Sharing Land Values – there is no quick fix!

After the publication of ‘Advice to Scottish Ministers on Options for Land Value Uplift Capture’ to Scottish Ministers, Shona Glenn, Head of Policy and Research, discusses how a more collaborative approach to land development, in which the public and private sectors share risks and reward, should be a long-term aim. 

The value of land depends on where it is and what you can do with it – and what you can do with it is largely determined by the planning system. That is why, when planning permission is granted – or there is an expectation that it might be granted in the future – the value of land tends to increase. As this value is publicly created, there is a strong argument that it should be used to pay for the infrastructure needed to develop the kinds of places people want to live.

When the Scottish Land Commission was created one of the first things the Government asked us to do was to investigate how this could be achieved. This week we published some suggestions.

Our first suggestion is that we need to stop looking for quick fixes – they don’t exist! History has shown that poorly designed solutions don’t last long and tend to provoke conflict and resistance while they do last. Such an approach will not help to increase the supply of new homes.

Proposals to simply exclude hope value from the compensation local authorities pay to landowners when exercising compulsory purchase powers risk falling into this category. But the ambition to use this value for common benefit seems entirely right.

Commentators often point to Germany as an exemplar to follow so we looked at the German system to see what we could learn. What we found was that, while planning authorities in Germany can acquire land at existing use value, it is fundamental differences in their planning system that allow this to happen – not different compensation rules.

At the heart of this is a trade off between certainty and flexibility.

Planning in Germany is a very systematic affair with a formal hierarchy of plans and large public investments in the implementation of those plans. There is a lot of legal certainty about what kind of development will be permitted at an early stage so land values tend to be determined very early on. This means there is relatively little scope for hope value to arise and market value tends to be much closer to existing use value.

Scotland could move toward a more plan-led, German style, planning system – but it will take more than a simply changing compensation rules to achieve that.

Part of what we need to do is get better at using the planning system to actively shape land values – over the long-term this should help to reduce the gap between market value and existing use value.

A step toward this would be more clarity and consistency in the use and application of developer contributions across the country (the Land Commission has recommended a national review). The Infrastructure Levy proposed in the Planning Bill would be a further step in the right direction.

But this will only take us so far. If we want to move to a more plan-led system in which decisions about what to develop, where and when are driven more by the public interest than market forces then we need to take a serious look at how land is allocated for development. Over the next year the Land Commission will be working with stakeholders to do just this.

Planning policies can be an effective tool for shaping land values but this approach is likely to be most effective in areas where there is significant value to capture. In many parts of Scotland this is not the case. That is why we also need to recognise the need for the public sector to take a more proactive role in initiating and driving forward major development in Scotland and to accept the risks – and associated costs – of doing so.

Moving toward a more plan-led system will also take time – but the housing crisis is happening right now – so what can we do?

We believe that the Masterplan Consent Areas (MCAs) contained in the Planning Bill could be part of the solution. To do this they would need to be designed to provide a framework for collaboration that would allow the risks and rewards of development to be shared more equitably between the public and private sector. (Land value sharing anyone?)

This would be very different to our current approach, that tends to see large-scale development as a zero-sum game in which the public interest can be achieved only at the expense of commercial interests. What we are proposing is based on the principle that a more proactive involvement by the public sector should enable additional value to be created that would not otherwise exist. We believe that creating a framework that would enable landowners and developers to share in this value should make it possible to harness their own rational self-interest in pursuit of the common good.

A framework for delivering this approach that is consistent with the existing provisions for MCAs contained within the Planning Bill already exists. Over the next few months we will be working with stakeholders to look at how it could be made to work in practice.

Today’s recommendations to Scottish Government are informed by 18 months of research, including a joint report from the Scottish Land Commission and Scottish Futures Trust, Funding Scotland’s Infrastructure published today:

The Commission started by looking at lessons we could learn from the past. Last year we published a research report looking at historic attempts to capture land value uplift in the UK.  We have also published discussion papers on public interest-led development in Scotland; on local authority land acquisition in Europe and the lessons for Scotland.