What Is the UK Community Infrastructure Levy?

The purpose and implementation of the Community Infrastructure Levy is part of the 2008 UK Planning Act.

The increased burden on infrastructure from new developments is real and should be built into development costs. But is the CIL the way to do it?

The Community Infrastructure Levy (CIL) is a product of the UK Planning Act 2008, enforced since 2010, as a means of making developers pay for the increased burden on infrastructure that comes with new homes and businesses. It is an outgrowth of earlier recommendations in 2003 from economist Kate Barker, who felt that planning gains that went to developers should be partially channelled to overburdened infrastructure features (roads, schools, utilities, etc.) and to increase the stock of social housing.

UK strategic land investors, of course, need to take this into consideration. Infrastructure will make the properties they develop more valuable – but only if funds from the CIL are put to use in ways that materially affect the new developments. Evidence suggests this does not always happen that way.

In its most basic form, the CIL is charged on any building that has some degree of human occupancy (i.e., not parking or warehousing) including residential, commercial and retail space. Only buildings adding or constructing anew 100 square metres or more of floor space (gross internal area) on or after 6 April 2013 are subject to the levy. Changes of (existing) building uses are not liable, nor are structures that are not actually buildings (such as warehouses or wind turbines). Social housing development and buildings owned by charities are exempt as well.

Implementation of CIL has of course met some criticisms, many of which make a legitimate point. Because local planning authorities collect the levy and apply it as they choose – within prescribed parameters, of course – they are instructed to establish charging schedules. This was to be completed as of April 2014 but now is likely extended to April 2015. Those authorities can also set different rates for different sized developments, however they must establish evidence to justify those different rates.

Importantly, a “CIL in kind” provision allows that developers themselves may be best suited to build certain infrastructure components using cost-effective methods. For example, when building a community of 50 homes, the developer or homebuilder might be able to establish water and other utility services with the equipment they already have in place, where they are most familiar with the land and adjoining infrastructure. It could be much more cost efficient than to channel funds through a bureaucracy that then hires a third party to do the work.

A columnist for The Guardian who writes on local government issues took a swipe at the CIL for having a significant unintended consequence. Ian Blacker wrote in October 2012 that the CIL may actually be reducing the number of affordable homes. He cites how in London, the mayor wants to channel CIL funds to the gargantuan Crossrail project, not social housing. Also, that the CIL funds in any planning authority can be geographically used anywhere in that authority, well removed from where the infrastructure needs are increased by new development.

Blacker concludes the CIL is uncharted territory, stating, “we are entering the realm of unintended consequences.” To the developer, joint venture land investment managers as well as the local planning authorities, this may be unsettling news.

But the demand for housing is largely unmet; investors in development still find places to build and where the return on investment makes it worthwhile. Whether or not the CIL cuts into planning gains is yet to be determined; would-be capital growth fund investors are encouraged to consider CIL costs and speak with an independent financial planner to see where real estate investments might fit within a broader investment portfolio.

How Does Green Infrastructure Benefit UK Housing Values?

How are housing values affected by green infrastructure?

While widely known as a social good, green infrastructure is also studied for its impact on property values. The green news is good.

It may seem that with the pressing shortage of housing in the UK, there should be flat upon flat being constructed all over the country, in urban centres as well as on and beyond the greenbelts.

But while that may have been the approach in the Post-War period, we live in a more evolved and enlightened era. Urban planning has developed as a science that takes into account many factors before launching into building schemes, those factors including transportation management, how infrastructure can and cannot support population increases and density, as well as how new development can impact the local and global environment.

These are matters of significance to communities, to be certain. But the greater sensitivity to environmental considerations ultimately guide the work of those involved in UK land investment and development. Sustainable architecture and design require a different initial perspective, sometimes incurring larger costs up front that achieve a return on investment a few years later.

In particular, the devastating floods of 2000 and the spectre of climate change now drive greater attention to the effects of built environments on the natural landscape and weather phenomena, and vice versa. And, these events informed a report from Forest Research made to the Departments for Environment, Food and Rural Affairs (DEFRA) and Communities and Local Government (DCLG). It was titled “Benefits of Green Infrastructure” and released in October 2010. The extensive study undertaken in this report (196 pages) covers the benefits of green infrastructure in several respects: the economy, social impacts, the environment, ecological dynamics, land regeneration and hydrological effects.

As one might expect, it delivers a positive position on what a conscious approach to development can mean. This includes the use of plants and topography (i.e., how rain water is managed) to mitigate pollution and flooding and to encourage physical activity and social connections. But what’s striking is that home values are also impacted.

For example, it may be intuitive that homes bordering on green spaces (including official greenbelt lands) tend to be priced higher. After all, homes and cottages that border golf courses naturally have greater value on a per-square-foot basis than those a few miles away. But the DEFRA/DCLG report identified how developing and improving properties that are adjacent to green space yields higher returns on the real estate market. “Green areas have a better image and attract more visitors, bring with them retail and leisure spending and provide job and rental opportunities. This in turn increases land and property values,” cites the report, which borrows directly from a study titled, “The Economic Value of Green Infrastructure” (Natural Economy Northwest, 2008).

To come upon this conclusion, researchers use the hedonic price method, which computes economic values for ecosystem or environmental services as they directly impact market prices. The hedonic pricing model is used by urban planners, strategic land partnerships and others when proximity to open space is clear, as well as when data on real estate transactions are available. In other words, it is based on real experiences in establishing home values.

How much can this value be increased with the presence of private and public parks? Here are two key findings of multiple studies in the DEFRA/CLG report:

1.    A view of a natural landscape adds up to 18 per cent value to a home’s property value in North West England.

2.    A view of broadleaf woods in peri-urban settings increases a home’s value on average across the UK by £7,680.

Business activity can also be generated with green infrastructure. A project in the Mersey Forest, a network of woodlands and green spaces across North Cheshire and Merseyside, involved new tree planting (8.9 million trees planted thus far), woodland management, human access to green spaces and recreational facilities, habitat improvement and land reclamation encompassing more than 500 square miles of land. Of note, this was done by engaging local communities and businesses heavily in the process. The programme was hedonically studied and found to have directly increased economic output by £2.8 million in gross value added in tourism spend, jobs related to products from the land and in health improvements.

The relationship between green infrastructure and health, as studied at the Mersey Forest, come from increased physical activity and a removal from built, urban environments that are characterised by concrete and a lack of growing plants and wildlife.

Green infrastructure often also includes a conscious and decidedly natural approach to water drainage. Hydrological effects of the use of plants and strategically placed bioswales and wetlands help convey and absorb storm water in place, instead of sending it far away in human-built drainage systems. The floods experienced in the UK and elsewhere are often due to a concentration of water where built-systems cannot accept a large volume all at once, as it happens in storms. Environment Agency UK reported as early as 2007 that a failure to absorb water in situ, particularly with new housing and commercial development, could inflict £54.6 million in damages from river and coastal flooding per year.

Investors in land development and homebuilders are increasingly conscious of these factors and are now incorporating such green infrastructure into their planning processes. Of course, dedicating land to green space might reduce the total acreage on which homes and businesses are built, but the increased value of those built acres might offset that cost in the short run and certainly add value over time.

Individuals who are looking at real assets/land investments should consider working with two types of advisors. One would be a land investment funds advisor, expert at taking raw land to productive development. The second would be an independent personal financial advisor, able to assess an investment opportunity relative to one’s overall wealth management portfolio.

How Do Housing and Infrastructure Development Compare to Population Growth in the UK?

With the population of the UK expected to hit 66.8 million by 2030, there are many ideas on how that should be managed. The good news is solutions are being discussed.

The growth of the population in the United Kingdom runs counter to trends in many developed Western countries, where population is either flat or even in decline. For the most part, it is viewed as a positive, a revitalizing factor that energizes the economy and the culture. But it would be disingenuous to say that it does not come without challenges – and there are differing opinions on how it can be managed.

Aside from the housing shortage in the UK – attributable to a great degree to population growth, but matters of economics and lending standards from skittish financial institutions factor in as well – there is also a great deal of concern about the strain that ever-increasing numbers of people place upon the country’s infrastructure. From transport to resource demands to schools, more people require more of everything. How can the country manage if things continue on the same course?

The Building and Social Housing Foundation (BSHF), an independent research organisation that promotes sustainable development, has long held that increasing the private to-let and social housing sectors is essential, along with the supporting infrastructure necessary to support that. Without this, deep social inequity develops that negatively impacts just about everything else.

Another organisation, the UK-Green Building Council (UKGBC), devised the Sustainable Community Infrastructure, which seeks to deploy “integrated, cost effective, sustainable infrastructure such as community-scale power, cooling and health, water harvesting, waste disposal and telecommunications.” It places emphasis on urban planning and smart building, architecture that strives for net-zero energy use (power generation by the building itself through renewable sources, along with buildings that simply require less energy in the first place).

The UKGBC sponsors the country’s LEED certification program, but green building hardly stops there. The “Passivhaus” concept, pioneered in Germany, has taken root in the UK with 24 structures built thus far that achieve a very high degree of energy use efficiency. While perhaps too expensive to be built on a mass basis, these homes introduce ideas on sustainability that educate traditional homebuilders and which help develop a building materials supply chain with innovative products that can benefit all.

Forum for the Future, a London-based sustainable development non-government organisation, tackles the question on many fronts. It challenges the notion held by many that containing population growth is sensible or desirable. In its report “Growing Pains: Population and Sustainability in the UK,” the organisation argues that growth is inevitable and that all major public infrastructure bodies need to plan accordingly, preferably in cohesion and in consideration of many possibilities (i.e., with flexibility). A central point made is to “use what he have more efficiently,” meaning seek out improved technologies, renewable energy, improved water efficiency, a coherent and efficient transport system and innovative approaches to reducing flood risk. Where populations are located will matter, including how regional planning processes might shift where people live today to less populated areas (the report cites a skilled worker shortage in Scotland, for example).

The existing planning mechanisms in the UK have in recent years shifted authority to local councils, which can be an asset. There still are national directives, national schemes for increased homebuilding and national trend lines. But when an investment group, for example, asks to have a parcel of land rezoned to accommodate new housing, the local council has the opportunity to examine the proposal relative to very local needs. This is designed to speed up the process of land use changes and development overall. What is particularly important about this process is that market-led forces generally are more likely and more able to deliver what is most needed.

Investors in sustainable construction more typically see returns on investment over longer periods of time – say, seven years instead of three, because renewable energy features such as photovoltaic cells or tighter building envelopes carry front-loaded costs. That may not be workable in many development scenarios, however the imposition of carbon taxes, beyond the very low petroleum tax and climate change levy (CCL), would change the homebuilder ROI to something more immediate.

Individuals who consider joint venture land investment schemes should ask land investment advisors about matters of sustainability, as it might affect the viability of a project. But before getting to that point, an independent financial advisor should be consulted to determine if and how development risks and rewards factor into their personal financial portfolio.

Advisory: None of the information contained on these pages constitutes personal recommendations or advice. If you are unsure about the meaning of any information provided on this website, then please consult your financial or other professional advisor.

Are Housing Prices Inflated by “Middle Men” Land Investors?

Residential developers formerly bought land, built homes and then sold them. But now many hand only zoning and infrastructure, handing off building to builders.

With so much attention on Britain’s critical shortage of housing, much thought and discussion is given to the processes and regulations around home building and real estate development. Among the players who are so affected by the debate and who ultimately build homes are developers.

That said, “developers” are quite often two distinct players, one the one hand there are those involved in land investment and, on the other, there are those who build the homes. The former identify sites, obtain zoning designations necessary to align them with market needs, and then sell the property to builders. One question that arises is this: by having two stages and players in development, does it add to the overall cost of housing?

How this two-step process affects pricing is difficult to ascertain on a broad basis. One argument is that it theoretically could, while another posits that land investors and homebuilders share a natural division of risk and responsibility.

Land investors buy raw, undeveloped properties or brownfields with uncertainties around land use designation changes (zoning). They also need to project forward two or more years before the market value of the property reveals itself. The investor or investment group spends money on infrastructure: they build roads, sewers, water utility lines and sometimes electrical and broadband cable installations. The homebuilder, in contrast, will often construct houses on the speculation that a buyer will be willing to pay the price that fits their business model. These are very different equations that require very different sets of skills.

Some of the factors called for in the National Planning Policy Framework (NPPF), released in 2012 by the Department for Communities and Local Government, place certain responsibilities on those investors whose business is modeled around the creation of new housing. Those responsibilities largely fall on the investor side of development:

• Be sensitive and innovative around greenbelt land, where development may nonetheless be necessary. The developer should fashion land use to ultimately reduce resource use, enhance natural habitat and increase production of energy from renewable sources.
• Provide plans in advance that a development will be financially viable. No town wants a project to be approved and then derailed by cost overruns that are unmanageable or where construction standards are then compromised as a cost-savings method.
• Engage voluntarily with local planning authorities in the pre-application stage and sometimes with the local community. This would include developers availing themselves to any pre-application services that might be available.

So without question, the homebuilder needs to construct good homes for the markets to which they want to sell. But the land investor deals with an important part of the whole process that most homebuilders do not want to manage.

Individuals who are looking for alternative investments and who consider becoming part of the investor portion of the process generally work with groups of financiers who hire specialists with a good understanding of land and land economics. Those investors are urged to contract with an independent financial advisor to set their level of involvement in relation to their portfolio risk standards.

Advisory: None of the information contained on these pages constitutes personal recommendations or advice. If you are unsure about the meaning of any information provided on this website, then please consult your financial or other professional advisor.

So, It’s a Free-for-All in Land Planning?

Is it a free-for-all in land planning?

Well, not quite!

The Government is proposing some significant reforms to "provide a comprehensive plan to unleash one of the biggest home-programmes this country has seen in a generation," in the words of Prime Minister David Cameron.

The proposed reforms include the following:

• Large commercial and residential applications will be directed to a major infrastructure fast-track system;

• The government will invest in housing sites to create 5,000 homes for rent at market rates;

• The Planning Inspectorate has been instructed with immediate effect to divert resources to prioritise all major economic and housing-related appeals;

• Affordable homes will not be required where it can be shown that to build them what make a scheme unviable;

• There will be a measure to allow developers the chance to seek additional time to get their sites up and running before planning permission expires;

• Developers will be able to opt to have their planning application determined by the Planning Inspectorate instead of poor-performing councils.

Other measures include:

• New legislation for Government guarantees of up to £40 billion worth of major infrastructure projects and up to £10 billion of new homes. The Infrastructure (Financial Assistance) Bill will include guaranteeing the debt of housing associations and private sector developers.

• 16,500 first-time buyers helped with a £280 million extension of the successful "First Buy" scheme, which offers aspiring homeowners a much-needed deposit and a crucial first step on the housing ladder.

The Governments see an infrastructure and house-building programme as a key factor in delivering a prosperous economy; as in the 1930s, we are going to build our way out of the recession. Eric Pickles, Secretary of State for Communities and Local Government, said, “This Government wants to get the economy growing. To remove unnecessary red tape. To support locally led sustainable development.”

The above measures are to be applauded. The planning system will remain fundamentally intact; however, measures to reduce bureaucracy and promote an efficient, timely planning system, allowing good-quality development to proceed quickly, will provide the infrastructure, jobs and economic boost necessary for the UK economy to thrive.

~ Anthony Brindley, Lucent Group UK ~

Why Full-Scale Land Development is Not Solely Done by Homebuilders

The full range of developing raw land into residential construction is becoming too much a risk for companies that build homes. The task is now split, with good results.

Home builders in the UK have traditionally functioned as developers. This means they took on everything from buying land to developing streets and utility infrastructure to building the homes. If the homes are priced right for the market – and meet market expectations for what a home should be – they made a good profit.

But the housing crisis in the UK suggests that this formula is no longer working effectively as it once did. Despite a robust increase in the population (2011 Census found that, overall, the country grew by 7% in the previous decade) and a historically underbuilt environment, homebuilders were unable to undertake the traditional risks of building. While the population grew by about 4 million people between 2001 and 2011, only 1.4 million homes were built in the same time period. The average home has slightly more (by statistical averages) than two people, suggesting that this rising population is underserved. Consequently, the price of homes has risen even while lending standards have reduced the numbers of qualified buyers. About 270,000 new homes built per year would satisfy population growth, according to the (now defunct) National Housing and Planning Advice unit.

That said, growth and demand are not uniform across all regions of the country. London and the South East have high demand, while the Midlands and elsewhere (including Wales) have lower economic growth and therefore lesser demand and wherewithal for housing. And in surprising niches here and there, there is an absolute demand for new homes.

This is where the creativity has come into play. Instead of taking on the full sequence of development – buy, plan, build infrastructure, build homes, then sell – home builders increasingly rely on strategic land specialists and their investment partners to bear some of the risk, do part of the work and share the reward. The land specialists and investors therefore do the following:

1. Identify local housing needs – Land specialists study economic, business development and other data to learn where new housing is most critically needed.
2. Identify appropriate sites – Within an identified market, land investment groups search multiple locations to determine where the best opportunities lie for optimal return on investment.
3. Understand local planning authority preferences – Land is not acquired without knowing the local predisposition to make zoning changes that would allow residences to be built where another use, such as agriculture, is the status quo.
4. Negotiate a purchase – One or several landowners need to be approached with an offer. Needless to say, this needs to be done within clear financial parameters.
5. Work with local planning authorities to achieve use designation changes – Once the land is purchased, a strategic rezoning must be pursued. This is more possible under the new National Planning Policy Framework (NPPF), which grants local authorities more discretion than in the past. Local authorities are now encouraged to free up between 5% and 20% of land for housing.
6. Construct development site infrastructure – With that land-use change, the land investors will fund construction of streets and utilities that provide homebuilders with a ready-made place for residences.
7. Sell to homebuilders – This is where the homebuilders pick up the programme. They buy single or multiple lots, build the homes then sell them. Of course, their capital investment in structures is significant, but it’s less money carried over a shorter period of time than if the six previous steps had been their responsibility.

Individuals who are interested in the land investment phase – up to and including step 6 above – should do so in partnership with experienced land investment specialists. And at that, they should consult with a personal financial advisor to determine if such an investment fits their overall investment goals and objectives.

What is the Root of Home Shortages in the UK?

Speaking of ‘the UK housing shortage’ misses the point. Cities Outlook 2013 says thatlocalizing the problem might be the national solution.

It is conventional wisdom in the United Kingdom that there is a housing shortage. And while that in fact is quite true and is evident in the high cost of housing overall, it is wrong to think the shortage is emblematic of only the economic downturn since 2007. In fact, this shortage goes back at least 30 years and arguably is due to failures in government policy in combination with robust population growth.

Various economics and population studies suggest that approximately 232,000 houses or housing units need to be constructed per year, simply to keep up with population growth (about 7% over the past decade, according to Census 2011).  But since the mid-1980s, housing completions by the three main sectors – private enterprise, housing associations and local authorities – have exceeded that number only once. The shortfall has been cumulative and has rapidly gotten worse since the burst of the housing bubble that peaked in Q3 2007.

But the actual picture of housing shortages is mixed when examined city by city, according to a report titled Cities Outlook 2013, sponsored by The Centre for Cities and supported by the Local Government Association. According to their study, the problems in the housing sector vary considerably from city to city. London currently has the least affordable housing and highest demand found today, in 2013, greater than it was in 2007. This same situation of elevated prices and high demand is found in Cambridge and Bristol. In weaker economies (Hull, Hastings and Middlesbrough, for example) prices are lower, the existing housing stock is poor and jobs are lacking, illustrating how housing inventory is a vastly different picture and subject to, but not a driver of, local economic conditions (the quality of local jobs and connectivity to other markets are more influential to those economies).

This matters more than just how crowded and unaffordable housing has become. The Cities report also details how housing markets impact local economies in three key areas:

• Business and enterprise – A robust housing market, where buying and selling transactions occur, stimulates several industries: construction, estate agents and the mortgage industry, to name a few. When housing is expensive, it effectively puts a cost burden on business if companies need to pay more to attract essential workers to an under-built area.

• Labour markets – Workers are drawn to not just jobs but an area’s quality of life, therefore outsized housing prices tend to discourage labour mobility. And for those workers who move to expensive housing markets, consumption of other goods subsequently declines, negatively affecting the local economy.

• Infrastructure – Housing development is intrinsically related to transport infrastructure and consequently needs to be considered holistically: Build the roads and rails from public coffers as private investors and perhaps housing associations add to housing inventory.

According to Cities Outlook 2013, the crux of the problem is that housing policy and programmes are set on a national level. This then fails to address local challenges and opportunities (e.g., the Infrastructure point above). For example, some of the locales where housing is more plentiful (indeed, many properties are abandoned but could be rehabilitated) benefit little from new-construction incentives (which is how the “Help to Buy” scheme is largely focused).

Initiatives such as Get Britain Building, changes to the National Planning Policy Framework and the New Homes Bonus accomplish this inadequately, says the report. It acknowledges the Localism Act does this in part, but argues instead to jumpstart home building in 2013 by two means: focus government policy on development in the specific cities where housing demand is greatest, and incentivise retrofits and reconfigurations as well as new-build development. To this latter point, the government should look at cities where vacancy rates are highest then target funding and zoning powers to retrofit and build new, whichever makes the most sense (i.e., allow for local decision making).

Without question the role of the private developer is essential – centralised development that is too heavily focused on social housing does not lead to a balanced and thriving community. Increasingly, private development of housing involves groups of investors who work with professional strategic land buyers, who themselves develop raw land or brownfield properties where demand is greatest (and where public policy is amenable to such development).

Individuals who are unschooled in land development should consult with a qualified personal financial advisor to determine how and where their money can be wisely invested in housing development. As should be clear, it is a complex arena where special skills are extremely important.