There has been a lot of attention on Labour’s proposals “to get Britain building again” as part of a drive to deliver their pledge of 1.5mn new homes in 5 years (not least from my colleague Tom Hewitt here A return of Development Land Tax?, Tom Hewitt (burges-salmon.com)). Whatever this might mean for the nation and economy as a whole, there is potential for a big impact on landowners with possible development sites, otherwise known as strategic land. 

Firstly, this could be a huge opportunity for landowners as more development is likely to mean more land sales. Those sales can be transformative to the finances of a business as the prices achieved for development sales can often be well above the current use value of land. At the same time though the discussions on possible government policies include what’s described as “land value capture”, which may reduce the gap between that current use value and what a developer might pay for the land. 

What is land value capture? 

In very broad terms, land value capture describes a policy approach which demands that developers be obliged to provide additional non-profit generating aspects of a development at their own cost. The aim is to provide more in terms of infrastructure and social housing, but the impact is a reduction in the price that a developer will be prepared to pay for the raw material they need to do the development in the first place; the land on which they build. 

Unpacking this a bit with the example of a housing development, the developer is already obliged to provide certain things alongside the houses they will build and sell, like roads, green space, affordable housing and, on bigger schemes, perhaps schools or medical facilities. These obligations are imposed under s.106 Agreements between the planning authority and the developer. The point being that, in this example, housing is where the developer generates profit, with the other aspects being a cost to them which eats into that profit. 

When looking at land to buy, the profits a developer could generate from building and selling houses less the cost to them of the project, including the s.106 obligations, gives rise to the price they are prepared to pay for the land they need. Currently it may be possible for a developer to argue that they cannot afford to buy land at the current market prices unless they can reduce their costs, partly by providing less in the way of, say, infrastructure or social housing. That is then a negotiation with the planning authority as to what obligations the developer has to fulfill in relation to a particular scheme.  

What land value capture seeks to do is to tighten the obligations on a developer to provide infrastructure and, particularly in context of the current discussions, social housing. If those obligations are immovable and are at a level that the overall profits a developer might expect to achieve are reduced, that will reduce the amount developers in general can afford to pay for land across the board and so bring market prices down. Hence, the value in the land moves away from the landowner and is captured by the wider community via the benefits of social housing and infrastructure. 

This of course begs the question of whether it’s right that the landowner bears this additional cost through reduced land value or whether there should be a more even sharing of the burden with the developer seeing a reduction in profits, but the current commentary seems to assume that landowners will bear the brunt.  

Land value capture is based on the idea of a consensual arrangement between landowner, developer and planning authority: an alternative, which featured in the Planning and Infrastructure Bill announced in the King’s speech yesterday, was the use of compulsory purchase orders to acquire land at a “fair but not excessive” value. CPO is a topic all of its own, and for more information do contact the Burges Salmon CPO team Compulsory Purchase Order | Compulsory Purchase Lawyers (burges-salmon.com). 

What’s the impact for landowners?

So, from a landowner’s point of view there might be a better chance of bringing a site to market because more land will be needed to build the new homes, but the price they achieve for their land may be below what they might have done under the current rules. In any case, such values are still likely to be well above the value they might achieve for the land in its current use, so many landowners will still want to go ahead with sales.  

Where multiple landowners needing to come together to deliver a site, particularly on large scale schemes, they will still need to think carefully about equalisation arrangements to share the risk and rewards of the project to avoid adverse tax consequences and come to a fair deal commercially, and they need to do that at an early stage.  

Finally, though the values might not turn out to be as significant as they have been, careful thought about succession and tax planning still needs to happen at an early stage. Reliefs which may be available while land is used for, say, farming would be lost once development starts, and an opportunity to get that value to the correct part of a family or their business may be lost. Business structures, particularly Balfour based ones, also need checking ahead of a development project to ensure that they will still work. 

Strategic land continues to be a long and winding road for landowners, and though the details may change, the fundamentals of getting the deal right and starting to think about it early won’t.