What is Land Value Capture?
Recouping the value that belongs to the public.
Land Value Capture is a way to ensure equitable distribution of the benefits and burdens of urbanisation.
The term Land value capture refers to a concept that describes several land-based finance tools whose use is growing. Land value capture is rooted in the notion that public action should generate public benefit. It operates from the premise that public and government actions drive up real estate values. For example, changes in land-use regulations or the installation of infrastructure increase the value of land through no action of the landowner.
Although this increasing value in land (often called ‘increments’ or ‘windfall’) is a result of public investment and government action, it is normally accrued by private landowners through no efforts of their own. This has enabled anti-social land practices such as land speculation. Land value capture offers an array of policy tools and instruments that recover the publicly generated value increases, through the conversion to public revenue or through the provision of infrastructure for public benefit.
As such, Land Value Capture can be understood as a way to finance social investment, public infrastructure and spatial transformation. One of the great advantages of the value capture concept is that the cost recovery is assigned in large part to direct beneficiaries.
Here’s a helpful video explaining Land Value Capture:
Tools and Instruments
Land Value Capture (LVC) is a concept that offers an array of tools for planners and city administrations. If used correctly, LVC tools can drive inclusive and equitable city development and fiscal sustainability. However, this is dependent on the tools used, which is why it is important to view LVC as a concept that offers many tools. Each municipality should be in position to choose the tools most applicable to its specific context and unique challenges. The National Land Value Capture Programme aims to strengthen institutional capacities, so that municipalities will be in a position to choose, implement and sustain applicable and relevant LVC tools and strategies.
Instruments that are used to recoup unearned increments in land values include betterment levies, special assessments, land readjustment, and tax increment financing. These different instruments of land value capture are designed to either defray part or the full costs of infrastructure investment that goes with urbanization. A number of these land value capture instruments are either fiscal or regulatory in nature. In other words, they fall under two broad categories namely fiscal instruments (i.e., conventional taxes, fees, and or charges) and regulatory instruments.
Fiscal tools require some form of either a tax or fee to be paid by the private landowner to facilitate the capture of the value for the public sector.
Regulatory instruments lead to some form of public benefit that the landowner essentially finances out of his increased land values. This may be imposed through some type of “in kind” contribution by private landowners for the public benefit.
Some well-known tools in the LVC toolbox
Levy or contribution’ in which additional land value derived from public land use regulatory changes (e.g., rezoning from agriculture to residential) is extracted from the property owners that directly benefits from the land use regulatory intervention. The landowners are compelled to make cash or in-kind contributions to obtain special approvals or permission to develop or build on their land. The nature and extent of the contributions is stipulated through subdivision or development agreements based on a particular norm or expectation, and in some cases, it may be negotiated (directly between the developer and the local authorities) on an individual basis.
These are different terms used but refer to the same basic type of land value capture tool. They are once-off fee payments imposed by a local authority on a new or proposed development project to pay for all or a portion of the costs of providing the associated public infrastructure. The fee only covers the actual capital costs of public infrastructure installed and does not ‘capture’ the additional value that is created through ongoing service provisions to the properties.
It is a one-time, up-front charge on land-value gain caused by public works (e.g., transport system improvements). They are imposed to help pay for part or all the capital cost of infrastructure upgrade that may be off-site but is of great benefit to the properties subjected to the payment of this levy.
It is a charge or levy on land-value gain caused by public works. The levy is generally in the form of an annual charge (like a property tax rate) against the increment in land values caused by a publicly financed infrastructure project.
This is based on the idea that the new development potential for different types of uses or additional development rights, created by rezoning and public investments in well defined areas should not be made available for free but ought to be sold/auctioned to those interested in taking advantage of the future economic benefits resulting from the public interventions.
Refers to a land use planning tool, program, regulation, or law that requires or provides incentives to private developers to create affordable housing and foster social inclusion. In terms of application, the tool is either applied as a condition of approval or in return for incentives such as density bonuses, the developer is required to set aside a percentage of the units in the development as affordable housing, and these will then be sold or rented to households whose incomes fall below specified income ceilings at prices or rents they can afford.
Public Land Leasing is an important tool in managing urban growth as well as in raising public funds. The government stipulates the restrictions on uses, height, plot ratio, and building design in the Conditions of Sale when contracting to lease a parcel of land. The contract is sent/ advertised to all interested land developers who will then bid for development rights in land through public auction/ tenders. Lease renewals represent another opportunity for land-value capture whereby leaseholder is required to pay an additional premium which is based on the increased land value.
It is an instrument to promote the development of large areas. The value capture logic is based on in-kind (usually land) contributions by all landowners in the area to an entity that in turn uses (sells) these contributions to self-finance investment in urban infrastructure and services that then increases the value of all properties in the area. Although the plot size of each original landowner is readjusted into a different size and shape, the overall value of each plot should be higher due to the public investments. In other words, the participants expect that the appreciation resulting from urbanization will more than compensate for the smaller size of each readjusted plot.
One way to acquire large tracts to be held for relatively long periods of time to better control the use of the land, to prevent speculation, and through their ultimate sale or lease to capture for the community any increase in land value resulting from public or market actions.
LVC in South Africa
Why do we need Land Value Capture in South Africa?
South African cities face urban inequalities and fiscal pressures
South African cities currently face municipal fiscal pressures coupled with public sector investment and programmes that have rarely managed to address issues relating to spatial justice, inequality, and poverty. The current interest in Land Value Capture (LVC) in South Africa stems from the fundamental question of how municipalities can promote economically productive cities whilst advancing the spatial transformation agenda to build equitable and inclusive urban environments.
In South Africa, the massive challenges of spatial inequity across the country are well known. Over the past 27 years of democratic governance, the concerted efforts by the national government to facilitate the delivery of over 3.8 million housing opportunities for the poor households across the country has had little impact on alleviating the growing increase on poverty and inequality.
The country’s urban areas have continued to be characterised by rampant structural inequality and poverty based on race and class. Most of the public sector investment and programs have rarely addressed issues relating to spatial justice, inequality, and poverty. While race can no longer be a determinant of where one may live, deeply embedded economic differentiation along racial lines persists and is entrenched in our urban systems.
The well-located areas remain unaffordable for most citizens including those with stable incomes and professions (such as teachers, nurses, police people; etc). This is partly because private sector development projects are generally responding to demand primarily in middle to upper income markets, and the development projects are mostly concentrated in well located areas of the towns and cities.
Bantry Bay located on the Atlantic Seaboard of Cape Town boasts some of the highest priced properties in Cape Town – inaccessible to the majority of Capetonians. Meanwhile, the spatial marginalisation of the working class families to the urban periphery has not only further entrenched the apartheid city, but has deepened poverty. Top photo from the DAG archives. Bottom photo by Ashraf Hendricks – GroundUp
As a result, a significant number of households have been excluded from areas that are well served by public transport, social facilities, amenities, and economic activity based on their race and income. Cape Town is one classic example of municipalities characterized by economic and racial exclusion.
The current spatial inequality challenge has been further exacerbated by the rapid urban growth coupled with the limited resources to finance public interventions that support inclusive growth. Municipalities are facing fiscal pressures due to multiple factors that include dwindling equitable share distributed to municipalities, inflationary increases in municipal expenses that have outstripped market value real estate assets, prevailing informality and the capacity constraints and difficulties in increasing the rate levied on private properties. The funding constraints at a Municipal level have resulted in suboptimal development outcomes.
These ongoing fiscal pressures have made government and other concerned built environment practitioners recognise the need to be far more innovative in developing new instruments for mobilising financial resources. One area that has been considered important in terms of offering opportunities to provide practical solutions is the Land Value Capture (LVC) concept also commonly known as Land Based Financing in South Africa.
Land Value Capture tools in South Africa
In South Africa, the concept of land value capture is currently relevant and has great potential especially given the growing urban areas, but it may be some time before the country effectively implements this concept. The current laws and practice require improvement, and, in some instances, new laws will have to be passed to enable the effective use of other innovative land value capture mechanisms. This section provides an overview on selected land value capture related instruments currently being applied in South Africa.
The capital gains tax forms part of income tax of individuals trusts, and companies and it arises when an asset (both movable and immovable property) is disposed. The conditions under which a capital gains tax is payable have changed over time and as of 1st of October 2001, capital gains tax is now levied in terms of the Taxation Laws Amendment Act, 5 of 2001 effected by Revenue Laws Amendment Act, 19 of 2001 and Revenue Laws Amendment Act, 60 of 2001. The capital gains tax is at a lower effective tax rate than ordinary income and only applicable on proceeds of an asset that exceed its base costs (South African Revenue Services. 2019). Exemptions are applied to primary residences used for personal use on a permanent basis and the exemption for primary residence is limited to the first R2-million gain.
At the time when South Africa transitioned from Apartheid to democracy, various tax instruments tied to land and property were levied in terms of legislative provisions set by the national government and respective local councils. At the national level, the new democratic dispensation inherited pre-1994 tax legislation that makes provision for levying once-off taxes whenever immovable property is acquired. These are the Transfer Duty Act 40 of 1949 and the Value-added Tax Act 89 of 1991, but one can also refer to the Estate Duty Act 45 of 1955 and the part of the Income Tax Act 58 of 1962 dealing with donations tax. The value-added tax (VAT) rate is currently set at 15% and according to section 9(15) of the Transfer Duty Act transfer duty is not payable whenever the transaction is subject to VAT. The transfer duty rates vary depending on the value of the property. For instance, properties acquired on or after 1 March 2020, there is no transfer duty on the property under Rand 1 million (Mboweni 2020). The transfer duty is only payable on properties valued at R1 000 0001.00 or above and Table 4 on transfer duty tax rates below shows the progressive tax rates.
Transfer Duty Tax Rates from 1 March 2020
|Property values category||Applicable transfer duty rate|
|R1 – R1 000 000.00||No transfer duty payable|
|R1 000 001.00 to 1 375 000||3% of the value above R900 001|
|R 1 375 001 to R 1 925 000||6% on the value above R 1 250 000.00 plus a flat rate of R 10 500|
|R 1 925 001 to R 2 475 000||8% on the value above R 1 750 000, plus a flat rate of R 40 500|
|R 2 475 001 to R11 000 000||11% of the value above R 2 250 000 plus R 80 500|
|R 11 000 001 and above||13% of the value exceeding R10 000 000 Plus R933 000.|
A development charge also known as an impact fee or developer contribution, Capital Contribution, Engineering Service Contribution, Bulk Infrastructure Contribution Levy, or an Impact Fee (internationally), is a charge that a municipality imposes on the developer of a new development project to pay for all or a portion of the costs to the public sector of providing public infrastructure to the new development. Development charges are generally used to help offset fiscal burdens related to municipal provision of infrastructure such as sewer and wastewater treatment systems, road networks, public school systems and parks. Development charges are calculated by assessing the costs that the development would impose on the current municipal infrastructure network and what additional capacity or infrastructure would be required to ensure that the new development is adequately serviced. The calculation methodologies for these fees tend to differ across jurisdictions and can be charged on an actual cost basis, an imputed/notional cost basis, or as a flat fee. The treatment of costs related to different types of municipal service infrastructure may also differ. The fee is often able to be paid either in kind or in cash
Currently, municipalities across South Africa are also able to require the payment of this once-off Developer Charge fee. DCs are levied in terms of provision set in national and provincial legislative frameworks such as the Local Government: Municipal Systems Act, the Spatial Planning and Land Use Management Act 16 of 2013 (SPLUMA), Municipal Financial Management Act (MFMA) and different Provincial Land Use Planning legislative frameworks for the different provinces in the country. In Cape Town for example, DC is levied in terms of section 100 of the Cape Town Planning By-Law. Section 100 on conditions of approval makes provision for the possibility of the city to impose reasonable conditions which arise from the proposed use of land. This implies condition limited to cost recovery and or mitigating the impact of the proposed use on the general environment and existing soft and hard infrastructure. The term soft infrastructure refers to institutions and basic technology services that are essential for the proposed use of land and overall quality of life and hard infrastructure refers to physical things that are essential for the proposed use of land and quality of life. Therefore, the DC is meant to recover the actual cost of external infrastructure required to accommodate the additional impact of a new development on engineering services. In theory the fee is calculated on a pro rata basis according to the total cost of the infrastructure and the amount of services that will be provided to the development. Since these land value increments are unearned (the property owners did nothing to generate them), it might be fair and efficient to claim an even larger share than the cost of the project for the public.
The developer charges instrument is currently insufficiently mainstreamed by various municipalities across the country. There has been growing criticisms and concerns about the failure to recoup the value equivalent to the costs incurred by the public sector on their capital investment. This is partly due to the municipal desire to reduce the risk of litigation by developers, who might claim they are being charged multiple times for the same infrastructure or endowments. National Treasury introduced a Draft Policy Framework for Municipal Development Charges in 2011 and this was followed by the drafting of the legislation currently known as the Draft Municipal Fiscal Powers and Functions Amendment Bill, which is currently going through parliamentary processes.
The Draft Bill intends to (among other things):
- regulate the power of municipalities to levy development charges
- to set out the permissible uses of income from development charges
- to provide for the basis of calculation of development charges
- to provide for municipal development charges policies, community participation and by-laws;
- to provide for engineering services agreements
- to provide for the installation of external engineering services by land owners instead of payment of development charges
- to provide for the consequences of non-provision of infrastructure by a municipality
- to regulate reductions to the obligation to pay development charges through subsidies
- to provide for matters relating to the budgeting of and accounting for development charges
- to establish an entitlement on the part of municipalities to withhold other approvals or clearances due to non-payment of development charges
- to provide for dispute resolution, delegations and financial misconduct
- to provide for transitional provisions relating to development charges
- to empower the Minister to make regulations for the effective implementation of matters relating to development charges.
The term municipal property rates refer to the property tax levied at the local government level in South Africa. The Local Government: Municipal Property Rates Act of 2004, which is the national legislation governing the valuation of properties for rating purposes, prescribes that all properties on the valuation roll must be valued at market value as of the date of valuation. The market value is defined as “the amount the property would have realised if sold on the date of valuation in the open market by a willing seller to a willing buyer.”
Given that the property rates are valued at market value, it has been argued that the value increases (i.e., due to zoning changes or infrastructure investment) are reflected to some extent in the property tax base. While this argument is potentially credible, it is equally important to note that such an effect (i.e., the prospect of recovering the actual unearned increment in value) is diluted by revaluation lags and the low effective rates of the property tax. This explains why the South African National and local government governments ought to or have turned to using other fiscal instruments to capture a portion of these land value increments to support the financing of public investments and public services.
Special rating areas, also often referred to as betterment levies, special assessment districts or city improvement districts (CIDs) refers to an additional tax or assessment paid by property owners within a defined geographic area (the “special assessment district”) to fund public improvements either on the form of infrastructure or service provision. The additional taxes are collected from owners who will derive benefit from the capital improvements made within the SAD. This capital payment principally occurs in two ways:
(i) The municipality pays for the up-front cost of the investment and is repaid over time by the special assessment revenues; or
(ii) The assessment revenue cash flow is securitized. This tool can be used when private property owners acknowledge that their property could rise in value sooner if they agree to be assessed at a higher rate, rather than wait for the public sector to identify and deploy capital funds for a specific improvement.
The assessment rate for the additional tax tends to vary depending on the type of land use (e.g., residential, commercial, industrial), and the municipality may apply either a constant rate or phased rate increase until the needed funding amount is reached. The length of time for the SRA also varies but generally depends on the local municipal regulations and the financing required.
In South Africa, special rating areas have been used to revive urban nodes across the City of Cape Town. Cape Town is also a city with the only known unique case in South Africa whereby an SRA was established to finance large infrastructure project and through recourse to a long-term loan. This SRA is commonly known as the Claremont SRA, and it was one of the first SRAs established in Cape Town. Going way beyond the usual “crime and grime” approach adopted by SRAs, The Claremont Improvement District Company (CIDC), who managed the Claremont SRA, arranged to finance the construction of a bypass road that would ease traffic on the SRA’s main artery and increase the attractiveness of the area.
Inclusionary housing (IH) is an important example of a land use regulatory instrument inspired by the concept of land value capture. The IH mechanism encompasses a broad range of applications in which land value increments resulting from changes in urban regulations are recouped by the public sector. The broad range of applications currently being considered in ongoing draft policy instruments include onsite, offsite and payment in lieu of inclusionary contribution by the benefited property owner.
The idea of Inclusionary housing as a land use planning tool to advance spatial transformation is not new in South Africa, it emerged from 2004/ 2005 policy initiatives responding to concerns, that too little had been done to redress the fragmented and divided apartheid city, and that a more interventionist approach was required.
The 2004, Comprehensive Plan for Sustainable Human Settlements Breaking New Ground’ (BNG) outlined at least three things relevant to Inclusionary Housing:
- The creative use of planning instruments to promote densification and integration
- a broader redefinition of the mission of the national Department of Housing so that it would now focus on the quality of planning and human settlement generally
- A greater role for the private sector.
The BNG policy provisions were further reinforced and clarified by the 2005 Housing Indaba whose key outcome was the signing of a Social Contract for Rapid Housing Delivery. The Social contract declared that that “every commercial development including, housing developments that are not directed at those earning R1500 or less, ought to spend a minimum of 20 % on the construction of homes within human settlements for those who qualify for government subsidies”.
In June 2007, the ministry published a policy framework for future legislation, which was followed by more detailed guidelines in 2008. The 2007 policy framework called for a two-part inclusionary program namely:
- ‘‘voluntary pro-active deal-driven component’’
- ‘‘compulsory but incentive-linked regulation-based component’’
- Incentives such as tax credits, land, fast-tracking of approvals, density bonuses, bulk, and link infrastructure.
An analysis on the implications of the past IH policy initiatives (dating back to the period between 2004 – 2007) indicates that the impact of inclusionary housing policy and practice vary greatly especially between the two key components outlined in the 2007 draft framework for inclusionary housing. Various legal issues and institutional constraints are believed to have hampered effective application of the inclusionary housing program. The key concern raised was the lack of national legislative frameworks that provide either express or implied statutory legal provision for municipalities to impose and enforce the land use planning related inclusionary housing policy requirements. The 2007 national policy on inclusionary housing drafted to foster the provision of affordable housing within private property developments was never signed into official legislation. So, the lack of legislative and institutional support for inclusionary housing from the other spheres of government meant that there was no real way of enforcing the policy and its uneven implementation through protracted negotiated agreements on a case-by-case basis was potentially open to challenge in court.
The SPLUMA legislation has to a large extent resolved this legal concern. SPLUMA spells out quite a strong legal obligation for both local and provincial government to make the necessary actions that ensures that land use planning process advance spatial justice principles. As a result, we find ourselves in a space where Inclusionary housing is no longer just a political statement of commitment to change or an alternative vehicle to create affordable housing but rather an important land use planning and management mechanism to fulfil the statutory requirements enshrined in SPLUMA legislation. While various local government and provincial administrations are currently making concerted efforts to develop inclusionary housing policy and programmes, some private sector developers, have already begun taking initiative to make provision for inclusionary housing units as a precautionary measure.
Quick Links to our publications on Inclusionary Housing in South Africa:
Unpacking the Western Cape Draft Inclusionary Housing Policy Framework:
The Western Cape provincial government released a Draft Inclusionary Housing Policy Framework for public comment on 14 May 2021. It lays out important definitions and concepts, as well as outlining how Western Cape municipalities should go about developing municipal inclusionary housing policies.
We’ve unpacked the content of the draft policy framework for you, so you can understand what it is all about.
Nearly all the large and small municipalities across South Africa own or control sizable portfolios of underutilized or underperforming real property assets. These real property assets present opportunities for municipalities to advance their fiscal, economic, environmental, and social policy goals through strategic transaction/ conveyance that include but not limited to sales through auction system and leasehold. In as far as public land leasing is concerned, several municipalities have been struggling to effectively calculate and understand the market value of its holdings. This is partly due to the inadequate legal or regulatory framework as well as insufficient technical capacity to negotiate with private real estate developers.