My Lords, I rise to speak to the question of whether Clauses 174 and 175 should stand part and, to some extent, to government Amendment 412D. I thank the noble Lord, Lord Carrington, for his masterly introduction.
I intend to focus more on what I hope will be the technical side. I have a sort of background here. I dare say that I am the only person in this House—probably in the Palace of Westminster—who had to deal with a development land tax calculation when I worked in public service. I recall those years very well, because the entire land supply dried up during that period. I will try to give a bit of technical background without making it overly complicated.
I, too, am grateful to the Compulsory Purchase Association and Mr Raj Gupta of Town Legal for their comments. Mr Gupta kindly gave me permission to quote from one of his emails, which I may do later.
This is all to do with the question of hope value. If I can loosely paraphrase, this is regarded as an excessive element of value that is so far divorced from current purpose, use and enjoyment that it is regarded as offensive. The first thing you have to know about hope value is that there is a lot of it about. On the outskirts of every village and town in every municipality, there is land that is tied up by legal agreements or whatever that are to do with this inflated hope value. So the first thing we need to bear in mind is: what do you do about the bits where stuff is already in the pipeline? If you put a block on that, it will have consequences.
Hope value does not exist in isolation from the umbrella of market value. Market value combines various things; it may be a current use value, an alternative use value and a hope value. Wrapped together, they form this construct of market value. Things such as hope value are not objectively measurable in their own right, which becomes a bit of problem; I remember that problem from dealing with development land tax calculations, where the question was about the current use value that had to be entered on the form on which one was making the calculation.
However, market value has a clear, established, internationally recognised definition. It is capable of independent corroboration by what is happening in transactions, which are evidenced—that is, the evidence can be produced from within the marketplace. I will leave aside the complexities of specialist things such as going concern value, but this question of hope value rests on the belief that an asset is capable of being made to be worth more, with value being added in some way, such as through works or changes of use, possibly with the prospect of development but possibly by simply bettering what is already there.
Development, by definition, also includes permitted development rights; it is a form of development. The question about that is how to single out those things that society, until now, has regarded as being part of the entitlement of ownership—namely, permitted development rights—from these other excessive sums, if “excessive” is the right term.
The rules for compensation for compulsory purchase have been developed over nearly 180 years and, in modern terms, use market value as their baseline. They sit alongside issues of human rights in relation to, first, the reasonable enjoyment of one’s property and, secondly, the right not to have it taken away other than for demonstrably compelling reasons of public interest—of which more anon—and then only on the basis of fair compensation determined, in the event of a dispute, by an independent adjudicator. So far, so good, as I am not for one minute suggesting that human rights justify a hugely disproportionate level of value. But this is tied into this construct of market value. If one were to start filleting out market value, there would have to be a better definition or one closer to that referred to by my noble friend Lord Carrington.
Pivotal to all this is the concept of equivalence, and it will become apparent why I am talking about this. Equivalence is the ability to buy an equivalent asset from the money gained from the compulsory process. Put another way, the compensation should put the owner in the same position, as near as money can make it, as they would have been but for the compulsory acquisition. That principle was established long ago in a case called Horn v Sunderland.
Particular things need to be borne in mind here. First, the special interest of the acquiring authority is always to be disregarded where it could be realised only as part of the authority’s scheme. That is a given and has been a factor for a long time. Secondly, any reduction in value by virtue of the acquisition being compulsory should also be disregarded, and that is at both ends of the spectrum. Also, the compensation is to be paid in full at the time of taking the land or else interest runs thereon, and any reasonable costs or losses associated with and arising from the act of it being a compulsory acquisition should be paid as part of the compensation.
Clause 174 refers to “no-scheme” minor amendments, but in amending the Land Compensation Act 1961 it seems to go further than the strict purpose of simply eliminating those aspects of value that could be realised only by a scheme involving compulsory powers. It seems to dig deeper than that. The question is how deep and where that process ends. It also amends the definition of compulsory purchase purposes to a point
where what it defines could be seen as part of the normal current use rights and not the sole preserve imported by the acquisition scheme itself. I refer to the words “re-development, regeneration and improvement”, which is a very broad definition.
Clause 175 sets out to reinforce this in relation to assumed developments under certificates of alternative development. This is clearly something that the Government want to make harder for claimants and, conversely, easier for acquiring authorities. I will not go any further on that, because my noble friend Lord Carrington covered it pretty well.
Government Amendment 412D introduces a new scheme of Secretary of State direction enabling acquisitions to be made at existing use value in certain circumstances. However, the provision is rather complex and has a sting in the tail in that, after 10 years, if the land has not been used for the specified purpose, which has to be specified up front, there is a potential claw-back. As I see it, it also muddles the justifications of public interest and the rationale for having CPO powers. The two are not the same.
With regard to the ostensible aim to provide more affordable housing, here are some home truths: the amount that the owner of bare, undeveloped land gets after the costs of obtaining the planning assent is typically in the range of 8% to 12% of the finished product value, otherwise known as the gross development value. The complaints about high land values—I know this from having analysed spreadsheets with all this information on them—often come from housebuilders and ignore the effect of the additional rolled-up cost of obtaining planning permission and the very substantial costs on risk of speculatively financing these. The whole planning process makes it more expensive.
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If land were sequestered without compensation at all from the landowner, you would typically be talking about a modest, single-figure percentage of the ultimate gross development value. The noble Lord, Lord Carrington, is right about that. The process of the development—the complexity of the finance, materials and labour—over extended timeframes makes this a really complicated piece of discounting to arrive at net present values for. The whole thing is speculative, in the sense that you are trying to predict what might happen over a period of time—not in terms of the end values, because those are present day, but, particularly on larger sites, the risks associated with developing them out and the rate at which they can be developed out without swamping the local market in the process.
The noble Lord, Lord Carrington, referred to affordable housing requiring market housing to fund its construction. That is true. Mostly, this is reflected in the landowner receiving a lower value for the property.
By and large, local authorities do not build the houses themselves; they enter into commercial agreements with developers to construct them, and these commercial entities make profits, typically not less than 20% of the finished product value. I would be glad if that would lodge in noble Lords’ minds: we are talking about single figures of GDV for the landowner and 20% for the developer. That is a common figure and is embedded
in many viability assessments that go to local authorities. Whether it is visible is another question, but it seems worth comparing.
These are readily discernible by anybody familiar with development appraisal and construction economics and practice. But there is an increasingly grey area, which the noble Lord, Lord Carrington, referred to, between what is properly regarded as public interest and what may be termed government commercial objectives, which may be driven by political priorities and the mercantile advantages thus facilitated. To give one example, the Government used the 2017 Electronic Communications Code to reduce rents, to benefit a category of investor who were investors in the leaseholds on these various sites. They made a killing commercially, it would appear, but have so far produced no measurable operational benefits to the network, let alone to the consumers who sign up for their mobile service.
The Government claim to have consulted on the measures. As the noble Lord, Lord Carrington, said, the consultation results have been published. I am grateful to Mr Raj Gupta for his summary. He says, first, that the outcome of the consultation demonstrates that
“there is very limited support for any form of abolition”.
Secondly, he said:
“There were some ludicrous responses given”,
in one or two areas;
“For example, one respondent said that a Crossrail 2 study had shown that the abolition of hope value would fund 50% of the cost of the new railway when a PWC study commissioned by TfL said that total land acquisition was less than 10% of the cost”.
They cannot both be right, but I would put my money with PWC. He thought that
“The response to question 5 is really telling. The Govt noted that hope value was more likely to be paid for transport schemes and regeneration of brownfield land—but it is not proposing capping for those kind of schemes”.
And so it goes on.
I will bring my comments to a close. An existing use value needs to be defined. What among the prospects of free markets is it that the Government propose should now be disregarded? The net result of this could be highly irregular in terms of the pattern of values. Existing use value means different things to different people. A piece of bare land in a village or urban fringe might have a low scheme land value—I suppose it might have utility for the protection of the view for owner A, horse grazing for owner B, a wildflower meadow for someone else, or be part of an agricultural holding or amenity land, all of which have different valuation criteria. The list goes on. It means different things to different people. I said that I make no judgment about property owners and whether they should get inflated or other levels of value, but the Government need to explain and consider market sentiment or the result risks being the precise opposite of what they are setting out to achieve by these measures.