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.
