. After that, the agreement is a legal commitment built into the title of the land.
It could be, therefore, that some landowners refuse to take part, although this is rare. The risk they run is that the funding gap will not be closed, the project will not be delivered, and none of the landowners will get the extra value from the railway.
Hazel: “If somebody doesn’t sign up, and that’s rare, there’s nothing we can do about it except that there is a risk for that person and all the others that the scheme won’t then happen, and they won’t get the extra profit.”
Those landowners who don’t sign up for an LVC agreement could later have to pay out through the more traditional developer contribution methods, such as Section 106. And having established a value along the route through the LVC process, they could ultimately have to pay more of their profits through an alternative non-voluntary land capture agreement.
“At the end of the day, we’ve secured £40m, more than any other method would have raised,” says Hazel.
And crucially, unlike other land capture methods, the latest concept in Northumberland targets the landowner - not the developer or tenant. And the way it’s being done there has the added value of potentially creating more public transport and sustainable developments around the stations.
Joseph explains: “The incentive is to reduce car parking and create denser and more walkable developments, because you’re developing around public transport stops and stations.
“That makes it more likely that people will walk to the station and might not even own a car. This will create ‘transit oriented development’, as they call it in the US.
But to make an LVC work, you do need a certain level of certainty that a scheme will be built. And that’s not always easy, particularly in the early planning stages. If the lead time is too long, contributions under LVC agreements might also be difficult to achieve. And there’s a third major problem: the political appetite for what is, essentially, a wealth tax.
Henry Kelly, economist at sub-national transport body Midlands Connect, maintains that it’s not always easy to work out who would benefit from the uplift in value: “It’s quite difficult. You have developers. You have standard freeholders. Then you might have leaseholders. And then you have tenants, who are probably the people that will end up paying more, because they have the benefit.
“And that’s just the residential side. If you think about the complexity of structure that you will have on a lot of commercial and retail developments, you end up wondering: who are you taxing and how are you taxing them?”
Even Kelly agrees that Land Value Capture will become more popular because of falling levels of Government finance available. However, he highlights another potential issue related to the structure of local government.
“The problem is the link between the planning body and the transport authority. Who’s building the scheme and who is approving it? With two tier local government, that could become quite problematic.”
There’s little doubt that the dwindling amounts of central government funding are pushing local transport planners down the route of alternative fundraising methods, and that LVC agreements such as the ones signed in Northumberland look set to become a common arrangement.
Another solution could be greater utilisation of the ‘rail + property’ model captured in Hong Kong some 50 years ago. But if the Hong Kong model is to be followed, then train operators and the Government will need to ensure they are properly incentivised to invest, through the new Passenger Service Contracts and the wider rail reform that is set to replace the traditional franchising model.
Land value capture deals have the potential to capture more funding, and much earlier than other methods.
Stephen Joseph is of the view that the latest land value capture concept could help to make a difference: “It depends where we go on broader issues such as house building and the planning system, but if you do some of this then you might have housing around public transport rather than roads.”
