Committee Reports > List of Committees > Joint > 1985 > Committee on Building Land > Report - Building Land

Appendix 7

Estimating the Gains from Increases in Land Values

A7.1 There are two types of financial return in transactions in building land. Firstly, there is windfall gain which is a return to ownership of property in excess of the owner’s valuation, i.e. the price which would have been necessary to transfer land from its existing use. * Secondly, there is the total financial value of a transaction, which may or may not include an element of windfall gain but which in any event involves realising the market value of the property.

A7.2 The number of transactions in land in any year is unknown and it is not possible, therefore, to estimate the amount of windfall gain or total financial return for a particular year. The main alternative is to base estimates on the annual usage of building land. This would represent an assessment of the size of gain which has accrued from land used in the year but does not necessarily indicate the year in which the gain was realised. This approach is adopted below in relation to 1983.

A7.3 The Committee’s primary interest is in estimating the level of windfall to private interests. The definition of windfall gain above requires and estimate of the value in use of land (not its exchange value in existing use). Since this information is not available, the only practical alternative is to base the estimates on the market value of land in existing use with an allowance for value in use. This has been done by using double the average price per acre of agricultural land. Because of this the term financial rather than windfall gain in used to describe the estimates below.

Private Single Houses

A7.4 The main estimation difficulties in this sector are:—

•It is necessary to arrive at a typical price per site. The range of prices for serviced and partly or unserviced sites is shown in Appendix 4. Less than 10 per cent of single houses are built on fully serviced sites, between half and two thirds have access to mains water and over 90 per cent use septic tanks. The effective price range for private single house sites is, therefore, likely to be £5,000 to £8,000.

•Allowance must be made for houses where no site purchase is involved. This occurs where a farmhouse is being replaced (by the landowner) or where sites are made available to family members (or other relations). No information is available on this area.

•Allowance must be made for the original market value of the land. The average price of agricultural land in 1983 was £1,350. Whether or not this is appropriate to transactions in small plots of land is open to question.

A7.5 Table A7.1 illustrates the effect of different assumptions in the above areas:-

TABLE A7.1

Estimates of Financial Gain in Private Single House Sites, 1983

Private Estate Housing

A7.6 Similar problems arise in this sector in relation to arriving at a typical price per site and making allowance for the original market value of the land. There are other difficulties, however, which do not arise in private single housing:-

•Intermediaries are a normal feature of the estate housing market (as defined earlier, this includes builders and property developers). The typical prices for undeveloped private estate house sites quoted in Appendices 4 to 6 result from a mix of transactions, between original landowners and intermediaries and transactions, between intermediaries. For example, a property company may acquire land from the original landowner, obtain planning permission and sell the land in a single or number of smaller parcels to builders. A builder may decide not to proceed as originally intended and instead sell land to another builder. There are many reasons for such transactions (some presumably speculative in nature). The presence of intermediaries complicates the estimation of financial gain in two ways. Firstly, it is difficult to identify the typical price paid to original landowners, secondly, part of the financial gain accrues to the intermediary but is bound up with holding costs and trading profits. These points are illustrated in Table 4.1 (Chapter 4) where the financial gain is distributed between the price paid for land and profit (or loss) on development. In a buoyant market, such as the early and late seventies, intermediaries may make a substantial gain. In a depressed market, like the middle seventies and early eighties, the anticipated gain is dissipated in holding charges and trading losses.

•In the case of private estate housing, allowance must be made for land used for open space and ancillary purposes. In some cases, such land is purchased separately by local authorities and other agencies. In other cases, builders and developers may make land available for open space, etc., as a requirement of planning permission or in negotiation with the local authority. There is no detailed information on this whole area.

A7.7 Table A7.2 illustrates the effect of different assumptions in the private estate housing sector:-

TABLE A7.2

Estimates of Financial Gain in Private Estate Housing, 1983

Local Authority Housing

A7.8 Whilst similar types of estimation difficulties, as discussed above, would arise in the case of local authority houses some alternative information is available. A submission from the Department of the Environment states … “It has been calculated that an average of 4 per cent of the all-in cost of local authority housing projects is attributable to land costs (exclusive of development and servicing costs)”. Given an average all-in cost of £27,500 in 1983, this suggests £1,100 as the average land cost per house.

A7.9 It is not clear whether the 4 per cent refers only to land used for housing or whether it includes land for ancillary purposes. Local authorities completed 6,200 houses in 1983 representing a total land usage of about 900 acres of which just under 400 are for ancillary purposes.

A7.10 Depending on assumptions made it would appear that the total financial gain accruing to private interests from local authority land usage in 1983 may be about £5m.

A7.11 Land used by local authorities may of course have been purchased many years earlier. Details of actual annual expenditure by local authorities (on land acquired by agreement) are published in the Quarterly Bulletin of Housing Statistics. The figure varies from year to year as does the amount of land purchased but in most years since 1980 it has been between £3½m and £4½m. This does not include expenditure on land acquired compulsorily.

Apartments

A7.12 Apartment development usually takes place on small infill sites in mature urban areas. Little information is available on land prices in this area or on the structure of ownership and transactions. Prices per unit may be of the order of £5,000 at present, financial gain on this basis could be around £4m to £5m.

Industrial Land

A7.13 It seems likely that most land used for industrial purposes is transacted by the IDA and similar agencies. Annual usage of land has been estimated at 1,000 acres. The average price paid by the IDA varies considerably from year to year depending on the mix of land purchased. The latest available information gives an average figure of £11,800 per acre in 1984. Financial gain from annual usage at 1983 price levels could be between £7m and £15m.

* Excluding any expectations of capital gain on the part of the owner.

* Including original price to landowner and “unearned” profits to intermediary.