Summary: Tucked away in a paragraph towards the end of the Mayor’s draft London Plan is a model from abroad that could dramatically accelerate development in the capital if it takes root. At a recent BLP seminar on the draft Plan there was strong interest in the little-discussed Development Rights Auction Model (“DRAM”). Here, we shed some light on the concept, why it is being proposed and what it could mean for landowners and developers.

The draft London Plan: grand ambitions for Generation Rent

The key challenge for the draft London Plan issued for consultation in December is to address the increasingly acute housing crisis, with London’s population projected to increase from 8.7m today to 10.5m in 2025. Mayor Sadiq Khan’s new proposed annual housing supply target is therefore up from 42,000 to 66,000 homes on the current London Plan. Many are proposed to be built in designated Opportunity Areas, clustered into Growth Corridors which themselves are focused around key transport nodes and planned transport infrastructure. Public transport is also a key priority for a city aiming to reduce car use.

Mind the funding gap…

And yet most of the Opportunity Areas in which the Mayor is seeking accelerated housing delivery are highly dependent on large-scale transport developments for which public funding is simply not available. A key challenge to growth is finding the £3.3bn required per year to deliver the infrastructure projects identified in the Mayor’s Transport Strategy as catalysts for development. Funding is in place for only four of them (the Elizabeth Line, Northern Line extension, Overground extension and Silvertown Tunnel). The reality for the (many) others is that if some go ahead, others may never do so (e.g. the Bakerloo Line extension if Crossrail 2 proceeds).

There are limitations on how much TfL can borrow. The draft Plan also recognises that there is only so much that the development community can pay under the existing regime (CIL, business rates etc.). The tone of the draft Plan’s plea for fiscal devolution for London suggests that even the Mayor recognises it is very unlikely to be heard. Reliant on Treasury agreement to major infrastructure projects, with all the delay and uncertainty which that entails, London’s negotiating position is increasingly tough in the wider national context and in the shadow of Brexit.

To put it simplistically: no new money - no new trains and train stations - no new houses (or at least nowhere near enough).

Infrastructure and land value uplift

You don’t have to be a devotee of Channel 4’s “Location, location, location” to work out that there are significant premiums to London properties around new Tube and rail stations. This land value uplift can be significantly in excess of the infrastructure construction cost; it is estimated that eight TfL projects costing £36bn to build, including Crossrail 2, the Bakerloo line extension and the DLR extension to Thamesmead, could increase land values by around £87bn. Historically, however, this land value uplift has gone to developers and landowners, not the infrastructure provider.

So the draft Plan notes that the Mayor is exploring a range of innovative options for capturing land value uplift, one of which is the Development Rights Auction Model (known as “DRAM”)

How DRAM works

Nothing to do with whiskey, alas, the DRAM mechanism involves a “transit authority”, say LUL or TfL, working with “urban planners”, presumably the Boroughs, to prepare an integrated zonal development plan (“ZDP”) for a growth hot spot around an existing or proposed transport node. The ZDP sets uses and densities in a way which maximises land value. The Borough then obtains outline planning consents across the zone, alongside any consents for the transport scheme itself.

The Borough then calculates a “no scheme world” value for land across the zone and offers landowners the option of pooling their properties into an auction and splitting proceeds accrued over “no scheme world” values. The split mooted is 60% to the landowners and 40% to LUL/TfL/the Borough. Clearly a degree of horse-trading would occur.

Alternatively the landowners can proceed with development alone, with CIL rates capturing for the Borough what an auction would have done. Or landowners can sit tight and do nothing – but will be restricted to development which does not alter the density or use of their land.

The benefits of DRAM

A 2017 TfL Report suggests that this model reduces land assembly costs and the need for compulsory purchase, removes development risk for landowners and accelerates development. The approach is considered to capture money more efficiently than existing land value capture methods such as the Community Infrastructure Levy or business rates, with modelling suggesting that DRAM would raise twice as much (£3bn as opposed to £1.5bn) across sample projects such as Crossrail 2 and the Bakerloo line extension.

Devil in the detail

Though used in Hong Kong, Beijing and Australia DRAM will need some careful thought to make it work in a UK context without becoming the demon drink of which landowners and developers steer clear:

  • Master-planning even an outline scheme and obtaining consents is not cheap. The Boroughs/TfL/LUL will need to consider sources of upfront funding when income from a successful auction profit-split is years down the line and potentially uncertain.
  • Landowners will need to be brought on board as early as possible, if only for the basics such as site access for the ZDP’s professional team.
  • To be of real value, ZDPs will need to be more than glorified masterplans. They should ideally set a policy framework for the envisaged development given that the local will probably not have caught up with the ambition which DRAM is introducing.
  • But the UK has a very formalised process for development plan documents, involving statutory consultation and public examinations by Secretary of State Inspectors. That process takes time, perhaps even two years with a willing Borough, and can depend on the level of local objections and legal challenges.
  • Just because the ZDP is capturing value for the transit authority for a clear public good, i.e. doing something real to tackle the housing crisis, does not mean that some local people will not object on grounds such as traffic impact and the implications of increased densities in the usual way. Progress may require real political will at the local level, and whatever help the Mayor can offer in that regard – and the draft Plan suggests he is keen to do what he can wherever he can.
  • As developers are only to come on board at the auction stage, and a key point of DRAM is to de-risk schemes with relevant consents in place, the promoting public bodies will in many ways be guessing at the details of the kinds of schemes the major house-builders or mixed-use players will be willing to bid for in years to come. Outline planning permissions can be very flexible, but to be lawful they need to have at least broad parameters which can be assessed for environmental assessment purposes. If they are too broad, the environmental assessment becomes too unwieldy as every possibility within the assessed box, or “Rochdale envelope”, has to be considered. But there is precedent for resolving these kinds of issues with secured specified principles on matters like heights and locations of buildings and the location of particular uses.
  • The promoting public bodies will also need to straddle the difficult line between burdening the ZDP area with unviable infrastructure and affordable housing obligations, on the one hand, and being perceived, on the other, to be giving the prospective developers too easy a ride, so as to enhance the attractiveness of the development package that is ultimately to go on auction.
  • To truly avoid the need for compulsory purchase, itself a process which takes time and the demonstration of a compelling case in the public interest, authorities will need to agree with as many landowners as possible a “no-scheme world” valuation and an auction split. Particularly with landowners in possession of critical areas required for mitigation, e.g. an access road.
  • More thought may needed on what to do with landowners who decide to go it alone or do nothing. Currently CIL rates could not simply to be raised to capture what an auction would have made so as to recoup the costs of promoting the ZDP. Statute requires that money raised through CIL can only be spent on supporting development by funding the provision, improvement, replacement, operation or maintenance of infrastructure. Also, the outline permission would run with the land unless the class of persons benefitting from it could be intelligently tailored – but you cannot lawfully constrain a landowner from the type of development density already consented on their property with ease.

All in the mind

Government auction models do work well outside of the planning arena, and the possibility of DRAM taking off in the capital is tantalising. This kind of blue-skies thinking, championed by the Mayor, is in many ways the only game in town for the foreseeable future to plug major infrastructure funding gaps. The pressure is on to deliver that infrastructure, with landowners already buying up land in areas earmarked for transport improvements.

DRAM will require the Boroughs and TfL/LUL embracing the same kinds of risks which developers take, with the same indomitable drive, for less direct return. They will be working for years to avoid developers at auction simply taking the view that they have just driven up property prices on the back of consents which are not quite right and too hard politically to vary. Developers, for their part, may need to change mindsets based on pursuing their own perfect planning permission, albeit at risk (and after however many variations), with lower acquisition costs and a higher rate of return after disposing of completed units.

The future…

With a joint Government task force including the Greater London Assembly and TfL looking to pilot use of DRAM on a major infrastructure project in London it is still early days. For now, landowners and developers will not be in a position to do anything other than progress development in the usual way. However, it will be fascinating to see how this unfolds. If it heralds the start of a new approach to large-scale development in the capital, then all the better!