Value Capture Methods Under Question 1

Monday, February 8th, 2016
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Methods of value capture which are currently under consideration in Australia have been called into question, with a leader in the property sector warning that there are flaws within the value capture mechanism proposed for a light rail project in Sydney.

In a recent interview, Urban Taskforce CEO Chris Johnson voiced concerns that the idea of value capture as was being used overseas was being misunderstood in Australia, and that there was a danger of a mentality developing where the concept could serve simply as a means of taking more money from developers.

“I think value capture has been misunderstood by people,” Johnson said. “There are a whole range of ways in which value can be captured across a whole city…

“It seems that the interpretation in Sydney and Australia in general is ‘whack the developers to get some of their profits and we’ll get the money that way.’”

While stressing he is not opposed to the concept of value capture per se, Johnson says there are a number of potential concerns about how it might be applied in Australia.

First, there was a specific worry about proposals on the part of the Baird government to help finance the Sydney Light Rail project via a ‘Special Infrastructure Contribution’ of $200 per square metre levied on new residential developments along the rail corridor – a proposal he says would add around $20,000 to the cost of new apartments along the corridor.

By levying the charge on new residential developments only, Johnson says, the entire burden of paying for the uplift in value which the line delivered would be borne by purchasers of new residential property only.

Owners of commercial property or established residential property would also benefit from an uplift in values of their property as a result of the line but would not have to contribute anything in respect of this benefit.

Moreover, Johnson is concerned of a ‘mining tax’ type of mentality where value capture essentially becomes viewed as a method by which to claw back money from the development sector.

Such a mentality would, he said, add to the cost of delivering new housing in a sector which is already subject to heavy levels of taxes and charges.

Around Australia, enthusiasm on the part of the Turnbull government to look at value capture methods as a mechanism by which to help finance significant urban infrastructure projects has generally been well received within the property sector.

Jo Langley, technical director – infrastructure advisory at AECOM, for example, believes the potential for Australia to use value capture mechanisms to raise money for infrastructure projects in an equitable fashion is significant.

Moreover, not all industry leaders share Johnson’s concerns.

Responding to an editorial Johnson published in News Ltd papers regarding value capture in December, Planning Institute of Australia NSW vice president Gary Shiels said the concept of capturing the uplift in value which owners of property receive as a result of public infrastructure works was sound and had been spoken about for years.

“In the case of Sydney’s two newest public transport routes – a light rail route through Sydney Olympic Park and the new Metro route to Bankstown, the Government is asking for a contribution from landowners of $20,000 per ‘apartment’ to help fund the public infrastructure,” Shiels said.

“This is a small fraction of the increase in their value as a result of the Government (i.e. taxpayers) funding. This cost is likely to ultimately get added to the price of an apartment – as the apartment price including all cost to development, which forms the housing market price.”

Johnson, however, believes there are more efficient and equitable mechanisms by which to implement value capture compared with those proposed for the Sydney Light Rail.

These include land based taxes and special levies attached to council rates, which are levied based upon the value of the property in question, he said.

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  1. Rick Rybeck

    It is true that value capture can be an effective and equitable tool. But we must distinguish between privately-created building values and publicly-created land values. Public goods and services (like a new streetcar) enhance nearby land values. Commercial land tends to benefit the most. Therefore, a value capture fee should be levied against publicly-created land values. Thus, landowners would pay for infrastructure in proportion to the benefit that they receive. Applying a fee to privately-created building values will reduce the number and quality of buildings, reduce jobs, and increase rents. In effect, it would chase development away from transit infrastructure. Surprisingly, a tax on land values encourages development of high-value land. And high-value land is typically what we find next to transit stations — and that is where we want development to occur.

    The economics of this might be counter-intuitive, but they work. Value capture should not be overlooked. Otherwise, we simply transfer wealth from taxpayers to a few landowners. But it is equally important that we get value capture right, by applying the fee to publicly-created land values and not to privately-created building values.