Wednesday, September 02, 2015

Land Makes Profits

  “Landlords’ right has its origin in robbery. The landlords, like all other men, love to reap where they never sowed, and demand a rent even for the natural produce of the earth.” - Adam Smith

“Property ownership and property rights are the fundamental of a free market.”George Eustice, junior agriculture minister. 

Land in Britain has become the safest investment for those with a few spare millions to offload. Prices are up by a staggering 277% in a decade, according to Savills market survey of UK agricultural land 2015. Prime London property has risen by a mere 127% in the same period. Agriculture is the last great subsidised industry. It gets several billion pounds annually from taxpayers through the European Union’s common agricultural policy. For investors, it is recession-proof. Regardless of any downturn in the world economy the subsidy cheques keep rolling in. Furthermore, agricultural land also offers generous tax breaks. It is exempt from inheritance tax after two years if it is actively farmed. And additional relief allows the sale of a farming asset to be rolled over into a new business or acquisition. Capital gains tax is thus deferred until the sale of the asset. By any reckoning, this amounts to a substantial, hidden state subsidy. “What does the state get out of it?” asks George Dunn, chief executive of the Tenant Farmers’ Association. “Not much … for those with a lot of cash, made through capital gains elsewhere, land provides the complete tax solution … run it as a ‘sham’ farming operation [run] by another individual on a short-term basis, you take no risk. And when you pass away there’s all this tax relief.”

Around 150,000 acres of agricultural land now comes on to the market in England annually, four-fifths less than in the 1970s – hence its rapid appreciation. Land, in effect, is being rationed through a variety of wheezes – not least in an unregistered “shadow” trading market. The losers are the vast majority of people aspiring to become homeowners, or more likely tenants, in a market that handsomely rewards a few at the expense of the many.

Earlier this year, a south Lincolnshire local Conservative councillor exasperated by the rocketing price of development land threw political caution to the wind. Roger Gambba-Jones railed: “The major cause of our housing crisis is the price of the land. The owner of a field can increase its agricultural value a hundred-fold [if he sells] for commercial development and 200 times for residential.” Little wonder that despite allocating sites for housing in a local plan, authorities like his own – South Holland district council – were powerless when potential building land remained undeveloped because, says Gambba-Jones, “the owner is holding out for the top dollar”.

Currently, agricultural land is going for £10,000, or more, per acre. But on some estimates, land with planning permission for development can be worth 250 times more than farmland. With prices for building land heading into the valuation stratosphere, a shadow market has emerged. The gain in value from planning permission encourages a high level of land trading, rather than development – primarily for housing – resulting eventually in windfalls for the landowner rather than for the local community.

A housing review commission chaired by the former chief executive of Birmingham city council (and former BBC chairman) Sir Michael Lyons warned that an artificial scarcity of land was distorting the housing market, limiting building and “incentivising the acquisition and trading of land”. The commission spoke of six firms of land agents alone holding strategic land banks of 23,000 acres – enough for up to 400,000 homes at current building densities. It expressed particular concern that “non-developers” – farmers, landowners, institutions – were holding on to land either under an option or with planning permission. Although they had no intention of currently building, according to Lyons they “may be motivated by speculating on future land values”.

“Options” are a familiar tool in the arcane development world. They involve a legal agreement in which, say, a volume builder reserves land from an owner and buys at a later date. This land is not available to others who might want to build more immediately.

We need to know the scale of this activity if we are to begin addressing the pressing need for more housing. Perhaps this could be achieved by making it a legal requirement to register land option agreements with the Land Registry, bringing transparency to this unquantifiable shadow market. Ninety years after the registry was tasked with detailing the ownership of all land in England and Wales, around 15% remains unregistered. Full registration was scheduled for 2011. Remarkably, there is no compulsion. The writer and campaigner Kevin Cahill has noted that that failure reflects the way the registry was constructed “by lawyers on behalf of landowners designed to conceal ownership, not reveal it”.

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