Can social objectives be used to drive investment outcomes?

Value capture’ is an important mechanism in funding urban and social infrastructure. Unfortunately, it is not applied enough and is often poorly executed. What is it and how can it be done better?

Value Capture is a funding mechanism whereby individuals or businesses that benefit from planning decisions or government investment are required to share part of the value they derive. The concept is not new, however, the use of the term is becoming increasingly prevalent among state and federal politicians to explain how infrastructure projects that are otherwise unfunded can be delivered.

We actually think this is a good thing and believe the remit of how value capture is applied should be expanded. Unsurprisingly, most developers and investors are against the concept on the grounds that it stands to reduce profit from property transactions. This is what it is intended to do, but the lost profit can be more than offset through other benefits.

How is value capture different from other property taxes?

Value capture is intended to better distribute windfall profits. Just as you only pay income tax when you earn income, the ‘capture’ occurs specifically when planning decisions or government investment result in large valuation uplifts. Whilst it can be argued that value capture is an upfront charge on a project, it also reduces the need for charges or taxes in other forms as there is a more equitable distribution of proceeds.

Take, for example, the announcement of a new train station. It is highly likely to bring immediate (and substantial) uplift to the value of nearby properties. A valuation process readily identifies favourable value changes and some of this uplift is then partially redistributed through value capture to help fund the cost of the station or deliver other community benefits. On this basis, both landowners and the community benefit from the delivery of new major infrastructure.

How is value capture used currently?

As it stands, value capture is implemented through funding contributions in certain areas only. For example, on Melbourne’s urban fringe, developers undertaking new land subdivisions pay Growth Area Infrastructure Contributions (GAIC) and Infrastructure Contribution Levies. These levies are a form of value capture which redistribute some of the windfall profits that would otherwise be paid to the landowner to funding the critical infrastructure required to make new suburbs areas functional and liveable.

The first problem with this type of value capture is that it cannot be applied across the broader market without impacting the value of existing development land (and potentially negatively impacting supply). Secondly, it is effectively just another tax, and the proceeds are not necessarily spent (either wisely, or at all) on the areas they are collected from. Finally, it fails to recognise (and capture) the many possible forms of value that can be created through the planning and infrastructure delivery framework.

As an aside, in the case of growth areas, the true cost of delivering the required social infrastructure is often far in excess of the developer contributions. In the short-term, housing supply is increased, and the developers are rewarded, but the shortfall in funding is ultimately borne by the community which faces a lack of adequate infrastructure and amenity. On this basis, there is an asymmetry in financial and social outcomes.

What other forms of value can landowners benefit from, and share?

We believe the concept of ‘value’ should be broadened beyond the capital appreciation which results from wholesale planning changes. Such changes do to not necessarily occur frequently nor uniformly. Indeed, value can be delivered to landowners, and ultimately shared by the community, via numerous means.

For example, a landowner or developer may benefit from an expedited planning approval, which could significantly reduce funding costs for the development and its associated investment risk. This value could be quantified by assessing the reduction in the cost of debt and equity resulting from the shorter approval timeframe, as well as a potential reduction in equity and debt rates resulting from the reduced risk.

Other forms of value which could be delivered to a landowner or developer could include a planning dispensation on the required number of car parks for a given development, or a planning approval to exceed a discretionary height control. These would have a direct impact on the developable area and would therefore deliver additional quantifiable value.

We believe that value capture should be applied in such circumstances on an ‘opt-in’ basis, such that with each benefit there is a corresponding trade-off.

So how can this value be captured to drive better development outcomes?

We would like to see this framework developed further; where rather than a trade-off, there is mutual benefit. The current dynamic is development-led and defined by an adversarial and taxation-oriented response. In the case of inner-city and middle-ring areas, there is often adequate infrastructure to service additional development, but the development outcomes are more focused on pure profit than broader social and community needs.

We would like to see a planning system which is proactive, rather than reactive, and uses value capture to achieve superior development outcomes. In particular, we would love to see statutory bodies proactively approaching developers and landowners and working with them to bring a coordinated response to the market. This could be achieved by a Council offering to rezone land, expedite planning approvals or waive other conditions in exchange for capturing and sharing the value. In many cases, such an approach would add value to the landholdings, reduce risk, and bring forward windfall outcomes.

In doing so, Council should request landholders deliver social infrastructure which is otherwise undersupplied. This could include affordable housing, crisis housing, community medical centres, public open space, and community gardens. Further to this, Council should then engage the private developers to deliver the agreed infrastructure. They can often do so at a higher quality and cheaper cost than any statutory body and this then provides a far better value capture mechanism for the community.

Conclusions

Politicians are right to be taking an interest in the concept of value capture. However, they should broaden the scope of what value is to landowners or developers, and how it can be captured to drive better planning outcomes and to pay for improvements in the planning system. Many of the costs associated with development stem from uncertainty in outcomes and timeframes. If this can be minimised or eliminated, or the benefits are brought forward, the upside can be shared by all.