Hope for more regeneration under new land value capture proposals?

John Sayer, Head of Regeneration at Ardent, comments on the impacts of proposals to restrict inclusion of hope value in compensation payments when using compulsory purchase for regeneration and development schemes.

In short order, following the announcement of the Levelling-up and Regeneration Bill, the Government launched a consultation announcing a proposed key change to compensation payments for land bought through compulsory purchase. That consultation closes next week, and it seems there is significantly divided opinion between those proposing the changes and those in the industry.

The proposals would see a move from the current system where a landowner is paid market value for their property, ignoring any effects the scheme underlying the compulsory acquisition may bring.   Instead, an acquiring authority could apply to have compensation capped at existing use value or existing use plus a defined percentage, in either scenario being less than market value. This provides the ability for acquiring authorities to buy land at less than market value where development hope value pre-exists, thus forcing a landowner to sell at a market discount. It would, however, be necessary to demonstrate this will help deliver a scheme otherwise not viable or that it will bring other community benefits.   The community benefits are not defined, presumably for a case to be made at a project level, but the most obvious easy win would be to convert a saving on land costs to more affordable homes. It is, however, already the case that public benefits must be demonstrated to use compulsory purchase powers.

As a headline, this sounds like music to the ears of public bodies and their development partners with a regeneration agenda. So, is this a silver bullet to help unlock the regeneration of decaying high streets or deliver much-needed new homes?

First and foremost, the majority of land sold for regeneration or development transacts by private treaty. Compulsory purchase powers are acknowledged as a tool of last resort. It therefore follows that a modest amount of land is acquired through the compulsory process and any public benefits the proposed changes bring would therefore be constrained to a small number of sites. Unless there is an ambition to acquire significantly more land through compulsory purchase, which seems impractical, then this proposal will have an extremely limited impact on capturing value for public benefit due to its limited market exposure. However, the proposals would create a two-tier system in the market where transactions take place inside or outside of the compulsory purchase regime, with a raft of knock-on consequences. This would create unfairness in the market for current landowners and may deter future site assembly by private treaty.

A further requirement is that projects cannot be private sector led. The Government has intimated the proposed directions to cap value could not be used where an acquiring authority is in a partnership with a private developer. Such partnerships are a long-standing tried and tested delivery model for regeneration projects where the developer’s resources and an acquiring authority’s statutory powers join forces to bring about positive change. Even with the increase in Government funding for regeneration projects in recent years many projects will simply not be able to stand on their own two feet and be delivered without private sector support. This limitation therefore seems likely to exclude a notable number of projects benefitting from the proposed changes and might smother a number of fledgling redevelopment opportunities.

It seems likely that only an exceedingly small number of projects would be in a position to benefit from these changes. The most likely users are Homes England and the various Development Corporations. The process to deploy these changes is unclear but likely to be fraught with difficulty. For example, to demonstrate benefits, it is likely that detailed data such as viability appraisals will have to be made available. Such data may be detrimental to the overall case for compulsory purchase powers and are often commercially sensitive.

In some markets the existing use value can be the best and highest value that might be achieved. In the south-east, where swathes of industrial land have been lost to housing or major infrastructure projects over the last decade, this has created significant market competition where existing industrial use values can be equivalent or even greater than redevelopment values. In this situation the proposals will bring no benefit.

There is also the impact on the landowners themselves, who by their nature do not choose to be involved in this process. An Equalities Impact Assessment is already part of the compulsory purchase process, the importance of which I expect will continue to grow. The current compensation regime seeks to put landowners in a position of equivalence. Under the proposed changes landowners could be forced to sell at below market value. Departing from such equivalence may be seen as unfair and offends one of the central principles of the so called compensation code. This could have major impacts on many – from individuals to wider groups such as where a major pension fund is the owner. These circumstances will create a greater risk of challenge and uncertainty to projects and likely cause delay.  This seems at odds with the Government mantra of recent years that they are seeking to make the process “clearer, fairer, and faster.”

I recently attended the Compulsory Purchase Association’s National Conference. This was a hot topic on the day with the packed auditorium of more than two hundred lawyers, surveyors, planners, and accountants from across the compulsory purchase industry discussing with keen interest.  The conference Chair asked for a show of hands in the audience for an indication of how many favour these proposals. Not one person showed support.

The need to find ways to deliver more public benefits from new developments will be an ongoing debate. I fully understand why the Government wants to find new ways to bring further benefits to society. In my opinion, these proposals will not deliver the benefits that Government and the various lobby groups who are supporting the changes are seeking to achieve. Any changes should bite on the whole land and property market to bring about real change. By default, these will then flow into the compulsory purchase process in the current market value-based compensation provisions. Amendments through the planning system to existing levies or the introduction of new ones are the most likely way to share the benefits from land value uplift. A tweak of this nature to compulsory purchase legislation is more likely to create greater challenges elsewhere and could result in regeneration being stifled, rather than acting as a catalyst for transformational change.

To discuss these issues or how we can support you in respect of a regeneration or development scheme you are promoting (or are impacted by), please contact John Sayer on 07500 866113 or johnsayer@ardent-management.com