Examination of Witnesses (Questions 60-79)
MS LIZ
PEACE, MR
MIKE GUNSTON,
MR LOUIS
ARMSTRONG, MR
CHRIS HART
AND MR
TED WESTLAKE
24 APRIL 2006
Q60 Mr Olner: Just a quick supplementary
connected to a question that I asked the group giving evidence
before. Do you favour any exemptions for the quarrying industry,
for the minerals industry or for the sports industry? The Barker
Report only spoke about housing but this planning thing is going
to be all-embracing. Do you think we ought to stick to housing?
Mr Westlake: Anything that is
an exemption for any category of property or development spells
distortion in the market, it spells favouritism of one type of
development over another. We do not think that is particularly
desirable.
Q61 Mr Olner: A simple yes or no
to stick the Planning Gains Supplement to housing only.
Mr Westlake: It would be a nice
idea in one way but you then have problems in mixed use development.
Where does your housing begin or end in apportioning values, et
cetera. It is rather uncertain and airy fairy, I am afraid.
Mr Hart: I think the answer as
far as I would be concerned would be no because a lot of development
now is mixed, particularly in the areas you are talking about,
for example sports development. A sports stadium will often have
a great deal of infrastructure around it. It may have residential
but it usually needs commercial to make it pay for itself. Once
you get into composite development it is very hard to split out
what is and what is not exempt. As a generality, I would say the
answer to the question would be no.
Q62 Chair: Ms Peace, firstly, to
pick up on something you said before, which was you seemed to
be suggesting that land values would be extremely difficult to
value, although my understanding is valuers are doing it all the
time on complex sites, why did you think that would be so complicated
for commercial brownfield sites? Secondly, I understand your position
that you would prefer commercial sites not to be within this at
all but if they are going to be covered by PGS, how does PGS disadvantage
commercial development when it would be taken into account in
the land price and how do you think the proposals should be modified
in order to ensure that commercial development is not unduly disadvantaged?
Ms Peace: In terms of commercial
development quite often you would not be looking at a purchase,
you would be looking at a developer who has owned a site for a
length of time and decides at some point in his ownership of it
to redevelop it. In the whole development process you would then,
through a PGS system, be taking quite a large chunk of money out
of the site just at the time when it was probably not very helpful
to the viability of the actual development. Mike will expand on
a typical type of development site. We do not think PGS is the
sensible way to extract the contribution for infrastructure, it
fundamentally misunderstands the stages at which value is added
to development in commercial development sites and there are other
better ways of extracting the contribution to infrastructure,
which I would have to stress we do not dispute. We accept that
development needs to make a contribution but we feel that PGS
is the wrong way to do it. I am sorry, I have forgotten your first
question.
Q63 Chair: Why you thought that valuers
would have such a problem in valuing property when they do it
all the time.
Ms Peace: Can I defer that to
one of our valuation experts here because of the technicalities,
a quick survey.
Mr Hart: One of the real sticking
points from a valuation perspective is an assumption to be made
that everybody is freehold with vacant possession. That is a major
sticking point because we are not valuing what is there, we are
not valuing the leasehold interest, the interlocking interest,
the marriage value between the various leasehold interests available
to the freehold, we are valuing on a presumption that it is freehold
with vacant possession. An extreme example of where this would
predicate against the potential developer would be a farmer looking
to diversify who might have a three-year tenancy, he might be
half way through a rolling three-year tenancy and he wants to
redevelop some outbuildings for offices or for holiday homes or
cottages. He does not have a freehold interest with vacant possession.
Therefore, PGS applied to the small-medium sized enterprise which
had a leasehold occupation could prevent development because of
the presumption in valuation that you have a profit which you
can grasp. On the other three year farming tenancy you do not
have a freehold, you could never realise the freehold value.
Q64 Chair: Mr Gunston, would you
like to give an example of how a complex commercial development
works?
Mr Gunston: I was going to say
that there is another twist to that as well. The presumption in
the consultation paper is that the granted planning consent will
lift the value but you may not have the frontage of the site or
whatever, you may still have to acquire it, so there will be a
lot of value tucked away in that particular interest still to
be acquired. There is somewhat of a presumption in the proposals
as set down so far. It is true also that we do not necessarily
go out as an industry and buy buildings every time. Quite often
they are within a portfolio for an established period. We have
examples in our organisation where we have developed after 30-odd
years gradually acquiring interests. If you have got to that stage,
the addition of PGS might distort the equation, the risk factors
may not have been included in that example.
Mr Armstrong: If I can interject
before I come back to the residential point that Martin Horwood
made. Ted Westlake, who has written a book on development land
tax based on the previous 50 years' experience, could demonstrate,
and we are happy to submit more evidence on this, how difficult
it is in practice and how previous attempts at some form of capture
of uplift in value have failed partly because it did not have
all-party consent and partly because of the difficulties and long
lengthy process of advisers conspiring with each other over these
sorts of issues, valuation in this case being more an art than
a science. Might I come back to Mr Horwood's point on residential.
Although Kate Barker had hoped that there would be much more development
land coming forward for housing, and affordable housing would
be made easier and there would be more of it, everything we hoped
for, in practice the RICS's view is that there would be disincentives
to bring forward land and the extra costs of PGS that would not
otherwise have been paid under the existing regime where so many
smaller developments are below the threshold for section 106 tariffs,
would then have to add the cost to the housing. Therefore, not
only would you not get a lot of land coming forward, as Kate Barker
had hoped, but you would also run the risk that housing itself
would be more expensive because of the additional cost of the
tax, so it would not seem to the RICS to be a natural way of achieving
that particular residential objective.
Chair: If you want to provide additional
evidence can I suggest that more helpful than a detailed history
of the debate would be some positive suggestions as to how the
PGS could be improved.
Q65 Lyn Brown: Can I ask why you
think it is so important to retain the link between the developers'
contributions and the provision of infrastructure at a local level,
and can I also ask what you think would be a reasonable or acceptable
amount for the Government to obtain to invest in national infrastructure
projects?
Ms Peace: Shall I kick off on
activity and then again I will ask Mike to come in with specific
examples? This is speaking now very much from the commercial perspective.
When a commercial developer or a commercial landlord wants to
do a development he almost inevitably meets a degree of opposition
in the area in which he wants to do it. After prolonged negotiation
usually a deal is reached and as part of that deal there is a
section 106 payment which brings some amelioration of the impact
of the development to the local authority, so that the local authority
which is going to feel the effects of the development also gets
the benefits of the development and the developer himself will
almost certainly have a hand in providing that degree of mitigation
and that infrastructure. The whole thing means that at the end
of the process—and not everyone is perfect, I hasten to
add—there is a degree of win/win: the developer gets his
development, the local authority get the amelioration and it is
done within a timescale that both parties can agree. Then a few
years later the developer comes back again for another tranche
of development and the inclination of the local authority is to
think that this chap means well, he is okay, he has got the local
interests at heart, so you create a sort of community of interest
between developer and local authority. If you break that link,
if local authorities cease to receive back the full benefit arising
from the development that has been done, they are going to be
less inclined to favour the development and we certainly envisage
from the commercial development perspective a lot more contested
developments, a lot less development, a lot less rebuilding of
our somewhat derelict town centres and also a delay in the provision
of any infrastructure that is agreed because it is all going through
this loop through central taxation.
Mr Gunston: There is an undoubted
nexus between the development company and the individuals, the
local people, where the development might be situated. There are
undoubtedly out of that discussion all sorts of advantages that
the community might extract out of the scheme have a degree of
appeal and I think, as Liz Peace says, that there are extensions.
We have ten-acre sites, we have larger sites, but there is frequently
the question of going back to renegotiate a new scheme, an additional
scheme, for an extension or whatever, and I think that out of
that relationship it is undoubtedly much smoother. If that debate
is removed, or largely removed, I do really see that the process
will be slowed down. I guess above all the biggest concern is
that if there is this central pot of money the recirculation of
it to that community has commercial ramifications as well largely
because, if it is being negotiated at the locality within the
scheme, often a lot of those improvements that have been negotiated
will be undertaken by the developer. If the funds are coming out
of a central pot and then getting redistributed there is a question
of timing as to when those items are delivered and it could have
a very serious slowing down effect on the development process
going forward.
Q66 Chair: Evidence that we have
received before you got here, from the Treasury, is the absolute
opposite, that the national infrastructure fund could precisely
forward-fund and that the difficulty with section 106 is that
the development has to be complete before the infrastructure can
be funded. Would you not accept that that is as likely as your
experience?
Mr Gunston: If the process was
pump-primed and there was a substantial amount of money therein
going forward which could be then utilised straightaway, that
undoubtedly would be of assistance and would overcome a degree
of the timing issues, the commercial issues.
Q67 Lyn Brown: You did not tell me
what percentage you thought would be reasonable to take out of
the Planning Gain Supplement and put into national projects, but
the second thing I think I heard you say was that you fear that
commercially there will be less profit for the developer because
the infrastructure that might be accrued by the Planning Gain
Supplement would not be undertaken by that specific developer
but the business might go elsewhere.
Mr Gunston: I apologise if I gave
you the impression I was even alluding to profits. That was furthest
from my thoughts. It was purely the deliverability: if you had
got a scheme that was dependent on a piece of infrastructure,
a new roadway or something that had to go in before the scheme
was built, and if that roadway was not delivered, whereas the
developer in the present situation would probably build a road
as a preliminary and then move forward. What I am suggesting is
that under the proposals, as I understand them, that may not be
the case and the timing is not spelt out in the paper as to when
it might become the case.
Q68 Lyn Brown: A percentage is an
answer that I would like to hear, but the second question is,
you have talked about how important it is to have local relationships,
local partnerships for ongoing projects for speed and ease when
the project is on the table. Do you think that could be in any
way constrained or made more difficult by the money going to the
regional authority rather than the local authority?
Ms Peace: Yes. For as long as
the local authority are the planning authority and decide the
planning applications they will find it equally difficult if the
money is hauled back into the regional level. There is not a great
deal of commonality of interest between the tip of Cornwall and
what is happening in the suburbs of Bristol, for example.
Q69 Mr Olner: You are absolutely
right but it has taken several years to get section 106 arrangements
into some sort of order and some sort of recognition. Is it going
to take as long to get the new arrangements into order?
Ms Peace: We would rather we did
not proceed with the new arrangements.
Q70 Mr Olner: So you do not want
the new order to go forward at all?
Ms Peace: We do not want Planning
Gain Supplement at all. We would like to see an amalgamation of
building on the improvements that have started to be put in place
of section 106, and they have barely had any time to take root,
together with, where appropriate, the development of a tariff
based option, so we would rather not have PGS at all.
Q71 Chair: Is that predicated on
the basis that PGS would not raise any more money than 106?
Mr Westlake: It would have to.
Q72 Chair: Is your view predicated
on—
Ms Peace: It is predicated on
the basis that it would take a lot longer and be more difficult
to raise a sum equivalent to or even bigger than section 106,
and therefore the development process, for instance, would be
slowed down.
Q73 Chair: What is the evidence for
that?
Ms Peace: The simple practicalities
of how this scheme, that we have seen only very roughly outlined
in the consultation document, would work in practice and the knowledge
of how difficult it is to arrive at an agreed valuation. It does
not have to be done at the moment.
Mr Westlake: In terms of the valuation
process and why I do not think there can be a fixed proportion,
to go back to your question, you will not know for several years
if the scheme comes what your tax take is going to be and what
your infrastructure costs are going to be. You could have quite
a lot of development which, taking the brownfield site, is not
self-sustaining off its own bat in PGS terms, and therefore it
will be several years before you know that you could have deficits
in certain areas and you could have surpluses in certain areas.
To give a very quick example, if you are planning a tax take based
on largish schemes as being the prime sources of revenue, take,
say, King's Cross, the London Olympic site, when that starts development
how are you going to value that if that comes under the new regime?
It is very uncertain what the tax take is going to be, and however
they work their figures the fact that the Treasury is working
on a valuation based scheme rather than anything related to actual
sales or disposals where money changes hands and you know what
values and prices are is where you get your big difficulty.
Q74 Mr Betts: This almost makes an
assumption that everything is fine now, is it not? There is no
problem with section 106 agreements. Developers never ever complain
about the delays that happen with them. Is that not one of the
reasons this is happening, because of all the complaints about
106 agreements and the amount of time and the inconsistency between
one authority and another?
Mr Armstrong: I think there are
special solutions. If one is looking for a better way of funding
infrastructure, which we all agree is needed to provide the houses
we all agree are needed, using methods to make it as certain and
transparent and fair and quick as possible, we believe, and I
think the BPF do as well, that it would be better to have a closer
look at further improving the section 106 agreements, helping
the local authorities who do not have experience in making a really
successful 106 agreement with developers, extending perhaps the
106 remit a bit more widely, and then you have a direct relationship
between the infrastructure needed and the money being provided
locally to provide that infrastructure. PGS will have no direct
link between the money raised and the cost of the infrastructure,
and whilst the Treasury can be optimistic at its ability to hypothecate,
ring-fence and distribute quickly centrally, regionally and locally,
I do not think those in the market place with previous experience
of the way the funding of infrastructure has worked will think
that that is a likely runner. It is not a better solution. The
better solution would appear to be to allow further consultation
on 106 and the Treasury in its consultation paper has not allowed
for that possibility, to see whether, with more detailed modelling,
that could be made to work to satisfy local authorities that they
will get the infrastructure directly funded within their remit—and
the nexus point is important—and to try and make sure the
Treasury do not take an over-optimistic view of the realities
of providing the funding through the mechanism that they have
raised.
Q75 Mr Betts: Let me just come back
on that. I suppose the argument might be that just having a tax,
paying a sum of money out, might actually be easier for developers
and not having a minute to argue about how much contribution they
make to a 106 but the nature of it. We do not think things can
get bogged down in those sorts of detail. Just coming back further
on what you have just said, is the implication there that by improving
section 106 we can get more contributions from developers out
of it and, if it is, that is probably a slightly different view
than the BPF would have of the situation.
Ms Peace: If I can pick up both
that and your earlier point, yes, indeed, it is true the industry
has complained extensively about the way section 106s are handled,
but there is a huge amount of difference between local authorities
who handle it well and local authorities who handle it badly and
a great raft of local authorities who do not do it at all, so
there are quite a lot of developments that are probably of a size
such that there could legitimately be some degree of section 106
where it simply does not happen. I believe there is a study that
has been commissioned by the Government looking at the scope of
section 106. We did one of our own about five years ago so it
is substantially out of date, and I think we found that there
were only about 10% of developments that actually did attract
a section 106 negotiation and settlement. I think there is scope
for huge improvement. I think also the reforms that have been
introduced to the planning system through the Planning and Compulsory
Purchase Act facilitate that by requiring a greater degree of
strategic planning and thinking up front when you are planning
for development in an area. If indeed you are going to do that
and a local authority is going to do it well that makes it a lot
easier to start thinking strategically also about the infrastructure
you need and how you can then allocate the costs of that infrastructure,
thereby turning your section 106 effectively into a form of tariff,
but I would stress a very flexible form of tariff; I do not think
we want a rigid five pounds per square foot across the country.
That would not work. It has to be tied to local circumstances,
local strategic planning, local development, local infrastructure
needs, so I think basically what we are saying is that you carry
on with the improvements to section 106 and perhaps accelerate
those improvements and look at imposing a greater degree of strategy
on how it is developed.
Q76 Mr Betts: But again we come back
to the point: does that mean getting more value for the taxpayer
for local authorities out of that system? Presumably we are not
suggesting that the authorities that do 106 well should get less
money in the future and those that are not doing it should get
more?
Ms Peace: Absolutely. There is
capacity for more to be negotiated out of the system, yes.
Q77 Chair: Can I ask a very specific
question on one of the RICS proposals? You suggest on PGS that
it should be assessed at the difference between planning permission
value and 120% of current use value rather than 100%. Can you
briefly explain the rationale for that?
Mr Hart: Yes indeed. This in fact
is one way of imposing a de minimis provision, by uplifting
the CUV. This was the way it was done for DLT and other taxes
of that nature. It allows the marginal schemes to drop out. We
talked about brownfield land earlier; heavily contaminated brownfield
land could be the point. As long as there is a sensible de
minimis limit then it would be a lot easier to work the tax.
There are a number of ways of doing it but one is to take 120%
of CUV or a similar figure, and another one is to have a tax based
de minimis limit, to say that if the tax payable is less
than a figure then it falls out of PGS, because you get into valuation
margins where it becomes very hard to prove whether or not some
of the uplift is taxable or not. The valuation margins should
be probably on a situation like this plus or minus 10%, and valuations
done on the basis for taxation valuation generally used by the
Valuation Office Agency on big and complex estates can be plus
or minus 30%, and this was discussed during consultations in 2000.
Q78 Anne Main: Just on that point,
the de minimis, we were given advice earlier on that the
de minimis level being considered possibly was down to
a single unit. You could possibly be even thinking of a large
extension. I do not know if that would be captured by a single
unit, transforming a two-bedroomed house into a four-bedroomed
house. Do you have a view whether that would cause more chaos
to the system if we did go down to a de minimis unit or
even large extensions on individual units?
Mr Hart: We found during the consultation
process that the position was changing all the time. Originally
it was small home improvements that would be omitted and then
it got to be all residential improvements would be omitted. It
is very difficult when you get into small valuations to make them
stick. If somebody had a house, for example, worth £500,000
with a single garage, and they demolished the single garage and
put a very splendid double garage there, reworked around the front
of the house, put in new parking areas, generally speaking smartened
the place up and spent £50,000, they would need the planning
consent to put the double garage up. They have spent £50,000
in expenditure. The house is now worth £575,000. Is that
£25,000 gain due to the planning consent or the expenditure
and works that have been carried out? You have got an immediate
argument. If you are too tight on the uplift for planning gain
it will be very hard to sustain the valuation argument.
Anne Main: Yes, I can see that.
Chair: We are really running up against
time. There is one more major question.
Q79 Mr Betts: Looking at the issue
of current use value, and we have been told before that that is
going to include an element of hope value, is that not going to
be incredibly complicated?
Mr Westlake: We assume you are
actually not going to include hope value in current use value
as drafted.
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