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Developing a Methodology to Capture Land Value Uplift Around Transport Facilities

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DEVELOPING A METHODOLOGY TO CAPTURE LAND VALUE UPLIFT AROUND TRANSPORT FACILITIES

EXECUTIVE SUMMARY

The Project

  • This study was commissioned by the Scottish Executive to develop a methodology to capture land value uplift around improved transportation facilities. This has involved developing approaches to forecasting and measuring land value change due to transportation factors, as well as identifying and reviewing various mechanisms by which land value change can be 'captured'.
  • A review of other studies and the literature has demonstrated that the expected effect on both the residential and commercial property markets appears to be positive, but the range of impacts is very variable along the route, both in scale of impact and in the location of impact. However, some of this uplift may be due to the optimism of the markets rather than actual effects. Where possible, it is important to use transactional data rather than valuation data.
  • A further point relates to how the location of a transport scheme can influence potential land value gains. Empirical data for this is limited, and much depends upon scheme specific circumstances. Thus, transport schemes in urban areas may normally have the greatest potential for improving land values overall. However, a transport scheme opening up 'greenfield' locations to development - assuming this is supported by planning policies - can generate a considerable rise in relative and overall land values.

Measuring land value changes due to transportation improvements

  • Key factors that need to be incorporated into assessing land value change include the following:
    • The treatment of time: data needed before, immediately after and further in the future (5 years).
    • Scale of effects: this can be linked in with accessibility changes and distance from the station interchange.
    • Catchment areas: between 800m and 1000m, shorter for businesses and commercial activities and longer for residential activities.
    • Methods and data: Geographical Weighted Regression and Hedonic Pricing are the two most useful methods to capture local change, and transaction data from the Register of Sasines at the individual property level.
    • Attribution of impacts: the quantitative analysis needs to identify the relationships that are then 'unpacked' through qualitative interpretation and assignment of causality.
  • To develop a robust methodology for measuring value change requires commentary on the contextual situation, an appreciation of the data requirements and limitations, a clear understanding of the issues relating to attribution, and some means by which the numerical results can be interpreted. This suggests a mixed quantitative and qualitative approach.
  • A method for measuring land value change has been developed, which addresses the issues mentioned above. This has been termed Transport-Investment and Measurement of PROperty Value Enhancement (T-IMPROVE).
  • The feasibility of applying T-IMPROVE has been desk-tested against four case studies: the A77/M77 road link; Glasgow airport rail link; South East Edinburgh LRT; the Waverley Line. This was to assess if the data and systems were available for T-IMPROVE to be applied, and the results of this testing were positive.
  • It is recommended that T-IMPROVE is applied in practice against actual transport schemes. At the same time it would be valuable to develop a User Manual. This would enable potential users to better understand how to apply, present and interpret results. A decision on this will need to made soon if the method is to be applied against a currently proposed transport scheme.
  • T-IMPROVE is an empirically-based measurement method, and the practical testing of the method noted above, will help develop a database to support decision-making on a number of themes. However, a predictive approach would be needed in order to apply land value capture methods, as these capture methods need to have information on expected value changes as a basis for determining the level of funding they could generate.
  • A key conclusion is that it is not possible to use existing land use transport interaction (LUTI) models as a basis for developing a predictive approach to land value change, mainly because the zones they represent are too coarse for the purpose. However, there are a number of options for developing this capability, as well as possibilities for the enhancement of the proposed T-IMPROVE method. These can be summarised as follows, and follow a natural progression:
    • A strategic testing of selected LUTI models in the appraisal of land value capture proposals.
    • A major enhancement of existing LUTI models to enable inclusion of land value capture processes, and hence to forecast the impact on development and land-use of the land value capture itself.
    • The application of selected LUTI model (e.g. TELMoS) alongside the T-IMPROVE methodology.

Methods for capturing land value change

  • Eight 'alternative funding methods' have been reviewed as mechanisms by which land value change could be captured. The key features and evaluation results of each funding method are summarised below:
    • Business rate levy - substantial fund raising potential; based upon an existing set of arrangements; likely only to get support for a highly popular transport scheme; would require legislation.
    • Local authority business growth incentives - medium fund raising potential; does not charge businesses up-front; directed mainly at regeneration areas; newly enabled method.
    • Business improvement districts - small fund raising potential; can be useful for very localised transport improvements, but not for transport infrastructure of any significance; newly enabled method.
    • Land value taxation - substantial fund raising potential; can be used as replacement or additional tax, with consequential policy and funding issues; potentially requires a more radical change in practice and procedures than other methods.
    • Greenfield development tax - medium fund raising potential; funding level depends upon level of activity; may 'transfer' activity between local authorities; requires legislation.
    • Freehold charges - substantial fund raising potential; one-off charge theoretically, so there may be issues over how effectively and equitably to collect the charge; would require legislation.
    • Planning gain - medium fund raising potential; can only be related to a specific development; an existing method.
    • Buy-in charges - medium fund raising potential; useful for local transport schemes, but not larger schemes; would require legislation for some approaches.
  • A detailed review of each of these alternative funding methods is provided in Sections 5 and 6. This includes the results of evaluating each of these methods against a set of key evaluation criteria. These evaluation criteria are linked through to a set of threshold criteria developed into a 'PACE Pyramid' for this study, as illustrated below.

PACE pyramid - funding method selection criteria

  • The eight funding methods were tested through a high-level application at the City of Aberdeen and Clackmannanshire. This primarily focussed upon the level of funding that could be generated by these funding methods, but was linked to an overall 'in-principle' evaluation of the funding methods.
  • A definitive recommendation of which funding method, if any, to pursue has not been made. All of the funding methods are technically capable of being applied in practice. There are relative advantages and disadvantages attached to each of the funding methods. These are discussed in the report. Ultimately, however, it will require a political decision as to whether to pursue such funding approaches.
  • There would be particular value in testing the funding methods in detail in relation to an actual transport scheme. If this was carried out in conjunction with the detailed application of T-IMPROVE, this would provide considerably more benefits. It should be emphasised that the testing of the funding methods should be in 'shadow' form - in other words, no actual money should be collected.
  • In this context, it is important to note that changes in land values are already captured through existing mechanisms, such as rates, stamp duty, capital gains tax and inheritance tax. It is estimated that these could generate over 2 billion per annum in Scotland. However, a clearer measure of how much such funding sources generate, is required. This is necessary to ensure that individuals and organisations are not subject to 'double-taxation', or at least to ensure how much potential exists for capturing a share of land value uplifts without unduly penalising recipients of such value changes.