Kowloon Station

More Cities Are Tapping Real Estate To Pay For New Transportation

Darryle Ulama
Research Analyst, Hyperloop One

The world’s cities are adding 77 million people per year, just shy of 1.5 million people per week. Take a moment to register these numbers. Every week until 2030, urban centers need to figure out how to accommodate the influx of two San Francisco's worth of people. Growth pressures and rising incomes are forcing city planners on tight budgets to get creative in how they pay for critical transport infrastructure.

One technique that's getting renewed attention is land value capture, or LVC, which generates funds from the uplift in property values that result from new transit lines and stations. In LVC deals, governments share in the profits rather than cede them to developers or landowners. There are many types of LVC instruments, but generally, they are either fee-based, such as land taxes, or development-based, such as air rights sales and joint development. If executed properly, these tools could provide a more sustainable source of financing to prudent governments and better align public and private sector participation. Their ability to boost area density also allows cities to include LVC in transit-oriented development strategies, now in vogue across urban planning departments.

ⁱSelected LVC-Funded Transportation Projects

Project

Length (km)

Project Duration

Initial Project Cost

LVC Revenue as a Percentage of Project Cost

UK – Jubilee Line Extension

16

1992-2000

$5.3 BN

10%

Denmark – Copenhagen Metro M1

14.2

2002-2007

$2.0 BN

20%

China – Nanchang Metro Line 1

28.7

2008-2015

$1.3 BN

15.1%

Japan – Yokohoma MM21 Line

4.1

1992-2004

$2.0 BN

29%

India – Delhi Metro Phase I, II, III

234

1995-2016

$12 BN

5.0%

USA – Washington Metro Silver Line

37

2008-2014

$6.0 BN

16.8%

USA – Portland Streetcar Extension

5.3

2009-2012

$148 MN

10.8%

Source: Olajide, Oladapo. “Transit Value Capture Finance: A Global Review of Potential and Performance” 2015.

LVC is not an entirely new concept, but it has come back into focus. Just last year, the Australian Parliament published an advisory paper on value capture to encourage lower governments to consider LVC. In 2015, the World Bank released a guidebook for using land value capture to finance transportation projects in developing countries. And in China, land development sales have been deployed as a means of financing a significant portion of urban projects in cities as diverse as Nanchang, Wuhan, and Shenzhen.

To explore its potential, we’ve highlighted three cases in which land value capture is supporting some of the world’s most ambitious transportation projects.

Hong Kong MTR: The World’s Most Profitable Transit System

Any discussion on land value capture must include the Hong Kong MTR Corporation, the operator of the city’s transportation network and pioneer of an LCV method called “rail plus property” (R+P). Today, the Hong Kong metro is the envy of transit agencies the world over, with consistently reliable service and amenities unheard of in even the wealthiest cities, such as public computers and first-class cars. While most mass transit systems require subsidies to cover expenses (and still operate at a loss), the MTR boasted an operating margin close to 54% for its Hong Kong segment in 2016. For comparison, only about 2% of the more than 1,800 mass transit systems in the US report fare revenue exceeding operating expenses. The secret? The MTR collects money from the fare box, as well as from property development, rentals, and real estate management. In about half of the stations throughout Hong Kong, MTR helps develop and manage shopping malls, apartment complexes, and skyscrapers through joint development agreements. It helps immeasurably that the government owns all the land in Hong Kong, but the symbiotic relationship between transit and real estate is an example for other cities to follow when pursuing infrastructure expansion and upgrades. MTR is currently working on three projects to extend Hong Kong’s network by nearly 20%, including an express line connecting the city to Shenzhen and Guangzhou.

MTR’s value capture approach seeks to build community as well as transport links, says Steve Yiu, MTR’s Head of City Planning. As an independent company with majority government ownership, MTR occupies an important role in the city’s urban development, while still maintaining the flexibility to adjust fares and negotiate property development. MTR’s intermediary role lowers the risk for their developer partners and helps public agencies identify strategic corridors for station location. MTR is now exploring the application of the R+P model in Sweden and mainland China, and it has received interest from the United Kingdom and Australia.

Hong Kong Built-Up Density, 2012
Hong Kong Built-Up Density, 2012

London Crossrail: Europe’s Biggest Infrastructure Project

The idea for an east-west connection across central London has been in the minds of Brits since the late Victorian period, but did not resurface until the end of World War II. The Crossrail project finally broke ground in 2009 and at £15 billion is currently Europe’s single largest infrastructure project. The 118-km route, slated for full operation in 2018, will expand London’s rail capacity by 10% and bring an extra 1.5 million people to within 45 minutes of central London. The City of London has estimated that the project will generate over £40 billion in wider economic benefits.

Crossrail’s funding structure involves several LVC instruments, including the Business Rate Supplement (BSR) Scheme, a 2% tax on certain commercial properties across the city’s 32 boroughs, and developer contributions on all new development in the Greater London area. Tapping into London’s real estate makes economic sense – despite Brexit nerves, the city continues to be one of the hottest property markets in the world.

London Built-Up Density, 2012
London Built-Up Density, 2012

Hyderabad Metro Rail: The Largest Metro Public-Private Partnership

The capital of India’s newly formed Telangana state is one of the subcontinent’s most vibrant urban agglomerations. Hyderabad’s economy relies heavily on information technology and biotech, and 9 out of every 10 employees work in the services sector. Industry clustering and rapid population growth in surrounding municipalities demonstrated the need for the world’s largest public-private partnership in the metro sector. When completed, the Hyderabad Metro Rail will run more than 70km on elevated structures across 66 stations.

The national and state governments are meeting 40% of the project’s total cost, and the engineering firm Larsen and Toubro is expected to pay its share in part from revenue generated in real estate development, advertising, and parking fees. A cumulative 18.5 million square feet of designated areas and depots will be earmarked for real estate development, such as turning concourse level shopping centers in stations. If successful, the Hyderabad Metro project could become the blueprint for other Indian cities attempting to provide much-needed transport infrastructure.

Hyderabad Built-Up Density, 2012
Hyderabad Built-Up Density, 2012

Land value capture financing will not likely cover the entirety of an infrastructure project’s total cost, and project success largely depends on the right mix of population and economic growth, private investment, and mature institutions in land management and taxation. Hong Kong’s success also indicates that LVC might require a density threshold to realize its full potential. It can also take a long time for real estate projects to mature and start paying off. But as cities take on the enormous challenge of moving millions, land value capture can offer a powerful tool in addressing communities’ dire need for infrastructure, while more evenly distributing the value creation.

"LVC was essential to the streetcar systems that flourished in American cities such as Boston and Los Angeles in the early 20th century," says MTR Steve Yiu. “How wonderful would it be if Hyperloop wasn’t just a new mode of transport but, like the street cars a century ago, also helps build new communities for our next generation? I look forward to seeing that.”

Density maps source: Urban TEP https://urban-tep.eo.esa.int/#!