Chapter 1
Introduction

Tony Crook1, John Henneberry1 and Christine Whitehead2

1Department of Urban Studies Planning, The University of Sheffield, UK

2LSE London, the London School of Economics, UK

Purpose of the book

'Planning gain' raises fundamental issues around the role of the state and the optimal creation and distribution of land values. Such gain may, in part, be the product of better decisions about the use of land as a result of government intervention. But it can also arise because planning constraints affect markets in ways that do not offset market failures. The extraction and allocation of all or part of increases in land values, through government policies to capture planning gain, is a core policy and practice issue in many countries. This is significant because it provides a source of public finance and the potential for resource redistribution.

This book considers how mechanisms to create and extract planning gain have developed in England since the middle of the twentieth century. In the 1940s and 1950s, following the nationalisation of development rights, such mechanisms were a core element of national government policies and finances. Thereafter, there were many changes in the instruments used and in powers of implementation, although the principle of government control over development has remained unchanged. The main contribution of the text is to examine how the system for extracting land development value has operated since the 1990s based on a national legislative provision (currently defined in S106 of the principal planning statute - the 1990 Town and Country Planning Act) and implemented by local decision makers. In this period, planning gain has been in the forefront of policy development to enable local authorities to fund the physical infrastructure needed to support new development and meet wider community needs such as additional affordable housing.

The development process and the creation of development value

Our starting point must be the property development process and the way that development is driven by potential returns based on the value of outputs from that development (Brown and Matysiak, 2000; Reed and Sims, 2008). Development is the investment of capital in real property to produce a return. Usually - but not always or entirely - the return is measured in financial terms. Development is viable when its value upon completion exceeds its costs by an amount sufficient to compensate the developer for the risk that is borne and the effort that is expended on the project. These costs include the price paid for the required land, which in turn reflects its value in the best alternative use.

Development can take many forms. It may involve the identification and acquisition of a suitable site, the provision of off-site infrastructure to support the future use (i.e. the servicing of a site), the construction of buildings and other structures on the site and the disposal of the completed scheme to owners and/or occupiers. Developers may perform all of these tasks or only some of them. For example, there are those who specialise in assembling fragmented ownerships and selling on the resulting large site to realise the 'marriage' value. Others, including the original owner, may focus on obtaining outline planning permission and servicing land before selling it to a developer, who then completes the scheme. Developers themselves may retain and manage the resultant asset.

Development is not restricted to undeveloped, un-serviced land. Developers may purchase existing, serviced land and buildings for brownfield development. They may demolish the building and replace it with a larger or more functionally efficient building or one given over to a different use. Alternatively, the existing building may be renovated, refurbished or extended. The common requirement for the development to go ahead, whichever types or stages of development are involved, is that the value of the investment exceeds the cost by enough to provide a competitive return.

We now consider development demand and value. Land values are underpinned by the demand for land generated by the activities of society as a whole and their evolution. Land values are highest when the land is employed in its highest valued use and will, in a well operating market system, be allocated to that use by preparedness to pay and therefore price. Allowing for land productivity, agricultural values depend upon the demand for food and other farm products and the ability of consumers and users to pay for these products. Retail land values depend upon the demand for consumer goods and the way in which they are distributed and so on. As society develops, so gross domestic product (GDP), productivity and personal incomes grow. This inherently increases the average value of scarce land but it also implies that the most appropriate means of production, distribution and consumption are likely to change. The nature and pattern of physical development must in turn change in the face of these trends. The relative values of different types of property and land will wax and wane as a result.

The level and distribution of the value generated by changes in demand are affected by a range of other factors. A key influence is the availability, quality and cost of off-site infrastructure. It is no good building houses on a site that does not have access to the road network, sewers or mains water. In a regulated market, the state, through the land-use planning system, will contribute to the general change in land values by, for example, reducing negative externalities and increasing positive ones. It may also control landowners and/or developers' ability to respond to changes in demand and to achieve that value by permitting or prohibiting any kind of development or restricting land use to specific types of development.

The most dramatic increases in land values occur when a change from a lower to a higher order land use is combined with the physical development necessary to meet the requirements of the new use. One example is the transfer of agricultural land for residential use. The price at which the highest valued completed development may be sold determines the value of the land required to achieve that development. In other words, once development costs (building costs, finance, professional fees and the minimum developer's profit) are covered, any residual establishes the maximum market value of the land. The difference between the market value and the existing use value of the land is termed the 'development value'. Another generally used term for this difference between market value and existing use value is 'betterment' (Cullingworth, 1980; Hall, 1965), reflecting the extent to which property development enables additional benefits to be achieved such as the benefits of public investment in transport that improves the accessibility of a site given planning permission.

The price at which land will be offered and traded in the market will depend upon a combination of the character and motivation of the landowner, the development potential of the land and the nature of the extant planning system (Goodchild and Munton, 1985). Landowners will usually require a significant financial incentive to sell land. They will seek to maximize the proportion of the development value of the land that they obtain in the land price and will calibrate that objective against prevailing market experience. This is the mechanism that brings land forward for development. If the state reduces or removes the landowner's sale premium the supply of land will be reduced or halted unless an alternative means (such as compulsory purchase) is found to bring land forward for development.

The taxation of development value

Attempts by government to capture development values through the planning system have a long history in the UK (Cullingworth, 1980). This was initially seen as a matter of equity (Cullingworth, ibid; Hall, 1965; see also Fainstein, 2012, for international views). It was argued that increases in land values as a consequence of development should not be kept by landowners who had done little or nothing to generate this value but should be shared with the state as the representative of the wider society whose actions, in large part, created them. In line with these principles, national taxation of land development value was introduced, the income from which was used for general public expenditures.

Latterly, much more emphasis has been put on the more pragmatic rationale that development value taxation can be used to finance infrastructure and services both to increase economic growth and benefit communities (see, e.g. Bill, 2004; Campbell et al., 2000; Crook and Monk, 2011; Lichfield, 1989). This, in turn, has shifted the emphasis towards approaches that are both locally based and generate hypothecated revenues.

State intervention in the creation and extraction of development value is by no means confined to the UK (Ingram and Hong, 2012; Monk et al., 2013; Oxley et al., 2009), although England, in particular, has been at the forefront of the development of policy and practice in this field over the last three decades. In all systems, local or national governments regulate and manage land uses in ways that influence the generation of development values which in turn may be taxed in one way or another. Each country has its own legal and institutional framework that helps to determine what types of instrument are feasible and desirable. Even so there...