Land Value Capture: Creating the Financial Means for Affordable Cities

By |2024-01-04T16:29:16+01:00July 19th 2022|Finance, Housing and Construction|

Creating liveable, affordable cities requires significant public investments. How to finance them? The answer may lie in land value capture. This financing tool allows municipalities to recover the land value gains that result from public action such as zoning changes or investment in public infrastructure, to invest them back into the city. Sena Segbedzi, OECD Champion Mayors for Inclusive Growth Initiative, shares stories of success from all over the world.

Terms such as affordable, sustainable, liveable, equitable, just, and inclusive have been floating around the urban development policy and planning community to describe the optimal city, and since COVID-19 the pressure mounts as the same community aims to “build back better” and catalyse an “inclusive recovery”. Ultimately, what these concepts are trying to describe is the ability for a city to successfully accommodate and provide the necessities, specifically the goods, utilities, infrastructure, services, environment, safety, and workforce conditions to a diverse set of residents and stakeholders operating with different economic, educational, social, demographic profiles and circumstances. Simple, right?

One of the provisions that seems to hinge on cities achieving this optimal state for residents is accessible housing. The cost of housing has risen in the majority of OECD countries since 2005. Furthermore, housing prices have risen twice as fast as inflation and 50 per cent more than the household median income. Most concerning is that one in three low-income private renters in OECD spends over 40 per cent of their disposable income on rental costs. And just like with many of the areas of concerns in cities as a result of COVID-19, the housing affordability crisis has been reignited. The 2021 OECD report, Housing Affordability in Cities in the Czech Republic, examines the tremendous pressure of housing markets in cities, and how the confluence of low housing supply and structural forces that are driving demand for housing, such as economic growth, internal and foreign migration, not to mention tourism and short-term rentals, are driving up housing prices to the chagrin of long-term residents. The structural issues in the Czech Republic housing market are not unique. The provision of affordable housing is constrained across cities globally. Furthermore, just providing housing is not enough to make inclusive or affordable cities: location matters, services and amenities matter, public space and infrastructure matter, access to opportunities and education matters. And gaps exist across these factors in cities everywhere, closing the gaps takes resources.

Addressing the Resource Issues Through Land Value Capture

Fiscal constraints are one of the challenges that hinder a city’s ability to address perennial challenges such as housing and infrastructure upgrades. However, the power to regulate a major asset such as land is a major asset of cities. In OECD countries, land and property constitute 86 per cent of capital stock and are valued at a whopping 249 trillion US dollars. A large part of city development is attached to the planning, allocation, and use of land. This is where land value capture may be a tool that local governments can deploy to reach their inclusivity or affordability goals.

A Tool as Old as Time…

Land value capture provides a solution to raise significant funds. The public sector makes significant contributions to urban land values through public works such as building a new metro line that enhances a city’s connectivity and access, or developing beautiful green spaces that enhance attractiveness of a neighbourhood or city district, lifting up surrounding property prices. Zoning changes including changing rural land to urban land or increasing allowances for building heights, which also impacts the price and value of land. When this new value is generated, land value capture policies allow the municipality to recuperate some of the value that comes from the public action to create more public value. And while the concept is often referred to as innovative, it is not new.

In 2021, Colombia celebrated 100 years of using betterment levies, a land value capture tool whereby landowners partially pay for public infrastructure development from which they directly benefit (in this case profit in terms of property increase), Land readjustment, another land value capture tool, dates back to the early 20th century urban development in Japan. For those of us who shudder at the thought of paying what feels like more taxes, a reminder that the value created is not in fact generated by the landowner themselves, but comes as a result of investments, actions and decisions from the public authority. Furthermore, the land value gains are not recuperated upon completion of the new metro stop, for instance, but rather when the property is sold, and land value capture tools are flexible in that governments can set rules and put in measures to support equity, such as, adjusting what is levied according to proximity of the benefits or adjusting charges based on the landowners’ income levels.

Land Value Capture: Modern-Day Applications

The city of Reykjavik (Iceland) is preparing for an anticipated population increase; by 2030 the city is projected to host 39 per cent of the country’s population. Consequently, the city’s municipal plan 2010-2030 contains a densification strategy and a strong housing focus, which is at the centre of the city’s inclusive growth agenda. Already, approximately 5 per cent of housing in the city is owned by the municipality and used for social housing. New policies require that 25 per cent of new housing is affordable. To be able to increase the housing supply, the city has been working with non-profit housing cooperatives and developers, and has been developing a financing strategy that includes the use of land value capture through charges on building rights. During the 2017-2021 period, the charges on building rights amounted from ISK 3.7 billion to 4.4 billion annually (approximately EUR 26 to 32 million).

Sao Paulo’s (Brazil) sophisticated Certificates of Additional Construction Potential Bonds (CEPACS) allow developers to buy building rights in designated districts called urban operations (UO). The holder of these rights can build at higher densities, or has the flexibility to change use of the land plot. Most interesting is that CEPACS are purchased over the stock exchange, so essentially the market determines the price. CEPACs are famously known because of the amount of revenue they have generated, billions of US dollars to date. These revenues have been used to build public housing and infrastructure, including redevelopment of some of the city’s favelas.

In May 2022, the first phase of London’s (UK) Elizabeth line, also known as Crossrail, was completed. Construction costs reached USD 25 billion, which also included upgrades to existing stations in order to accommodate the new line. Financing of the Crossrail came from various sources including a few land value capture tools, an infrastructure levy, and betterment tax, as well as developer obligations among others, which generated over USD 3 billion.

From housing to public transportation, parks to bridges, there are examples of cities across the globe that have used some form of value capture to help supplement their resource needs. But apart from the high-profile cases that have been studied over and over again, the concept still feels very specific and niche. And it has been difficult to get a sense of the global circulation of instruments, and how in one place billions of dollars are being raised, while in another it encounters resistance. To start to understand if there is real potential for global uptake of land value capture, the OECD and the Lincoln Institute of Land Policy, in close co-operation with GIZ, built a Global Compendium on Land Value Capture Policies.

This is a first-of-its-kind global scan and review of land value capture use, and begins to unpack how instruments are operated in 60 countries, including different allowances, obstacles, and constitutional frameworks that support or impede it. It is a first step to understanding if real global activation is possible and if it can be part of the solution to building better cities. To be clear, land value capture is not the pot of gold at the end of the rainbow that will address the affordability crisis. But it is an option worthy of exploration for growing cities that are undergoing physical transformation and paradigm shifts and that need to figure out how to raise their own revenues.

Sena Segbedzi