Property development can be a dirty business, particularly when it comes to land-banking, which is the speciality of Australia’s largest developers.
Land-banking involves the speculative buying of large parcels of land that are currently unsuitable for development in the hope of future development potential. But hope alone is not a business strategy. How can land banking be so routinely successful for developers in Australia?
One argument is that successful land-banking comes from political favours in terms of rezoning and public provision of infrastructure. These favours provide substantial value gains to landowners at no cost to themselves. While in certain cases this account appears to have some merit, there has been no systematic evidence that rezoning favours the politically connected.
Until now.
I have a new working paper out with my co-author Professor Paul Frijters, that you can download here, in which we look systematically at land rezoning decisions in Queensland.
The basic result is this: How well-connected you are determines how successful you will be in getting your land rezoned for higher value uses. In Queensland $410million worth of additional development rights were given to mates in just our sample of decisions.
In the study we use sample of planning decisions and landowners involving a total area of 12,676Ha, made by one State authority, the Urban Land Development Authority (ULDA), which took planning powers away from local councils with the intention to increase the scale and speed of development in the rezoned areas. Throughout its time the ULDA was no stranger to accusations of bias, with the Local Government Association of Queensland arguing the government is “playing politics and favouring developers.”
In order to establish how well-connected both rezoned and non-rezoned landowners were, we trawled through a wide range of data on political donations, lobbyists and their clients, industry groups memberships, politicians and their former employers, relationships of ULDA board members, and landowner’s corporate records, in order to construct a relationship network.
We also compiled historical sales data to estimate that this series of rezoning decisions increased the value of the rezoned land by $710 million.
Our main finding however, is that well-connected landowners owned 75% of the rezoned land, but only 12% of comparable land immediately outside the rezoning boundaries, indicating that these decisions were primarily driven by the relationship networks of the landowners, rather than any technical assessment of efficient and appropriate locations for urban expansion.
Political favours in the property industry were found to be much more about being part of the entrenched well-connected political class, whose tight-knit mutual relationships support implicit favouritism, than about visible activities such as making political donations.
These well-connected landowners made $410 million in profit from the rezoning decision, at the expense of the public at large who had the option to instead sell those additional development rights. The data tells the story that connected property developers bought land unsuitable for development land on the urban fringe, then successfully lobbied State politicians and bureaucrats through their relationship networks to rezone areas where they had bought properties, wrong-footing both councils and other property developers. This process of influence took 7 years on average.
Scaling up our results suggests that the ‘back-scratching’ rezoning game has probably cost the general public many billions of dollars in Queensland in the last few decades.
We propose a number of technical solutions to this great game of political favouritism in land rezoning. The size of the gains to rezoning can be diminished by increasing land taxes. Development rights could instead be sold to land owners, perhaps through local auction processes, or the value gains recovered through a betterment tax. Even a local democratic system for voting on new areas for urban expansion would counterbalance vested interests with the interests of the public more broadly.
One unfortunate lesson however, is that the same relationship networks that allow favouritism to thrive in rezoning decisions will obstruct any systematic reform of rezoning processes.
UPDATE [1]: Please read the original study carefully to understand how we controlled for the fact that well-connected developers might be just better at anticipating where urban expansion will occur. Our control group of landowners are in almost identical locations.
UPDATE [2]: Seems that NSW is looking to one-up Queensland in the land development back-scratching game. Former Energy Minister for Chris Hartcher, who is under investigation by the corruption watchdog, is now lobbying on behalf of land developers.
Not wanting to pour cold water on your research Cameron, but wouldn't it stand to reason that highly experienced developers armed with in depth research, would have a good "nose" for prime land in locations that lends itself for future development, thereby increasing the likelihood of their success, especially if they were well capitalised and could hang on for as long as it took to achieve a re-zoning driven by population growth, which is the very information that their research would have given them in the first place.
ReplyDeleteI'm not suggesting that no cronyism exists, I know that it does, but someone who is a better player than average armed with quality research will always beat the market for development land. Even with all that in their favour, there will still be losses when it doesn't happen or it simply takes too long.
But let's say we did choose to "sell" a re-zoning allowing the developer to buy the right to develop land and allow the public, though their local government to profit from that rezoning, then what safeguards would be in place to:-
1. Create new communities in the best possible location rather than in locations where the bidders were prepared to pay the highest.
2. How would you stop the rezoning purchase costs from being passed onto the buyers thus pushing up the cost of subdivided lots just as GST and Developer Contributions have pushed up the price of every house in Australia.
To your first point Peter, you will notice that the control group are owners of neighbouring properties, of adjacent or across the street. So either these well-connected developers have research that tells them exactly which lot to buy - lot 24 or 25 - or they are influencing the zoning decision to ensure their lot is inside.
DeleteTo you second point about selling development rights, in general the highest value gains will indicate the most suitable places for increased development. Rezoning is a location too remote won't gain much, but increasing zoning an urban area will provide much higher gains per area. Hence it will align local government interest with efficient locations for development.
Your final point is all part of the myth of 'costs determining prices'. Think about it this way, what is to stop a rezoned land owner passing on the value gains to a developer who buys the site? Nothing. Essentially the owner at the time of rezoning has the same power that governments would have extract the value. Does this push up prices?
Land prices are the residual of revenues minus construction costs. Add additional costs to the mix and the value of the land falls, not the value of the final constructed buildings. If this weren't the case, developers could increase prices regardless of whether they incurred costs for infrastructure charges or rezoning permits. It's a magic pudding story.
My arguments about this are here
http://ckmurray.blogspot.com.au/2009/12/tax-me-please.html
Thanks for your reply Cameron.
ReplyDelete1. Rezoning is only part of the story although it does add to the value of the land. Getting a DA is the big step and that step probably won't be taken by a lucky farmer who happens to have his farm on the outskirts of town rezoned with or without his influence. Buying the farmers land and getting a DA is a course of action available to anyone who chooses to take that step.
What I was originally meaning is when a land developer buys non-residential land on spec hoping that the pressure of the population build up will force the local authority to rezone suitable land on the town/city fringe. That's not difficult to do when the research is done well, only the timing is variable if done well. A developer won't buy englobo land in the wrong place, if they do they risk losses.
I don't see how a local authority could charge a local farmer just because they have rezoned his land - he may wish to continue farming but may not be able to pay the high fees allocated to the land use change. I don't see a fee as a satisfactory "one size fits all" answer. What if he sells to his son at a "farm' price and not at a "development" price. When I have a valuation arranged for a farm purchase the valuer will work on farm use, not development use unless that is the intended use post sale.
On point three, it's not a myth although I do understand what you mean. In a nation where there is plenty of land for development and costs are low then owners of suitably zoned residential land would not be able to extract a high premium, but in most Australian cities high prices are paid.
We can't keep on adding in more and more input costs and not expect the end price to the consumer to rise. In most areas the farm price sets a floor price, but it's hard to entice a farmer to give up his lifestyle for no gain, so there will always be a premium price plus costs plus margin.
In fact I don't think that it's any coincidence that since the late eighties interest rates have been adjusted downward by the RBA to allow new homebuyers to keep buying land despite the increasing input costs. If rates had risen or remained the same no new land would be sold today.
It's not magic pudding. The only manufacturers that can supply our market are Australian manufacturers, and they have to cover all input costs including a fairly heavy compliance burden and meet high infrastructure standards. We can import modular constructions from China, but not dirt.