Infrastructure Investment and Land Value Uplift

Savills has been working on ground-breaking research in to the relationship between infrastructure investment and increases in land and property values. Our analysis for Transport for London is probably the most comprehensive review of historic data on the relationship between major transport and infrastructure investment and land value change ever carried out for London (see here).

We have found a positive relationship between infrastructure investment and property values with most of the increase in residential sale values tending to take place once the infrastructure is nearing completion and after completion. 

We have worked with KPMG and others to review ‘value capture’ mechanisms such as supplements on Stamp Duty, rates, Community Infrastructure Levy (CIL) and S106, and Council Tax.  Our general conclusion is that usually the best way to secure an appropriate proportion of uplift to pay for infrastructure is for the capture mechanism to apply later on in the development process, for example on sale and/or following occupation. This approach lowers risk and provides greater certainty for property development while also facilitating higher total funding.

Historic Projects and Land Value Uplift

We researched the relationship between property prices and infrastructure investment for a range of historic and on-going projects including the Jubilee Line Extension and Crossrail 1. We controlled for background changes in prices by comparing change within a 0.5 km radius of each station with a control 1km to 2km outer area around each station. The results are illustrated in the tables in the links below.

The Jubilee Line Extension example illustrates how values increased the most once the project was complete. The Crossrail 1 example illustrates how values are starting to increase as construction progresses. Overall the larger the infrastructure project the more evidence of uplift. This is illustrated in this figure.

The results in the link above are aggregates across all stations on each line and individual station results can vary significantly. This may be partly a result of other factors and partly a consequence of differing views on the benefits of the investment for each station area.

Historic Projects and Land Value Uplift

We drew upon the above analysis to estimate overall value uplift in the catchment area around stations for new schemes including Crossrail 2 and the Bakerloo Line Extension. This analysis found that there is the potential for substantial uplift in property values, with most of the total increase arising from increases in value of existing properties. Eight prospective TfL projects that could cost around £36bn (including Crossrail 2) could produce land value uplifts of up to an estimated £87bn.

Value Capture Options

TfL and KPMG developed and assessed a series of options designed to capture a suitable proportion of the value uplift to help pay for the infrastructure investment. These options included:

• Zonal ‘transport premium charge’ e.g. via Council Tax supplements
• Zonal Stamp Duty supplements
• Zonal business rates income growth retention
• A Development Rights Auction Model (‘DRAM’).

Each of these options has advantages and drawbacks. While a transport premium charge could in principle generate substantial income not all existing residential property owners will have easy access to the relevant income to pay for these charges (e.g. retired owner-occupiers). This suggests such an approach could pose significant political risks. Stamp Duty supplements are potentially a good option though they will introduce further distortions in to the housing market and disincentives to sell/move. As commercial property is a relatively low proportion of total property owned and developed business rates supplements offer less potential to raise revenue and would further bias property related tax towards businesses. The DRAM mechanism has not been applied in the UK and has a number of administrative and other challenges and uncertainties.

Implications for Property Owners and Developers

The various value capture options have differing implications for land owners and developers. Generally speaking the earlier in the development process a levy/tax is raised the bigger the negative impact on cash flow and risk profile of potential developments. This tends to mean that mechanisms such as DRAM and CIL/S106 run the risk of discouraging development and/or do not offer the potential to generate so much revenue as other options. Options that raise the revenue at a later stage in the process, such as Stamp Duty supplement, in principle do not create so much additional risk and negative impact on viability, particularly if it is clear what to expect and plan for.

A key implication of the general context on the timing of value capture mechanisms is that from the perspective of enabled property development in general it makes most sense for government to provide the up-front funding for infrastructure investment and seek to recover part of this cost at a later stage in the development process.

Next Steps

There is considerable interest in the field of land value uplift and capture at present. Central Government has reviewed the TfL work. It recommended that further work was carried out looking at the DRAM mechanism. Savills and KPMG have subsequently carried out this work and TfL’s findings are expected to be published soon. Discussions on land value capture approaches are continuing between Government and the Mayor.

The general context is that although it is recognised that there is significant value uplift arising from infrastructure investment the options for capture are complex and have significant risks, including political risks associated with anything that could be labelled an new tax. As a first step the Chancellor announced refinements to CIL and S106 mechanisms in the autumn budget. If applied sensitively these changes could help generate additional revenue without hindering development.

Part of the context to the TfL work is that much of the development opportunities are on brownfield or occupied land, such as industrial areas. Such land faces particular difficulties for development, with for example high existing use/investment values. Other national projects such as East West Rail and the Oxford Cambridge Expressway have a different context with the potential development of significant amounts of greenfield land. This raises the question of to what degree are the old new town development corporation models appropriate to investigate anew.

Whatever the approaches chosen the key questions are how can the infrastructure investment help unlock much needed new development to help address the national shortage in homes and affordable housing, and facilitate economic growth.