Turning No into YesWinners, Losers and the CompensationEquation

Majeed NekyCallum WhittakerSeptember 2015

Improves the viability of development proposals

Leads to greater local consent and engagement

De-risks the development and planning process

A platform to facilitate local negotiation to shape financial compensation packagesrelating to new infrastructure, powered by property industry data and expertise

Local ability to negotiate financial packages of compensation which can be takeninto account as material considerations in the planning processGreater fiscal flexibility for local or combined authorities to underwrite and implementcompensation and financing packages for new infrastructure

Residents

Businesses

Asset owners

Local authority

Developers

Mediation of interests between key stakeholders

New compensation mechanisms & powers through devolution

Support for the delivery of needed housing & infrastructure

Turning No into YesDevelopment inevitably creates ‘winners’ and ‘losers’ – yet there is currently nomeaningful way to address this within the planning system. A more collaborative andtransparent approach to balancing these different interests could see greater acceptanceof nearby development, greater institutional trust and greater democratic participation.

Winners, Losers and the Compensation Equation

Land House salesConstruction

House building takesplace at theintersection betweenthree markets:

IntroductionThis award entry highlights the opportunity presentedby devolution to revitalise one of the primary purposesof the land use planning system: mediatingsuccessfully between divergent or opposing intereststo achieve the best outcome. It demonstrates how, bydrawing on the expertise, technology and intelligence-gathering and analytical capabilities of the propertyindustry, a new approach could be developed. Theproposed approach could significantly boost housingdevelopment by de-risking commercial developmentventures; empowering individuals and communities tohelp shape the places in which they live and work; andcreating new local asset bases to be leveraged forinvestment in infrastructure.

Devolution, public services andproperty rights: the case for innovativethinking from the property industryThe current agenda of decentralisation to cities andcity-regions, including the Cities and LocalGovernment Devolution Bill, offers a tangibleopportunity for localities to secure new powers andresponsibilities – if they can put forward a clear,evidenced rationale for how this will drive significantimprovements to public services, economic growthand social outcomes.

To an extent, the same is true with planning, housingand infrastructure. The ability, within a locality with theright freedoms and powers, to coordinate housingdelivery with infrastructure investment, skills pipelinesand broader regeneration and place-making is likelyto improve the economic viability, politicalacceptability and positive social impact of newhousing. The ability for Greater Manchester’sCombined Authority to implement a statutory spatialdevelopment framework at the city-region level, aspart of their devolution deal with Government, mayoffer an opportunity to test some of thesepossibilities, learning lessons from London’s city-wideplan.

“The new Government will deliver further devolution throughout the UK,aiming to empower local communities to drive growth, job creation and

regeneration. How can innovative thinking from the property industry helpmake devolved government a success?”

The main rationale deployed for devolution to date –most successfully by Greater Manchester – hinges onintegration: the idea that service budgets, ways ofworking and investment funding streams can bebrought together at the city level to improveeffectiveness and better address complex problems.

The main focus of most devolution ‘pitches’ aroundhousing to date are also consistent with this narrative:co-opting central investment funding for local use (aswith Greater Manchester’s £300m Housing InvestmentFund) and freeing up public sector brownfield land forhouse building.

However, the integration narrative is underpinned bythe assumption of shared interests and outcomes.What about an area of policy where everyone’sinterests do not align?

The current situation: conflict, inequityand delayThere are three key issues which the current planningsystem is ill-equipped to resolve.

Firstly, development must balance private land rights(individual good) with the collective good. Few toolscurrently exist for achieving this, and those that dotend to be blunt instruments – as exemplified by theacrimony and delay created by compulsory purchaseissues around the High Speed Two development. Inparticular, the ability to reinvest land value uplift or‘betterment’ arising from, for example, the provisionof new infrastructure has been a fraught and politicallycharged issue since before the passage of the Townand Country Planning Act. By harnessing the expertiseand data of the modern property industry, coupledwith technological solutions which open up new waysto facilitate effective ‘matching’ within markets, theissue can profitably be revisited.

Winners

Losers

Local authorities need new powers to

balance interests during development

Through devolution, there is huge untapped potentialto improve the way in which localities can mediatebetween different interests – such as those ofneighbouring landowners, developers and others – toprevent conflicts and delays arising in the process ofdelivering new housing, and solve them more quicklyand cheaply when they do arise. The current devolutionagenda – including the realignment of localgovernance to improve strategic capacity across alarger economic area – offers an unprecedentedopportunity for local institutions, including localgovernment and the property industry, to worktogether to pioneer new approaches in this area.

Delivering sufficient, and affordable, housing isunquestionably one of the ‘wicked issues’ of our agefor public policy. Yet housing delivery is not, now,driven principally by state organisations, but by acomplex set of interactions and negotiations betweenpublic, private, third sector and community interests.As KPMG and Shelter point out in a milestone report:‘The reasons for this systemic failure [to build sufficienthomes] are many and complex, because housebuilding is a complex, time-consuming and expensiveprocess. Crucially, it is one that takes place at theintersection between three markets: in land;construction; and home sales.’ By identifying andresolving failures in those markets, cities and regionscould outpace national policy and deliver the homeswe need – if they have the will and ability to push theboundaries.

Secondly, development inevitably creates ‘winners’and ‘losers’. ‘Winners’ notably include thosebenefiting from positive externalities of development(such as seeing the value of their flat increase after anew Crossrail station is built nearby). ‘Losers’ may bethose suffering from negative externalities such asloss of amenity value (such as an attractive view), lossof use value (such as through greater competition forparking spaces) or loss of property value. Yet there iscurrently no meaningful way to address this. Under thecurrent system, the rational response to fears ofnegative impacts from a development is to opposedevelopment, which incurs no significant cost for theobjector and carries significant weight with localdecision-makers. In all but a few cases compensationis indirect and opaque, taking the form of communityfacilities or payments to the local authority via Section106 or other agreements, and unlikely to assuageopposition. Meanwhile, the suggestion that 'winners'should be able to negotiate with and compensate'losers' – an economically sound and adult way inwhich to mediate between competing interests – isdismissed as 'bribery'. The result is a greater number ofrefusals, appeals and call-ins than might otherwisetake place, delaying or preventing new housingdevelopment.

Thirdly, when balancing different interests involved indevelopment, the interests of active stakeholdersneed to be balanced with intangible or voicelessconcerns. One key voice, for example, that does nottend to be represented at the decision-making table isthat of young individuals, couples and families whowould like to live in a town or city and contribute tothe local economy but cannot afford the cost of living.

A system which allows for a more rapid but also

Developer(s) Local authority Residents

Range of stakeholders whose interestsrequire mediation

Asset owners Businesses

There will be an estimated18% uplift above baselineland value to landownersnear Crossrail stations

To deliver new housing and infrastructure

accessible, collaborative and transparent approach tobalancing different interests and recognising andaccounting for the externalities arising fromdevelopment is likely to lead to greater and quickeracceptance of nearby development, as well as greaterinstitutional trust and democratic participation.

A new approachOur proposed new approach is based on empoweredlocal authorities able to establish and regulate marketmechanisms, whereby those experiencing positiveimpacts from a particular development couldnegotiate with those likely to suffer negative impactsfrom it. This direct engagement could be used by localpeople to shape a bespoke package of compensation– including direct payments to affected individuals –which could then become a material consideration inthe formal planning decision.

approach, at local discretion, would be underpinnedby the devolution of flexibility to take the result ofsuch negotiations into account when determiningplanning applications. If a scheme went ahead,localities would be able to raise a precept on ‘winners’– the other key flexibility proposed – in order toassemble the negotiated financial package.

This would provide a direct mechanism to makedevelopment more acceptable to those likely toexperience negative externalities. Critically, however,such a mechanism would not replace the existingplan-led system: constant ‘churn’ of institutions andregulatory frameworks is in itself a key factor indelaying development. Rather, the new approachwould entail a toolkit of discretionary powers whichlocalities were able to deploy within the broadframework of the existing system, in order to brokeragreement between divergent interest groups. Wepropose that a web-based platform could bedeveloped to facilitate such negotiations at a locallevel, backed by data and expertise already availableto and used by the property industry. The use of this

The densification of development in the vicinity of keytransport hubs – widely agreed to be desirable at thegeneral level but highly controversial and complexwhen translated to the specific – offers a pertinentand exciting example of how such a new model couldbe applied. In the case of this type of infrastructure,depending on the balance between positive andnegative externalities for a particular development,the negotiation of a financial package may also offeropportunities to secure a financial asset which couldcontribute to the financing of the infrastructure itselfor associated improvements to public realm or thecommercial environment. This fits well with the recentcall from the Passenger Transport Executive Group(pteg) on rail and station devolution, being pursuedperhaps most prominently by Leeds City Region aspart of its devolution bid, and with plans for acommercial property arm for Network Rail to betterleverage the commercial potential of station assets.

Of course, there already exist mechanisms – mostobviously the Community Infrastructure Levy (CIL) –whereby developers expecting to profit from a schemecan contribute to the infrastructure and facilities thatcan enable a development to proceed and make itlocally acceptable. The real possibilities of theproposed new model lie in bringing to the table thosethird parties who are likely to experience positiveexternalities from development - such as the 18%uplift above baseline land values estimated to accrueto landowners near Crossrail stations - to negotiatecompensation packages on a voluntary basis withthose experiencing negative externalities.

"Those experiencing positiveimpacts from a particulardevelopment could negotiatewith those likely to suffernegative impacts"

The proposed implementation of Crossrail 2 provides a useful example of how this approach could work in practice:

Case study – Crossrail 2 station development

The business case for the station redevelopment and detailed plans for implementation are shared for publicconsultation.

At the same time, real-time data from property industry sources is used to model the financial impact of stationredevelopment on nearby businesses, residents and land values.

This modelling is used to set parameters for a local negotiation within a web-based platform, which can be used asan engagement tool for those affected by the development.

The prospective developer contacts all nearby residents who will be either positively or negatively affected by thedevelopment and invites them to propose and negotiate compensation agreements via the online platform.

A financial package, including betterment capture via a precept and direct financial compensation for thoseanticipating negative externalities, is defined on the basis of outputs from this exercise and with final input from thedeveloper and local planning authority.

An online referendum of those affected is held via the web platform on whether to accept the proposed financialpackage. If the referendum result is positive, the resulting financial package is then included and considered as partof the local government planning process. (If not, the planning application can be withdrawn for furtherconsideration or can proceed as per the existing planning process).

Once the scheme is granted approval, the principal planning authority will issue a municipal bond against theanticipated income.

The income obtained from the municipal bond is then used, in accordance with the negotiated package, tocompensate immediately all local asset owners who are negatively impacted by the Crossrail 2 development.

The Crossrail 2 station is successfully built, with the property developer profiting as they ordinarily would.

The municipal bond is paid in full (over, for instance, a 5-year period) through an additional precept on council taxand business rates affecting those households and businesses positively affected by the development, as set out inthe negotiated financial package.

This would substantially de-risk property developmentproposals, whilst simultaneously improvingdemocratic and resident engagement with theplanning process. The proposed mechanism provideslocal people who have doubts about developmentwith a more positive avenue for engagement thansimply voicing opposition, offsetting pressure oncouncillors to refuse planning permission. This wouldminimise costs to developers, enhancing their abilityto target resources in the most profitable areas, andgive local politicians greater confidence thatdevelopment schemes are supported by residents.

Implications and applications business rate supplement set a clear precedent forintroducing an infrastructure levy or precept to funddefined infrastructure investments. More recently,Leeds City Region has proposed powers to raise alocal infrastructure precept as part of its devolutionproposition to Government. There is an opportunity tobroaden access to such powers with an amendment tothe Cities and Local Government Devolution Billcurrently progressing through Parliament (withconsequential amendments to the Local GovernmentFinance Acts of 1992 and 2012 and the Business RateSupplements Act 2009).

Making it happenLegislatively, ‘local finance considerations’ are alreadywithin the scope of material considerations inplanning following the Localism Act 2011 and it may benecessary to strengthen or clarify the wording here toallow for innovation in this area.

Compensation mechanisms help to delivernew infrastructure to support growth

The GLA’s Olympic Games precept and Crossrail

Looking at potential future applications, thismechanism also has a potential use in facilitatingconsensual negotiations to unblock developments asa more consensual, quicker and cheaper tool beforeresorting to the Compulsory Purchase Order process,which frequently creates tension and ill-feelingamongst local residents and asset owners.

De-risking the planning process in this manner has thepotential to facilitate the development of essentialinfrastructure and also increase the supply of housingand office stock. In particular, it would better allow forthe redevelopment of land and property within thevicinity of transport hubs and stations, meaning thathousing could be built at greater densities so thatcities could house more of their residents withoutbuilding on undeveloped or green belt land. Theability to bring forward transport hubs more rapidlyand reliably also enhancing the potential for cities toaccess wider labour markets and take advantage ofagglomeration effects in key knowledge economysectors.

As a more general platform for innovation in this area,a specific legislative ‘hook’ on planning andinfrastructure within the Cities and Local GovernmentDevolution Bill would provide a helpful basis forfurther consequential amendments that might berequired to legislation, regulation and guidance.

On the technical side, online marketplace platforms(such as Rightmove and Mouseprice in the residentialproperty sphere) are now well-established for a widerange of innovative commercial uses and could beapplied here relatively easily. Three aspects wouldneed to be integrated:

An easily navigable and plain-English ‘frontend’ for participants which allowed them toexpress preferences

A data driven ‘back-end’ with sufficiently richdata to allow for the automation ofmodelling around anticipated shifts in landvalueAn underlying set of algorithms, drawing oncontingent valuation methodology allowingfor some automatic aggregation and analysisof participants’ expressed ‘willingness to payor willingness to accept’ preferences, linkedto the data

Importantly, this approach would also require acultural shift towards the recognition that theconsideration of financial trade-offs between winnersand losers is not a deviation from ‘objective’ decisionmaking, but instead enables a constructive andrational discussion that supports better outcomes forall actors. As with some of the more typical reformsbeing pursued by places around joining up publicservices, the best way to initiate this cultural shift is forinterested localities to trial new approaches anddemonstrate, with credible and robust evidence, howthey could work on the ground.

Many in the property industry already understand thevital role that effective local government can andshould play in mediating between the interests of localresidents and those active in reshaping the publicrealm. By drawing on the property sector’s expertise,technology, intelligence-gathering and analyticalcapabilities within the mechanism set out above, localauthorities would be better able to promote thedelivery of the housing, infrastructure and office spacedesperately needed in many areas of the country. Sucha mechanism would clarify the role of local authoritiesas mediators and help to limit obstructions within theplanning process through greater democraticengagement and improved compensation practices.

Conclusion often feel insufficiently empowered, or lack thepolitical courage, to effectively prevent objectors fromderailing desirable development. Effectivecompensation measures would both reduce localdisaffection and provide planning officers andcouncillors with greater confidence to approve goodschemes.

Majeed Neky

In an era where housing is no longer delivered by stateorganisations but by a complex set of interactionsbetween public, private and third sector actors, a newmechanism is needed through which empowered localauthorities manage the intersection between the threemarkets in land, construction and home sales to shapea bespoke package of compensation for local peopleand places.

A lack of such effective mediation frequently leads toan inability to deliver the housing and businessinfrastructure needed to support economic growth andcontinuing local prosperity. Presently, local authorities

For these reasons, we advocate that the propertyindustry should publicly support and lobby for thedevolution of powers and finance to lower tiers ofgovernment, as both local authorities and developersare likely to benefit from new powers overinfrastructure provision, site development andunlocking new land for housing and office space.

More specifically, the industry can play a hugelyvaluable role in collaborating and co-investing withcity governments to develop and pilot innovativeapproaches in this area, including technological toolsthat allow existing information to be used in newways. The industry should support legislative changeto underpin such innovation and should promotethese emerging approaches heavily throughout theindustry and beyond to build public and institutionalawareness and demand for more positive decision-making. We look forward to being part of thesediscussions in the years ahead.

&Callum Whittaker

September 2015

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