Few station upgrades in London have relied fully on receipts from commercial or housing development for funding.
Public sector grants enabled the station works undertaken as part of the Jubilee Line Extension and Crossrail 1, and the Treasury underwrote the public loans taken out to finance the Northern line extension, backing them with ring-fenced tax revenues and development levies. Furthermore, these station densification projects were not conducted over live railways, making them less costly than projects above existing stations.
The small number of over-station development projects coming forward even in a period of rapid value growth suggests that revenue from development often cannot meet the full costs of building a deck for development, let alone funding major station works – at least in the current planning, funding and financing environment. In this chapter, we explore the costs and revenues associated with such projects.
Arup estimated the range of costs and revenues from a development above a large London transport interchange, theoretically located in Lambeth. The project comprises decking over a large (12,000 sq m) station footprint, to support development in excess of 10 storeys, plus improvements to the station. The model is illustrative only, and most variables are site-specific. We make the following assumptions:
• Development over the station footprint only – 12,000 sq m in this model
• Floor-Area Ratios (FAR) between 4 and 6 (generally meaning buildings up to 10 storeys high).
• 30 per cent of the deck area is retained as public space, the remaining 8,400 sq m are sold for development.
• The development is mixed-use (various commercial/residential splits, with retail comprising 20 per cent of the commercial space).
The model assumes that a privately owned developer finances and delivers the works, as per a development agreement or joint venture with the transport authority.
For simplicity, we have assumed that the engineered land is then sold in parcels (though the developer might also choose to develop directly). Below, we compare the costs of the works with typical land values for different areas of London, to indicate whether the sale of the development parcels would be likely to cover the cost of the works; though in practice, land values are derived from the anticipated development value (and would therefore respond to changes in mix and quantum of development).
The implication of different levels of affordability and density on sales values is not reflected in the model, but their impact on tax revenue is. The model estimates revenues from developer contributions and from property taxes in a central London location, using Vauxhall as an example.
The projection period runs from 2018 to 2042, including two years to gain planning consent, and six for the engineering works.
A broad range of engineering costs have been assumed from a benchmark of station development schemes, in order to reflect variations in the characteristics of stations, such as size, frequency of services, or risks (for example on ground conditions).
However, the cost estimates are indicative, and real costs could be higher than the range of costs considered here, depending on station specifics.
The developer’s capital investment covers works to support the decking, the building of the deck, and station improvements. It does not include the costs of development above the “engineered” land.
The revenue streams from station development projects are shared between the developer and the local authority.
The scenarios below consider what revenue streams from the project need to come together to cover the costs of development:
– Scenario 1: Revenue without public funding
– Scenario 2: Revenue with public funding, in current context
– Scenario 3: Revenue with public funding, if property taxes were devolved to local authorities
Scenario 1: Revenue without public funding
• For a large, central London station, such as Vauxhall
Using typical land values, revenue from sales of development parcels alone would not meet the costs of a theoretical development above a large, central London station, which are likely to be within the £150m-£250m range, in 2017 prices.
Indeed, the £107m sales revenue falls short of the lower engineering cost estimate, even at high density (FAR 6), and lower affordable housing provision (23 per cent). However, the scheme could be viable on a larger development parcel, for instance if development extends beyond the station footprint.
Alternatively, the local authority could agree to depart from its standard policies, allowing proportions of affordable housing below 23 per cent, densities above FAR 6 and little commercial space.
• For other stations
Development above stations outside London’s central area could be less costly – in the £75m-£250m range, in 2017 prices. But income for sales would also be lower and is, according to the model, unlikely to match the £75m lower construction cost estimate.
Scenario 2: Revenue with public funding, in current context
If local authorities sought to make the scheme viable and/or to ensure provision of affordable housing and other community benefits in line with policy, they could commit some of the future income that the scheme will generate.
Indeed, the value of sales is only part of the total income generated by development. Developer contributions and business rates flow to local authorities; station rents to the transport body; and tax revenue to central government.
Hence, Arup modelled an assumption that the transport body would allow the developer to keep station rents for a certain time period, and the local authority could borrow against a proportion of future borough CIL and business rates revenues.
For a large, central London location, station rents, borough CIL and a 20 per cent retention from business rates revenue would together represent additional funding ranging from £40m to £70m for the project, depending on development mix.
Assuming costs at the lower end of the range (close to £150m), this additional funding would allow for positive internal rates of return- between 1 and 10 per cent – depending on the commercial/residential mix, density and affordable housing levels. However, a significant funding gap remains at the higher end of the engineering cost estimate (£250m).
The model does not estimate tax revenues from property and rental values in other parts of London.
Scenario 3: Revenue with public funding, if property taxes were devolved to local authorities
Arup estimates that into 2042, this theoretical station development scheme in a central London location would also yield around £700m in Stamp Duty to the UK Treasury, given that the scheme is in a high-value area.
If the local authority were able to retain even a quarter of these Stamp Duty receipts, this would derive an additional £165m funding for the scheme, over the projection period. This would enable the scheme to meet costs of £250m, at the higher end of the estimated range. Some form of retention of these property taxes, recommended by the London Finance Commission, would represent a significant incentive to fund such a station densification project, and would enable the local authority to reinvest income from the development into the local area.
These high-level cost and revenue estimates suggest that complex over-station developments (that include upgrades to the station) are unlikely to be viable when funded only through the proceeds of property development, even where land values are high. But including adjacent land, allowing higher densities, or ring-fencing the resultant tax revenues could enable such projects to deliver a return on investment.
The next chapter looks in more detail at the barriers facing station development projects and the various ways
of overcoming these.