The Mayor of London has published research undertaken by Savills and KPMG to investigate the potential for a Development Rights Auction Model (DRAM) to help fund major new transport infrastructure, such as Crossrail 2 (see Development Rights Auction Model: Land Value Capture). 

This follows research produced by Savills and KPMG in 2016-17 that showed significant land value uplift effects around major transport schemes in London (see Land Value Capture Report).

DRAM is one of the potential mechanisms identified that could enable the public sector to capture a share of this planning gain – to help fund the new infrastructure itself.

Under the DRAM system, a masterplan for the area around a new or enhanced train station is developed (residential uses, higher densities) and compared to a masterplan for the area without the new or enhanced infrastructure. The difference in value between the two are the ‘development rights’ that are then auctioned to the highest bidder.

The successful bidder would benefit from having control of a large site. Existing landowners would be compensated based on current values. The system would require significant public sector involvement to manage the process and potentially be involved in land assembly. The concept has some precedence internationally, such as the approach taken by the Metropolitan Transit Railway to developing around stations in Hong Kong, but has never been applied in the UK.

Savills role in the research was to help test the concept on land around two potential future stations in London – one on the Crossrail 2 route and the other an extension to the Bakerloo Line. We developed a model with inputs from our teams' specialists in property economics, development viability, urban design and property agents. 

One of the advantages Savills has in these projects is its closeness to the development industry, which helps ensure advice is grounded in market reality.

The research found that it would be challenging to achieve successful auctions, with proceeds in excess of the costs which could be used to help fund the infrastructure. Two key reasons were:

Timing:

Ideally, DRAM would help fund the infrastructure, but the majority of the increases in land values follow the opening of the infrastructure, so there can be a significant time lag between the value uplift effects and the funding need.

Strong industrial land values:

The areas tested had significant presence of industrial stock, which normally would result in positive value uplift from a change of use to residential. However, London’s supply of industrial stock has been consistently eroded over the last decade and values have consequently been increasing. This reduces the incentive to redevelop. There were also significant costs associated with relocating current occupiers. 

Sometimes an outcome of research can be a re-focus on more productive avenues. The conclusions here suggest that productive next steps could be with the more creative application of existing mechanisms.

Central Government has consulted on changes to development contributions (see Supporting housing delivery through developer contributions) and TfL has highlighted the possibility of a Transport Property Charge on properties around new or improved stations (see Homeowners living near Crossrail 2 stations could be hit by new tax).

Savills continues to explore the scale and nature of land value uplift associated with major infrastructure investment and options for value capture that strike the right balance between incentivising development and raising contributions towards infrastructure costs.

Further information

Read more: Infrastructure Investment and Land Value Uplift

Contact Savills Land Valuation