Ian Lindsay, Senior Partner, aspireCP: November 2019

Much has been written on the subject of land-value-capture (LVC), seeking to monetise the increase in land values associated with planning policy and public investment in, for example, major transport projects. The cost of projects to the public purse is a major obstacle to delivery, yet transport investment is becoming increasingly essential to the sustainable development of cities across the globe. Experience suggests that making LVC happen on the ground is fraught with difficulty and so, instead of reprising the theory, this article focuses on practical issues from my experience of recent UK projects.

The growing international demand for LVC was one of the reasons behind the UK’s recent Select Committee Inquiry and the report, published in September 2018 found[1]: “For decades, governments have sought to capture increases in land value, but with limited success. When considering new mechanisms for land value capture, it is vital that we learn the right lessons from the past… Where new land value capture mechanisms reduce incentives for landowners to participate in the development process, local authorities will require effective CPO powers to ensure that communities continue to benefit from developments in their areas.”[2] This gives us important insights into the need to make LVC work through learning from experience and being prepared to back up the intent behind LVC by using compulsory purchase.

Crossrail

Both these elements were central to my experience on Crossrail, where I was Land & Property Director 2011-2018. More than any other UK rail project in recent times, the commercial realisation of value from property development above/ adjacent to our stations formed an important part of Crossrail’s core funding proposition. As a consequence, the design of stations, over-station developments (OSD) and the surrounding urban realm was delivered on an integrated basis at a dozen key sites, which had been assembled as part of one of the most complex compulsory purchase programmes ever undertaken in the UK.

Full development planning consents were secured to deliver c.3.5million sq.ft of high quality office, retail and residential space with a target of generating c. £500million towards the cost of building the railway. As I write, the commercial deals to make this happen are in place, construction on several sites is well advanced and current projections are that the financial target will be exceeded. In addition, Crossrail secured privately funded delivery of two of its stations (Canary Wharf and Woolwich) by working with developers on integrated station and OSD construction and the Crossrail Infrastructure Levy has out-performed its target to draw in ‘planning gain’ contributions from new developments within the Crossrail catchment area. Direct property LVC on Crossrail will therefore exceed £1.1billion.

Network Rail

Before joining Crossrail, I was Head of Developments at Network Rail and helped the company secure value from rail/ property development via capital contributions, third party railway improvements and ongoing sustainable revenue. This was based on delivery of the Shard at London Bridge, the Cannon Place development at Cannon Street, the redevelopment of Birmingham New St station alongside ‘Grand Central’ retail and the establishment of Solum Regeneration Ltd as Network Rail’s property development Joint Venture. What has this experience taught me?

Lessons Learned

1. Land Take – LVC works best where the railway promoter acquires the land outright and can then legitimately extract value through re-development and be in control of the outcomes. This was the basis of Crossrail’s OSD programme, but Crossrail were constrained by the compulsory purchase powers available to take only the land absolutely required for the railway and in many cases this did not extend to the most sensible plots which would maximise value and deliver the best place-shaping outcomes. Future projects should either be given wider ‘regeneration powers for compulsory purchase and/or work more closely with developers and local authorities to plan win/win CPOs.
2. Leadership – It is essential for the whole project to be committed to delivering development outcomes alongside delivery of the railway. It is right and proper that the railway is isolated from development risk. But, the rail delivery organisation needs to be incentivised to optimise development value and to understand the importance of wider regeneration benefits to overall success of the project.
3. Transport-Orientated Development – Part of Crossrail’s success was due to being deliberately ambitious in terms of place-making and urban realm improvements. This helps drive more value to capture and potentially wins allies who will be needed when the project is under construction. Leading architects were procured to produce bespoke designs for both the stations and OSDs, reflecting the different character of the individual places and communities that they serve. All of Crossrail’s OSDs and the urban realm designs were then independently design-reviewed. Crossrail also went beyond its statutory requirement to ‘reinstate’ urban realm, designing for much wider areas and then working in partnership with local and transport authorities to collect development contributions. In this way a £30m Crossrail investment became a £130m urban realm improvement programme.
4. Commercial Approach – Whilst it is tempting to enter into standard development agreement deals which transfer risk to developer partners in return for up-front land value only payments, my experience is that this means neither developers nor the railway promoters are incentivised to work collaboratively in construction. Moreover, a one size fits all strategy is not generally the best way to deal with a diverse range of development opportunities and construction challenges. It was this thinking that led to Network Rail seeking to channel station development through its own joint venture property development partner, Solum, and why at Crossrail I sought to vary the original commercial agreements to put in place a range of more market-facing deals which would optimise value in return for slightly greater levels of market risk appropriate to the nature of the different schemes.
5. Railway Interface – The physical interface between the railway, stations and OSDs is inherently complex. Understanding the interface and the challenges facing the likes of Network Rail and Transport for London (TfL) and how to manage their issues is essential. By putting in place transfer decks above our stations Crossrail separated OSD and Station construction and de-risked both as far as possible. But we also developed a suite of documentation and relationships to manage the interface proactively. The Crossrail model Development Agreement & Lease gave us mostly absolute control over the developer partner on design approvals from RIBA D through pre-construction, build and to completion. The Technical Interface Parameters (TIP) documents clearly defined the physical and functional interfaces, with any developer proposed change subject to a robust design assurance/ approval process. Infrastructure protection controls within the development agreement guaranteed safe construction and operation of the railway, with the developer acknowledging that in the event of any conflict on safety and security matters railway interests will prevail. Then Crossrail’s station delivery teams managed the infrastructure protection role through Construction Interface Control Documents (CICDs) which developers prepared, detailing how contractors’ working in close proximity could ensure safe/ efficient implementation of works and station operations. However, perhaps the most important ingredient of all was to employ Development Interface Managers, embedded within our station- teams. This gave both railway promoter and developers a focal point of contact who understood the construction challenges of both the station and the OSD and were there to solve problems before they became critical.

If the successful implementation of these projects has achieved anything as a legacy for the industry, I hope it has been successful in proving the concept that a transport project and property developers can work together in a way that allows both to manage their risks effectively and remain profitable.

[1] House of Commons, Housing, Communities and Local Government Committee, Land Value Capture, Tenth Report of Session 2017–19 https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/766/76602.htm
[2] House of Commons, Housing, Communities and Local Government Committee, Land Value Capture, Tenth Report of Session 2017–19, paragraph 43 p.18

Whilst this summary is believed to be correct at the date of issue neither the author nor aspireCP accept any liability for the accuracy or completeness of the information contained in this article. No part of this document may be copied or re-produced without the written consent of aspireCP LLP