Modernising compensation with a Property Bond solution€¦ · Modernising compensation with a Property Bond solution 1. Introduction HS2AA strongly advocate that the compensation

12 April 2013 1 www.hs2actionalliance.org

Modernising compensation with a Property Bond solution

1. Introduction

HS2AA strongly advocate that the compensation regime for major infrastructure projects should

be modernised. It has been widely recognised for many years that the statutory arrangements

are inadequate – limited to either compulsory purchase or when the project has been completed

and is operating. This means that the vast majority of people affected by ‘generalised blight’

from a major project are ignored.

Governments have investigated these issues before (with an Interdepartmental Working Group

on Blight after HS1 in the mid 1990’s) but have made no material statutory changes. Instead

the practice of offering a hardship-based non statutory scheme has been adopted focusing on

the most unacceptable cases caused by the blight eg first for HS1, then Crossrail, the Thames

Tideway Tunnel and HS2. Typically very few people qualify.

Major infrastructure projects clearly pose particular challenges:

They can have exceptionally long lead-in timescales – up to two decades for HS2

The eventual impact can be uncertain – much of HS2 has no real precedent

Opposition to the project is fuelled by a fear of bearing a large uncompensated loss

The blight effect albeit lacking scientific basis (and often termed irrational) is real and

large – for HS2 it can be estimated as averaging almost 20% if all the blight is within

1km of the line, and totals some £5bn for Phase 1.

Solutions that positively address the source of the blight problem (property market confidence)

need therefore to be implemented. It is a particular issue for the UK with its relatively high level

of home ownership.

The case for a Property Bond approach is set out and the issues raised by DfT/HS2 Ltd in 2012

addressed, with specific scheme details (at Appendix 1) and costs of blight (at Appendix 2).

2. Fairness

HS2AA believe that it is not co-incidence that Philip Hammond emphasised the need for “fair”

compensation when he first laid the groundwork in 2010 for settling the principle of

compensation for blight. Unless the principle of fairness to those affected is established, the

inadequacies in the package of compensation arrangements will inevitably cause opposition to

any project. HS2AA have consulted their supporters and affiliated members and believe that

the following principles should apply:

No individual should bear a disproportionate share of the cost of HS2 by suffering a

personal loss in the value of their property as well as contributing as a normal citizen

and taxpayer

Government should keep its promises eg to compensate ‘significant losses’1

1 20 December 2010 Philip Hammond said in House of Commons “Where a project which is in the national interest

imposes significant financial loss on individuals, I believe it is right and proper that they should be compensated fairly for that loss. He went on to say “it is right and proper that individuals who suffer serious financial loss in the national interest should be compensated”. It was repeated in many visits along the route in 2010.


People should not be denied the freedom to move or re-mortgage for 15/20 years

Government should apply the ‘polluter pays’ principle – as HS2 causes the loss in

property values, HS2 should pay for it (with all losses included in its business case)

All decisions should be subject to independent appeal

It was subsequently suggested (in court by Government) that the principle of fairness be

interpreted as fair to the taxpayer rather than fair to those blighted. This is saying that while the

cost of all other aspects of building HS2 be included in the business case (on which the

Treasury then takes a view on behalf of the taxpayer), the cost of blight be borne by individuals

and be excluded.

This view (of fairness to the taxpayer) is also inconsistent with the “broad intent” of Hammond’s

statements made in 2010 and as Mr Justice Ouseley interpreted them2 in his Judgement on the

compensation judicial review. Furthermore the cost benefit approach which includes the social

benefits of HS2 but not the dis-benefits (of property blight) is clearly deficient. Instead such a

view is more correctly described as a property tax on homeowners in the vicinity of HS2.

It is hard to see how the current treatment of compensation can meet even DfT’s most recent

statement that Government are “absolutely committed” to delivering a scheme that is “fair and

appropriate both to those directly affected by HS2 and to taxpayers”3. This requires all the loss

going in the business case and a scheme that properly compensates those affected.

If the Government cannot afford fair compensation, then the country cannot afford HS2.

HS2AA believe that, for a project said to be in the national interest, no individual should have

to bear a disproportionate share of the cost of HS2 (ie both as the owner of an affected

property and as a taxpayer). The current statutory and non-statutory arrangements (eg EHS

and other hardship options) do not avoid this injustice.

3. HS2 Property Bond

The focus of the property bond is not merely to fairly compensate those affected, but to reduce

blight, and eliminate that opposition (to the project) that is based on people’s fear of personally

losing large sums of money.

HS2AA consider that the Property Bond was and remains the only approach considered in the

previous 2011 consultations that can reduce property blight. It was endorsed by the property

professionals, and can deliver against the statements made by Philip Hammond4, Justine

Greening5 and Patrick McLoughlin6 on compensation since 2010.

2 Mr Justice Ouseley said in his judgement on the compensation Judicial Review that the “broad intent” of

Hammond’s statements was clear and he could understand such statements were found “encouraging and reassuring”. 3 Response to FOI from Mr Rolfe on blight, E0009966, 13 April 2013

4 20 December 2010 statement to House of Commons as Secretary of State for Transport - see footnote 1.

5 In January 2012 Justine Greening (the then Secretary of State for Transport) in announcing her decision on the

compensation package said that she “would introduce a range of further measures to address any blight caused by its proposals for HS2 and to reassure property owners”. The detail of the package she announced was the subject of

the 2012/13 consultation that are both now overtaken following the court judgement. 6 Patrick McLoughlin called the now overtaken 2012/13 consultation proposals (that included a long term hardship

scheme) “generous”, “comparable with HS1” and a response to the “exceptional nature of HS2”.


By offering property owners what is in effect an insurance policy against their property being

blighted, backed by mortgage companies, a significant part of the opposition to a project will fall

away. This ‘win-win’ aspect is an essential element to modernising compensation for blight.

A description of the HS2 Property Bond that HS2AA propose is at Appendix 1, together with

how it would operate to demonstrate why it is a workable scheme. The proposed scheme is

based on the one that Central Railway successfully operated for some 7 years.

For Government, the objectives of the HS2 Property Bond should be:

To fairly compensate all those affected by property blight caused by HS2

To restore market confidence (and so largely eliminating the blight)

To avoid opposition to the project driven by the fear of large uncompensated losses

Restoring market confidence is what sets a Property Bond approach apart and makes it

attractive. There has been strong support for the approach from many quarters:

The key property professional organisations (the Council of Mortgage Lenders (CML),

the British Banking Association (BBA), and The National Association of Estate Agents)

have stressed its benefits7.

The Royal Institute of Chartered Surveyors (RICs) noted (in their 2011 consultation) how

it might operate to provide market support

Many MPs including the MPs Mitigation and Compensation Forum8,

Large organisations representing thousands of members eg the NFU, Councils including

51m, the Country and Business Landowners (CLA) in their Vision for Reform9

HS2AA (with our many thousands of supporters and over 90 affiliated groups) have

perceived its benefits and advocate its adoption.

Even the Government Interdepartmental Inquiry – back in 1997 – recognised the need for new

thinking and commended the Central Railway Scheme.

The next section addresses the concerns that have been raised about adopting such an

approach by DfT. Although the decision to reject the Property Bond has now been overturned

by the 2013 judicial review judgement, HS2AA believe many of the same arguments will

emerge again and so it is important that they are addressed – and with the relevant evidence

about why the concerns should be dismissed.

4. Government’s reasons for objecting to the Property Bond approach

Justine Greening’s reasons for rejecting the Property Bond in January 2012 were of

‘increasingly evident’ costs and risk emerging, and it lacking “overwhelming support” in the

7 In the 2011 HS2 Consultation (Question 7 on compensation) the Property Bond was preferred to the other two

options by these groups on the basis that (as summarised by DfT in its ‘Review of Property Issues’) “it would allow for valuations on an unblighted basis and so help sustain local property markets” . Support was given again in the 2012/13 consultation (also now overturned) 8 The MPs group met with Justine Greening on 28 June 2012 where they strongly advocated the merits of the

Property Bond. Transcript available on Andrea Leadsom’s website. 9 CLA Fairplay Vision for Reform of the Compulsory Purchase System, November 2012 (see page 15)


preceding 2011 consultation. The Judgement makes the position clear on both these points –

that neither are an acceptable justification for rejecting the Bond:

The Government’s QC conceded that not having received ‘overwhelming support’ was

inappropriate grounds, and the judge agreed, observing on this point that DfT “bizarrely”

recommended an option that only 21 had supported (out of 36,000)!

It was revealed that there was an absence of grounds for costs and risks becoming

‘increasingly evident’, with the Government’s QC reduced to arguing that HS2AA’s

mention of costs in their report was itself the source of new concerns about costs! The

judgement concluded that such a justification was unsound.

In the preface to the Stage 2 October 2012 consultation, the Government then offer five

reasons why they consider that the Property Bond approach should not be implemented (in

addition to a 6th claimed in January 2012, and a 7th in DfT witness statements to court):

(1) That it is “neither a practical nor appropriate policy in this context”

(2) It may give rise to excessive and unacceptable cost to the taxpayer

(3) It risks exacerbating blight – eg if it had no geographical boundary it risks

undermining a wide property market area

(4) It may fail to “provide support to those most in need” and increase hardship

(5) It is sufficiently unproven and hence there is too large a risk of it either being

ineffective or having excessive cost to the taxpayer, as there is no public sector

precedent and no private sector implementation has applied to a project that

survived to completion. They cannot be confident the bond would provide the

market confidence

(6) That it lacked overwhelming support in the previous consultation

(7) It would set a future precedent.

(1) Not practical or appropriate policy

HS2AA do not understand how Government can support the contention that a Property Bond

scheme is not a practical policy or an appropriate policy at this time. The facts would suggest

otherwise.

‘Appropriate policy’

HS2 is a major national infrastructure project. The Government would like it to be the first of

many such projects, but the compensation arrangements for ‘generalised blight’ are long

overdue for reform and fuel bitter and dogged resistance.

HS2 is a contentious project and it has a large and widespread effect on property values along

its route (its impact and the extent of blight10 is discussed under Reason 2). Initially it was just

the London to West Midlands 119 mile route that was blighted, but with Phase 2 route

announced, it now covers over 330 miles. There are 172,000 properties within 1km of the line

10

Assessed by HS2AA from CBRE Dec 2010 Report on Property Blight for Phase 1 as averaging just under 20% if all the blight is within 1 km form the line, and much greater in rural areas


(or 250m of a tunnel) on Phase 1 alone, suggesting 300,000 properties would be a conservative

estimate for the full Y. This represents well over half a million people being affected.

Government statements that the proposed compensation arrangements (an Exceptional

Hardship Scheme and other hardship based solutions) are “fair” and “generous” has provoked a

sense of outrage from the hundreds of thousands affected, and many MPs who represent them.

Clearly for many the injustice of large losses also translates into objections to the project.

Finding an appropriate mechanism to alleviate the blight would make the project less

provocative. Such an approach is a “win-win” for both the promoter and those affected.

DfT agree that “HS2 is a project with very long time scales”11. It is approaching two decades

before its impacts can be assessed by the property market. The profile of blight is discussed

under Reason 2, but for HS2 it is clear that the uncertainties stay until it is built and operating as

it has no real precedent. It is too long a period for people to be expected to put their lives on

hold unable to move other than at a loss. A solution is therefore needed that addresses the

blight itself. HS2 is hence an appropriate project to which such a policy might apply.

Government say that HS2 is in the national interest. They clearly believe that ‘generalised

blight’ is an appropriate policy issue that should be addressed for other major transport

developments. In the 2003 White Paper on “Future of Air Transport” operators were specifically

required to “address the issue of generalised blight associated with the new runways”. The

scheme BAA then developed – a Property Bond guarantee scheme (based on the Central

Railway scheme12) stated in its booklet “the DfT has confirmed that this scheme is consistent

with Governments policy on voluntary blight schemes…”. The scheme provided protection from

loss in value to anyone purchasing or already living in the blighted area.

It is not reasonable for Government to support a policy they only apply to the private sector.

‘Practical policy’

HS2AA have developed the Property Bond scheme to show how it might work in detail (see

Appendix 1). We were criticised by DfT for providing such detail in the 2011 consultation on the

basis that only the principle was being settled at that stage. However, we took the view that it

would not be regarded as an appropriate solution unless the scheme could be demonstrated to

be workable in practice.

The scheme details were able to draw on the experience of the Central Railway scheme and we

discussed its operation with its creator. We held meetings with DfT/HS2 Ltd (which the scheme

creator attended to respond to questions) to explain how it could address potential difficulties

and be implemented in practice. We refined the scheme to address specific concerns eg to

ensure it would not be over-used.

We are not aware of particular practical issues that remain. Nevertheless in Appendix 1 we now

consider various options to further demonstrate its workability eg how stamp duty might work,

how to address particularly hard to sell properties prior to the trigger point for the Bond.

11

HS2 2013 Consultation: EHS for Phase 2 (paragraph 2.6) 12

The DETR Interdepartmental Working Group on Blight 1997 (post HS1) commended the Central Railway scheme “as coming closest to the problem of addressing blight”


HS2AA therefore believe there is much evidence to demonstrate that the property bond is both

a ‘practical and appropriate policy’ for Government to implement for HS2.

(2) Excessive and unacceptable cost

In the Judicial Review hearing, the Government’s QC argued that the grounds for their view that

the costs of a property bond had become ‘increasingly evident’ stemmed from HS2AA’s own

consultation response13, which stated that the direct cost of a Property Bond scheme may be

above that of the alternatives.

This ground is absurd and the judge dismissed this defence. But this still leaves the issue that

in DfT’s view the cost of a Property Bond approach is too high and it is an unacceptable cost for

the taxpayer to bear. This has the clear implication that the cost of blight is one that

Government find acceptable for the affected individuals to bear instead. This is not reasonable.

Cost of scheme options

The key issue is what the realistic cost of a Property Bond scheme would be and compared to

other options.

HS2 Ltd say they have forecast the relative cost of a Property Bond compared to other options

(presumably a hardship basis and a compensation bond) but despite repeated requests refuse

to release their forecasts to HS2AA or under FOI14. They claim such forecasts will of

themselves cause blight and are needed to inform the future strategy for Phase 2 (of the Y

route). Given the costs of blight being borne by individuals can already be estimated from the

CBRE report that they have now released, and the compensation strategy for Phase 2 has just

followed Phase 1 (eg with the EHS proposals), this is a surprising position to take.

HS2AA explained15 that a Property Bond may have no net cost to the promoter at all, as

It avoids the indirect costs of opposition in terms of delay, redesign and additional

mitigation that arise specifically because people understandably attempt to prevent

suffering personal losses.

The direct cost is also small because losses on those properties actually purchased by

the promoter are small. This is largely because the eventual blighting effect is expected

to be modest.

The Property Bond may therefore be a “win-win” as it protects property owners and it removes

pressures that would otherwise drive up project costs.

HS2 Ltd/DfT consistently contend that loss in property values will be very modest once the

railway is complete and running. This has been the advice from their property advisors

(CBRE)16. This supports HS2AAs view that the actual net cost of a Property Bond for HS2

would be modest – even without taking into account how it might facilitate the progress of the

project (and avoid the indirect costs).

13

Mould QC, 9th

day 13 December 2012 14

FOI 9399, 9453, correspondence of 10 Dec, 21 Dec, 2 Jan & 4 Feb 2013 final review by DfT, and FOI 9895 15

HS2 AA’s submission to the stage 1 and stage 2 HS2 Consultations (of Feb 2011 and October 2012). 16

Information Commission appeal Decision of the First-Tier Tribunal, Case EA/2012/0201, 29 January 2013


HS2AA consider that the cost to Government is not the purchase cost of properties (as they

suggested in their 2011 consultation), but the net cost after their re-sale and other factors are

taken into account ie

The net cost or final loss to Government is:

The initial purchase price of the properties purchased (at unblighted prices), plus

The cost of maintenance and management, plus

The cost of redeeming unused bonds at PBS termination (the difference between

blighted and unblighted open market sales prices), plus

The cost of the capital tied up by holding properties that are purchased until their sale

less

The eventual sale price of the property (when the market has recovered) for properties

HS2 Ltd purchased, plus

Rental income, plus

The cost of Part 1 LCA statutory payment (that would have to be paid in any event)

Plainly if the difference between blighted and unblighted values is eventually modest, then the

real cost to government is correspondingly small, as they get almost all their money back. The

issue becomes one of cash flow rather than losses.

But as the above table notes, the process ties up capital. It might be thought that there are

material costs to Government in purchasing and retaining properties until prices recover, even if

the final loss in value is minor. Government however argue that for the HS2 business case

there is no cost of capital – as it will be funded by them directly. If the same approach is applied

to property so acquired there would be no cost for this capital either.

While capital having no cost seems wrong (as the money has an opportunity cost which is the

cost of finance for Government), the Government has difficulty arguing that any extra money for

property purchase has a cost while it does not for the rest of HS2 (including the compensation

already in the business case)! The effect on the case for HS2 of including a cost of capital for

property purchases would be very small compared to the impact of including it for construction.

The following indicative graph illustrates what the expected blight profiles might be:

(a) Without a Property Bond scheme (blue black line) and other effective interventions (a

long term hardship scheme would not affect open market prices)

(b) With a Property Bond scheme (red dashed line)

(a) Without the Property Bond, blight is extensive and severe, it becomes worse when

construction occurs and only reduces to its final level when it is clear what HS2 will be like ie

when it’s up and running after a year ie in 2027 (phase 1) and 2034 (phase 2). Using CBRE

2010 report on Blight17, HS2AA assessed the current impact and cost of blight (Appendix 2):

Averaging almost 20% loss in market value if all the blight is within 1km of the Phase 1

route (with considerably higher figures in rural than urban areas)

17

High Speed 2 Blight Study, CBRE, December 2010; and HS2AA Summary Critique of CBRE Report April 2013


Totalling about £5bn loss for Phase 1 – which is a current cost of blight and hence

before any further loss when construction starts, or recovery in prices in years to come.

On this basis the loss for the full Y might be of the order of £10bn. This cost is primarily

an estimate of the current uncompensated loss suffered by individuals.

Importantly the £5bn loss is not the net cost to Government (as set out in the box earlier) but

simply the loss in value derived from property sales affected by their proximity to the line (after

adjusting for general property market effects) since the HS2 project was announced. The £5bn

is also not the cost if the Property Bond existed, as this would greatly reduce the level of blight

by removing the current fear of uncompensated losses.

(b) With the Property Bond, blight is minimal as owners, purchasers and mortgage lenders

know their asset is protected at its unblighted value. There would be a slight dip in value

following the announcement, which relates to an aversion to the risk or likelihood of wanting to

move earlier than otherwise might occur – particularly because of construction. This would be

reduced to the extent that purchasers are relieved of some of the subsequent costs of moving

(eg by Stamp Duty re-imbursement); or are compensated for enduring the construction

nuisance and loss of amenity (none is currently being suggested). The drop in values around

construction reflects the dis-benefits of construction.

The open market value remains above the eventual blighted open market price until the

Property Bond is bought back, at the difference between unblighted and blighted prices (eg for

those who have not moved). This will be greater than the ‘Part 1’ Land Compensation Act sums


which are based on physical impacts of the project only (ie excludes any allowance for views

and amenity).

It is difficult to estimate the eventual level of blight, partly because HS2 lacks a close

comparator as it does not follow transport corridors (as HS1 broadly did) and is designed for

substantially higher speeds and higher frequency of service than HS1. The result is that HS2 is

expected to have worse environmental impacts, but to an unknown degree.

It is plausible that the eventual effect will be greater in rural areas, as it currently is, as the

relative tranquillity and higher line speeds will make HS2 more obtrusive.

In summary: we do not know the expected costs of a Property Bond scheme, or the forecasts

that Government have made, as they will not release them. We do however know that it should

be substantially less than the £5bn blight estimates for Phase 1 as this takes

No account of blight reducing from almost 20% to something modest by the end

No account of the level of blight being reduced from the level shown to exist now (as a

result of improved market confidence)

It is difficult to see therefore how Government regard the Property Bond costs as “excessive”.

What the indicative profile illustrates is that ‘generalised blight’ is a temporary phenomenon. It

is common ground (and experts agree) that blight is amplified by uncertainty and is typically

worst before and during construction. However, for HS2 this is a sustained period – 15 to 20

years ie not just until the route or construction plans are finalised. And the current losses in

value are large. This is too long a period for the Government to expect individuals to hold on to

their properties (and not even re-mortgage which is commonplace) or only be able to sell them

at a substantial loss.

If the Government are right that the eventual blight is small, which is presumably the premise on

which their forecast is based, then they are able to take the long view in a way that individuals

who need to get on with their lives – including moving and re-mortgaging – cannot. If

Government are wrong, and properties do suffer permanent material losses in value, it is

unreasonable that individuals should suffer that cost. Part 1 Land Compensation Act payments

would only cover some of this cost..

Unacceptable cost to taxpayer

It is unclear on what basis Government have decided that the Property Bond cost is too large

for it to be adopted. Given Government have refused to release their forecast figures, these

estimates cannot be subject to public review and comment. Further it is at odds with the

Government’s previous support of the approach approved of for the private sector.

As has been noted, the current cost benefit analysis approach includes the social benefits but

not the social dis-benefits of blight, despite the fact they can be monetised (and are of the order

of £5bn for Phase 1). If the monetised uncompensated losses had been included then it would

undoubtedly be an appropriate policy to mitigate those costs. One way of doing that would be

through introducing a Property Bond scheme that reduced the blight.


Instead the only cost included in the business case relates to the compensated costs. An FOI

showed these at just under £1bn for the unavoidable statutory costs of safeguarding (for phase

1), which rose to £1.3bn when the non statutory elements (now overtaken) were added. A

Hardship Based scheme has as expected a small cost as so few qualify18 (around £0.2bn).

(3) Risk of exacerbating blight

It is argued that an over-generous scheme spreads blight, and a Property Bond that has no

geographical boundary has this risk. Compensation ‘creep’ is considered to spread blight ie if

‘Property A’ is compensated for blight then adjacent properties will become similarly blighted

and as a result have a claim for compensation.

Reducing risks by ‘location’ criterion under EHS

We know that HS2 Ltd are concerned about this risk, even in operating the EHS (that has no

specific outer geographic limit). They admit to using the ‘location’ criterion to restrict the

geographic locations to which EHS applies, even though properties further away pass the

“blighted” criterion test19. HS2 Ltd say that the ‘location’ criterion helps ensure blight is not

spread by being “obliged to accept applications from an unreasonable distance away”20.

The farthest accepted EHS case has been 800m from the line, but with over half lying within

200m, and 88% within 400m of the line. There is much evidence to show blight has a different

profile eg certainly out to 1km, and well beyond in many rural areas – with some agents

suggesting several miles. While neither HS2 ltd nor DfT deny that blight is wider than the area

covered by the likely physical impacts of HS2 (that the ‘location’ criterion tests for), they feel it is

legitimate to restrict EHS on this basis. We are not aware of the evidence for this.

The judge in a recent Information Commission Appeal case21 commented in his decision (para

41- 44) that to use the location criterion in this way appeared to go against the very purpose of

the EHS – which is to compensate those who are suffering property blight. HS2AA would agree.

The impact of “no prior knowledge of HS2” clause on blight

To prevent compensation creep, schemes (such as EHS and hardship ones) also include a no

prior knowledge of HS2 clause. But this in fact only serves to exacerbate the blight:

It fails to address the concern of potential private property purchasers that they may

suffer uncompensated losses if they try and purchase the property next to ‘Property A’

The prospective purchaser is being debarred from eligibility for compensation, yet

proximity to a blighted property (that is compensated) highlights the risk that the property

in question is also blighted or will become so. To avoid the potential for an

uncompensated loss, the prospective purchaser will then only purchase at a discounted

price, to reduce or eliminate their risk.

18

Based on phase 1 EHS experience just 40 cases /a have qualified ie representing 600 over 15 year scheme life 19

Almost 40% of Phase 1 EHS cases failing on the location criterion have been accepted as blighted properties under the blight criterion. Letter from Alison Munro of 12 March 2013 to HS2AA 20

Op cit 21

Information Commission appeal Decision of the First-Tier Tribunal, Case EA/2012/0201, 29 January 2013,

paragraphs 41-44 of the decision


On similar reasoning, if there is a boundary to compensation, properties near the

boundary will be blighted unless the boundary is so remote from the line there is no

question of blight.

Hence HS2AA contend that a no prior knowledge clause inevitably bakes in blight, as does a

boundary beyond which there is no compensation.

But this mechanism of spreading blight does not apply if potential purchasers are relieved of the

risk of uncompensated loss. The proposed Property Bond transfers with the property. If the

property becomes blighted because construction is more obtrusive than expected, or mitigation

of noise and visual impact less effective, or people are less prepared to tolerate loss of amenity

than expected, then with a transferable bond the new owner is protected. There is no financial

risk for the purchaser.

So contrary to the view that there is a risk that a Property Bond would spread blight, it should be

expected to reduce blight. Lack of information about the degree to which there will be nuisance

and loss of amenity (in construction and operation) causes losses in property value due to risk.

Potential purchasers will require vendors to pay them to bear this risk, and hence accept a

lower price. If the risk of uncompensated loss is eliminated, a price reduction to pay the

purchaser to take on the risk is not needed. The risk is reduced to the possibility that it may

become desirable to move earlier than might have been the case but for HS2. Consequently

there is less – not more – generalised blight in total.

This is not to say that the Government would not need to buy more properties than under

hardship based proposals, but, as explained under reason 2, this should not translate to a

significant net cost.

(4) Support for hardship cases

The Government has expressed concerns that a Property Bond may not sufficiently support all

those needing to sell for hardship reasons. This would particularly be the case prior to the

trigger point after which sales to HS2 Ltd would be permitted.

There are likely to be some properties, where the Bond would not be effective in encouraging

private sales at unblighted values. This is likely to occur with properties that would be heavily

adversely affected by the construction of HS2, such that the property would either be needed

for construction, or is so affected as to render it undesirable for use. The reason the bond

would be ineffective is that prospective purchasers would be faced with the imminent need to

move (again) and the additional costs and upheaval that this involves. Preventing loss to the

value of the property (which the Bond would achieve) is insufficient in this circumstance.

To address these circumstances various options are discussed at Appendix 1 section 4. One of

these options is to have an Early Movers Scheme, for those unable to wait until the trigger date.

This would apply to those properties that would be so adversely affected by the construction

that buyers are reluctant to purchase with the prospect of only a short period in which the

property would be useable (before they have to move again).


(5) Sufficiently unproven with lack of operational experience and evidence

The Government have reservations about the lack of operational experience as a basis for

confidence that a Property Bond would operate as intended (and provide market confidence)

over the full life of a project that runs to completion. They are concerned about the risk it might

not work.

Property bond schemes

It is true that no Property Bond scheme has been through the entire life cycle, with the relevant

infrastructure actually built and put into use.

However mortgage providers do have confidence in the effectiveness of such arrangements.

The Halifax Building Society accepted the Central Railway Property Bond as an adequate basis

to lend against unblighted valuations. As a result the property market functioned normally,

eliminating blight. There is no general reason to think that other Property Bond schemes would

not behave in this manner.

Moreover the Council of Mortgage Lenders (and the British Banking Association) have indicated

their support for a property bond approach for HS2, as has the National Association of Estate

Agents. The chartered surveyors organisation (RICs) also recognised that this could be a way

to support unblighted valuations.

The support of mortgage providers is a key component in maintaining confidence in the

property market, as HS2AA has emphasised previously in their consultation responses, and the

Property Bond has achieved this. Mortgage providers have a strong commercial interest in the

maintenance of market confidence and the normal functioning of the property market: properties

are security against loans – for home earners to suffer negative equity puts the finance provider

at risk of losses. Support from the mortgage providers in itself is a reasonable basis for the

Government to have confidence in the approach.

Notwithstanding, the Property Bond scheme of BAA for Sipston was problematic – but this

related to the behaviour of BAA, who used the scheme to land-bank and to take the properties

that it acquired out of residential use.

Hardship Schemes

Importantly, by comparison some hardship schemes have been through the entire project

lifecycle and they are a demonstrable failure, lacking any evidence to show that either they

Prevented blight, or

Compensated for blight from when the project was announced through to completion.

This includes the scheme for HS1 (that led to an Interdepartmental investigation by DETR as to

how matters could be improved). For Crossrail and HS2 the projects are incomplete.

An EHS may have a role with small road schemes where the project is short and the blight

temporary, with values quickly recovering and any residual dis-benefits off-set by improved

amenity. The EHS addresses a very short period of blight. But there is no evidence that an


EHS provides a satisfactory approach where blight is sustained because the project lasts many

years or decades before completion.

It is often claimed that HS1 now causes minimal blight, but this ignores the fact that for many

years property values did suffer, with few qualifying under the strict hardship scheme rules. It

hence neither prevented nor compensated for the blight suffered. Although the EHS for HS2

has only applied for 2.75 years, very few qualify – some 40 a year, under 1 a mile – and there is

no evidence of it having a positive impact on generalised blight.

Government have therefore been content to continue to use schemes that are proven not to

adequately address generalised blight for long duration projects. There is no’ risk’ that an EHS

does not satisfactorily address blight, it is a certainty with 20 years of experience proving this.

The Property Bond approach has however persuaded lenders and property professionals that it

would perform as desired.

HS2-specific issues

Trust: There may be a specific problem with HS2, which arises from the Government’s

behaviour in treating their previous undertakings on compensating blight lightly. As a result

residents near HS2 are cynical and distrustful of Government , which is a problem for a

Property Bond scheme that depends on the promoter (in this case, in reality, the Government)

honouring an undertaking to purchase if need be at unblighted prices once the project has

reached a specified point. If there is suspicion that they will not, either through a change of

mind or through not being prepared to pay the full unblighted price, the scheme will not work.

As a consequence, at minimum there must be an independent and respected appeals process,

and contractually binding and legally enforceable undertakings by Government. It might

however also require that physical individual bonds be issued rather than rely upon a general

undertaking by the promoter. Appendix I (section 2) considers this further.

Lasting effects on property prices: There is a material risk, contrary to Governments advisors’

view (CBRE), that HS2 proves to have a lasting major impact on local property values because

the combination of nuisance and loss of amenity from its operation creates considerable

aversion. Such a railway as HS2 has not been built before. However, if the final outcome

proves to be less acceptable than expected, why should those unfortunate enough to own

property near the line suffer the cost rather than the project that creates the loss in values? It

should be a situation of the ‘polluter paying’.

Delay or even cancellation: A significant risk for HS2 (given its doubtful economic justification,

high level of cost, and the plethora of alternative projects with better returns and shorter

timescales) is that it is delayed or even cancelled. A major advantage of the Property Bond

approach is that if there is delay or HS2 is cancelled (as with the Central Railway), confidence is

maintained in the property market, without the Government needing to make purchases. The

failure of Government to take due account of their actions (that introduced delay) on the position

of those suffering blight from HS1 resulted in a finding of maladministration22.

22

‘The Channel Tunnel Rail Link and Blight: Investigation of Complaints against Department for Transport’, Parliamentary Commissioner for Administration (Parliamentary Ombudsman), 1995


(6) Gained insufficient support in 2011 consultation and other issues

That it was claimed that there was insufficient support for a Property Bond is addressed briefly

at the start. The lack of overwhelming support for the Property Bond approach in the 2012

consultation was demonstrated to be an unacceptable basis on which it could be rejected.

A further issue that has been raised is that while some properties suffer blight others will enjoy

higher values. A recent FOI response on blight23 has stated that “it was important to stress that

the CBRE report is focused on property blight, rather than an assessment of the likely positive

impact on house prices, which we would expect to far outweigh any negative impact.”

First, this affords no reason for the injustice on those blighted.

Second, given the clear scale of the impact and extent of the blight (with some 300,000

properties potentially affected), combined with very few station stops, it is questionable that the

net effect would be positive.

We assume the statement refers to an end position with permanent blight at modest levels and

an intensive building programme around the stations. Although not specifically stated as such,

the way that HS2’s economic benefits would have effect is in enhancing property values near

the new stations. However, the transport user benefits claimed are themselves highly

questionable. This claimed positive impact on property values is already in the business case,

while the cost of blight is not.

(7) Create a future precedent

Over the past 20 years there have been small improvements in the compensation

arrangements. These have largely resulted from external pressures – the courts (Colonel Owen

case), maladministration (HS1 scheme) – rather than being volunteered by Government as a

solution to a problem. Their own Working Group proposals (post HS1) were never

implemented. Even the 2012/13 proposed long term arrangements (now overtaken) only

implemented what HS1 had over 20 years ago (by way of a 120m Voluntary Purchase Zone in

rural areas) and the all too familiar hardship arrangements.

If Government introduce a Property Bond on a non-statutory basis, this does not create a

binding precedent, and Government can learn from the experience and improve the scheme.

Modernisation of arrangements is desirable, and a precedent for more effective compensation

equally so.

23

FOI 9895 3 April 2013


APPENDIX 1:

A:Summary of HS2AA recommended HS2 Property Bond Scheme

1. Scheme Objective

The objectives of the scheme should be:

To fairly compensate those affected by blight (eg who want to sell but can’t; or who

stay throughout (or who purchase through a chain of private sales) until HS2 is built)

To restore market confidence and reduce the blight itself (by providing reassurance to

owners, prospective purchasers and mortgage lenders of protection against losses)

To avoid opposition to the project driven by the fear of large uncompensated losses

2. Recommended HS2 market-based Property Bond Scheme (PBS)

Eligible property owners apply to HS2 Ltd for a Property Bond that transfers with their property if

they sell and it applies until one year after HS2 is operating (when the PBS terminates). The

PBS guarantees HS2 Ltd will purchase a property at an ‘unblighted value’ (in their role as

purchaser of last resort) if:

The HS2 project has reached a specified trigger point, eg hybrid bill; and

No private buyer is found at the ‘unblighted value’ when the owner wants to sell.

To encourage private sales a stamp duty re-imbursement by HS2 Ltd would apply (to defined

cases). The PBS would also support re-mortgaging at ‘unblighted values’.

Eligible property owners in properties blighted at PBS termination eg 2027 or 2034 are entitled

to ‘loss in value’ compensation (rather than just ‘Part 1’ statutory compensation under the LCA).

3. Recommended Scheme rules

Eligibility: property owners suffering a ‘loss in value’ due to HS2, but excluding for any property

purchased from HS2 Ltd (at a blighted price due to its proximity to HS2).

Process: eligible owners can apply to HS2 Ltd for a Property Bond any time after the start date,

and need to meet some ‘general conditions’ if they wish to sell to HS2 Ltd. The bond can only

be redeemed from HS2 Ltd (at the ‘unblighted value’) when the trigger point has passed – with

only private sales until then.

There is no qualifying reason for moving, restrictions on proximity, noise etc, or threshold loss.

The sole test is whether there is a ‘loss in value’ due to HS2 at the time of the application.

Application to sell to HS2: to inhibit groundless applications some ‘general conditions’ apply:

A property must have been marketed for a minimum period (determined by price bands)

No ‘serious offers’ at blight-free value (with evidence to justify this value) be made

The belief that its reduced value is due to HS2 must be reasonable and evidenced.

‘Loss in value’ is market determined i.e. blighted price is based on what people will offer to pay

‘Unblighted value’ is professionally estimated eg. RICS ‘red book’ valuations. If the unblighted

value is not more than the best serious offer received, the owner pays the valuation costs.

Stamp duty re-imbursement: is for private sales of the most adversely affected properties. Re-

imbursement rather than exemption would avoid any legislative change.

Appeals: an independent appeals process to operate for eligibility, process and valuations.


B Technical issues (relevant to Recommended HS2 Property Bond Scheme)

1. Eligibility

All property owners are eligible with the exception of property owners (and subsequent owners)

who have bought their properties from HS2 Ltd. The latter have already purchased at a

blighted price that reflects the market impact of HS2.

Evidence in terms of blight is based solely on demonstrating loss in market value due to HS2.

This means there are no restrictions based on noise level, a threshold loss, geographic limits

etc.

2. Process: Bonds or Binding Undertaking?

Central Railway issued bonds to individual applicants. The issue process involved an up-front

property valuation and the resultant value was then indexed for the life of the bond. BAA had

similar arrangements but with different indexing that included mechanisms laid down for dealing

with home improvements. The bond was transferable to future property owners through private

sale.

The HS2 Property Bond scheme (PBS) differs in not valuing all potentially affected properties at

the outset – but only valuing them when a valuation is required as part of an application for

purchase by HS2 Ltd, or on termination (in place of ‘Part 1’ compensation). There are several

reasons why this is preferable, given the scale of the HS2 project. It:

Avoids large up-front cost of valuations for all potentially affected properties and the

associated administration cost

Ensures the valuations are appropriate to the time at which they are needed, as there

are likely to be substantial changes over such significant periods and not all of them will

be easily captured in indices

Changes to horizontal and vertical alignment may obviate the requirement for valuations

or require new ones

Without a valuation at the start of the scheme a crucial role of issuing a bond is removed. In

this context the HS2 PBS might constituted by legally binding undertaking (that would commit

the promoter to operate the scheme with full details of the scheme made available to owners,

purchasers and mortgage lenders).

However it might be argued that additionally individual bonds to individual property owners

should be provided on application, even if no sale is required at the time. This might also give

more confidence to the operation of the property market. But such bonds could not be

determinant of subsequent eligibility – which must remain based on whether a property has lost

value at that subsequent time ie when the owner is trying to sell and cannot.


Were this option (of individual bonds) to be considered for the PBS then it might operate as

follows:

A Bond could be provided to every applicant (who is an eligible property owner24) within

a wide radius of the line, which made clear that should it be necessary the property was

covered by PBS.

The Bond could additionally include a statement from HS2 Ltd allowing them to express

their views as to the limits of potential blight. This statement would be on the basis of

whether they believed the location of the property would be likely to be adversely

affected by the construction or operation of HS2 ie be physically impacted from HS2.

This would not be the result of an assessment of the state of the market at that time.

If HS2 Ltd stated they do not expect an impact this gives important information from an

informed source to the owner and the market (via any subsequent sales process), which

might help stabilise the market. If HS2 Ltd do expect an impact, then the owner has the

assurance of the terms of the scheme.

The Bond would make it clear that, if it is HS2 Ltd view that no impact is expected, the

owner is not debarred from subsequently applying to the PBS to sell their property or

obtain compensation at termination. Eligibility for compensation under PBS would still

be determined on the basis of loss in market value at the time of the application for sale

etc.

While a location criteria is inappropriate for determining eligibility in the EHS scheme (which is

compensating for blight), its use in the issue of an individual Bond might be helpful in steering

the market.

A small charge might be made for such an individual Bond. The HS2 Ltd statement would be

made against the then current plans for in the area including mitigations.

3. Application to sell to HS2 Ltd (meeting ‘General Conditions’)

It will be necessary to inhibit groundless applications to sell to HS2 Ltd, particularly as there is

no threshold of loss (see 3 below). This can be done by having some general conditions in

place. A charge could also apply which is returned if the application is successful.

Property owners would be entitled to apply to HS2 Ltd under the HS2 PBS if they believed that

HS2 had depressed their property’s value (and the trigger point had passed). The general

conditions the owner would need to meet are:

Seriously marketed their property eg for a reasonable period (or been

authoritatively advised unmarketable). The BAA Early Movers Scheme successfully

used specific periods depending on property value bands. Estate agents in the area

(but not locality) could provide the basis for tailored values. Some agents are insisting

on up-front fees to market the property because it is blighted by HS2, and even

requiring full commission if an EHS application is successful. By insisting that an

applicant uses an estate agent, HS2 Ltd oblige the applicant to bear costs that in a

normal market he might avoid through DIY sale and internet based advertising. HS2

24

Property owners (and subsequent owners) who have bought their properties from HS2 Ltd are excluded.


Ltd should permit DIY marketing or reimbursement, where estate agents insist on

special provisions because of HS2.

Unable to attain a serious offer at what the owner reasonably believes to be the

blight-free value. Some form of valuation would be needed; or evidence of similar but

HS2 unaffected properties having higher values. Not all offers are ‘serious’.

Supporting evidence from an agent may be required.

A reasonable basis for believing that HS2 accounted for the reduced value e.g.

relevant factors would concern its proximity, whether it is likely to be audible, visible,

create vibration, exposed to disturbance from construction, evidence from agents that

interest in the property is affected by HS2. Estate agents requiring up-front charges or

special clauses is itself evidence of blight from HS2. NB The Select Committee on the

CTRL Bill recognised that property values considerably declined even when they were

not close enough to suffer the physical effects [of its construction].

Properties that are over tunnelled sections of the railway should not be excluded. If market

forces dictate they are blighted, the owners should not be expected to suffer the loss. If

tunnelling and the tunnel in operation will actually have no effect on the property, the promoter

needs to get this message across. The previously proposed Tunnel Guarantee scheme gave

specific reassurance to properties over tunnels. By obliging HS2 Ltd to purchase blighted

properties, they are encouraged to ensure that good information is provided. This applies to

blight generally.

4. Dealing with especially hard to sell properties

As noted in the main report, Government are concerned a Property Bond may not support those

most in need ie those suffering hardship. We accept there may be particular difficulties for

especially hard to sell properties, and in the period prior to the trigger point for the PBS (after

which sales to HS2 Ltd would be permitted).

A successful Property Bond scheme means that properties in the area of HS2 continue to sell

on the open private market, both before and after the trigger point has passed.

It is recognised that there may be some properties where the Bond would not be effective in

encouraging private sales at unblighted values. This is likely to occur with properties that are

likely to be heavily adversely affected by the construction of HS2. Potential buyers would be

discouraged from purchase by the potential imminence of a need for a subsequent move and its

cost and inconvenience. Those wanting to move in advance of the Property Bond trigger

having been reached might have difficulty in finding a buyer at unblighted prices (even though

the unblighted value will be protected once the trigger point is reached).

Such properties might need special measures to avoid unfair treatment of their owners. The

PBS already includes one measure, ie Stamp Duty Re-imbursement (see below). But for such

properties this may even so be insufficient compensation to attract buyers. Other options that

might be considered (as they have for airport schemes) are

An Early Movers Hardship scheme

An Early Movers scheme


An Early Movers purchase hardship scheme applies the approach of the current EHS, in

restricting eligibility to properties that are or are likely to be heavily adversely affected by HS2,

and the owners are in personal circumstances that they cannot wait until the trigger point for the

main scheme has been reached.

However an important disadvantage of a hardship approach is that if there are delays to

reaching the PBS trigger point, what may seem a reasonable period for ordinary people to wait

may become unreasonable.

To overcome this potential problem an Early Movers purchase scheme without the hardship test

might be adopted. This would ensure that no one is faced with either being unable to move or

accepting a reduced price.

5. Stamp Duty Re-imbursement

We recognise the importance of the PBS in achieving private sales. One source of

encouragement (and additional protection to having to move earlier than otherwise intended) is

providing a stamp duty reimbursement to the potential purchaser of the property.

This is attractive as it provides additional fluidity to the private sales market:

Enables the current owner to have a better a chance of securing an unblighted priced sale

Provides a discount to purchasers (not financed by the current owner), who will feel keener to proceed if they know that if they do move again (eg when construction happens) then they will not have to pay stamp duty twice

It is the promoter (ie HS2 Ltd) who pays the stamp duty rather than the individual.

A stamp duty exemption would require legislation and loss of income, however stamp duty re-

imbursement by the promoter (HS2 Ltd) would not. Such an arrangement is common place in

the property market. In effect it adds stamp duty compensation into the business case for HS2.

It has been suggested that it is confined to the most adversely affected properties. But in

principle could apply more widely. Owners who think that their property would qualify (eg as

heavily adversely affected) would make an application to HS2 Ltd for stamp duty re-

imbursement. If granted HS2 Ltd would pay the stamp duty of any private purchaser.

6. Assessing the loss

For any compensation scheme to work there needs to be a basis for assessing the extent of

loss or at least its existence. This requires knowing the blight-free (ie unblighted) value and

whether the current market value is below this and to what extent.

Current value: If a property is marketed for a reasonable period, the market gives a

direct measure of the value of a property including any blight from HS2. Either ‘offers’

indicate the value, or their absence shows the value is substantially lower than the

advertised price.

Unblighted value: This needs to be estimated. The ‘Red Book’ process applied by

professionally qualified (RICs) surveyors provides estimates and is often used to


support loans. But while it is widely accepted, it may be felt to give conservative

results, which would represent a cost to the property owner.

The RICs valuation process unavoidably involves some judgement. There is consequently

some uncertainty as to what the blight-free value would be, given there will be variations

between different estimates for the same property. The scheme should allow for two (or more)

estimates in order to reduce the subjective component.

HS2 Ltd would commission an independent surveyor to evaluate the blight-free value using the

‘Red Book’ process. The owner would submit the evidence of their own ‘Red Book’ survey by

their appointed independent surveyor. The valuation would be supported by an adjudication

process as it is for EHS e.g. if the valuations were within 10% of each other they would be

averaged, and if further apart a third valuation is done.

What the unblighted value is should also be one of the grounds on which an appeal can be

made.

HS2 Ltd would, within a fixed timescale, offer to buy the property at the blight-free price. The

owner would be open to accept the offer or not. To discourage over use of the arrangements, if

the blight-free value is not more than the best serious offer received on the property, the owner

would have to pay HS2 Ltd the evaluation costs.

All the current EHS schemes have a valuation process, differing little from that proposed, apart

from the appeal stage.

The recommended Property Bond Scheme does not seek to recover other costs incurred in

selling (that may be considerable) nor seek a premium (as the Central Railway scheme gave).

This minimises concerns on over use. As noted above there would be an incentive to sell

through the private market by reimbursing stamp duty on especially hard to sell properties.

At the termination of the scheme some owners will be eligible for payments because their

property is blighted but was never purchased by HS2 Ltd (ie retained by the owner throughout

or sold only through private sales). In this case the valuation of the blighted as well as the

unblighted value would need to be done through professional estimation.

7. Not adopting a threshold of loss

Hardship Schemes (EHS, the Crossrail, CTRL and Highways Agency schemes) all have

employed a threshold, with full 100% compensation to blight-free market values available only if

properties suffer a greater loss than 15% of the blight-free value.

A threshold has been justified on the basis that blight must be sufficiently large to be

discernible, and to be discernible a difference of more than 10% is needed. HS2 Ltd however

also justifies it on the basis of advice from CBRE who say it is based on the expected difference

between asking and selling prices25.

25

Our investigation into this reveals that Hometrack data suggests the appropriate regional data for HS2

phase 1 would show an average 7.5% difference, and not 10 or 15%.


Interestingly HS2 Ltd has now revised the EHS requirement to be no offer within 15% of the

unblighted asking price26 (which is more favourable than for all other EHS schemes that use the

unblighted open market value (ie the selling price)). In any event this still means that owners of

heavily blighted properties are compensated, while those of moderate and lightly blighted ones

are not.

The effect of the threshold is also important for its effect on blight

It lowers prices in the area: a buyer (or mortgage lender) would appreciate that the

property if re-sold might only realise the unblighted value less the threshold – with a

result that the market price would become this lower figure (rather than the unblighted

level). It is another way by which the blight gets baked-in.

Affects mortgage lenders willingness to lend. Such a potential loss would also have the

effect of reducing the willingness of lenders to advance funds to potential purchasers,

further inhibiting the marketing of affected properties.

It is unreasonable: To require individual owners to suffer up to a 15% (or perhaps

7.5%?) is inequitable and inconsistent with the policy of obliging HS2 – not individuals –

to meet the cost of property value reductions. The average price of a property

purchased under EHS is £590,000, so a loss of 15% is over £88,000, and £44,000

based on 7.5% – a substantial loss for an individual to bear.

Neither the BAA nor Central Railway property protection schemes had thresholds. It is

proposed that neither should one apply to the proposed HS2 Property Bond scheme.

8. Would an HS2 Property Bond scheme be over used?

Unless the owner believed that the property was only saleable at a discounted value, due to

blight, they would prefer to sell it on the open market as it would:

Be quicker

Avoid inconvenience

Avoid additional costs

Might achieve a better price than the typically conservative estimation achieved if the

‘Red Book’ process is used.

It is also important that the HS2 market based Property Bond scheme would not pay any

additional costs eg legal fees and make it more attractive.

Providing an incentive to encourage private sales could also assist eg by re-imbursing stamp

duty for particular properties (discussed at 5 above).

It is plausible that fewer properties will ultimately prove to be blighted than is initially the case,

and those that are blighted become less so. Not only is this the conventional view but

apparently this proved to be the case with HS1 (CTRL).

Information about the environmental impact, and the extent and effectiveness of mitigations is

still not detailed: fear and speculation grow where there is no information. However, for those

26

Letter from Alison Munro of HS2 Ltd of 28 January 2013 to Hilary Wharf of HS2AA


wanting to move, the deterioration in the property market is just as real if it is based on fear as if

it were founded on full and accurate information. It is not reasonable to expect individuals to

defer selling their property until the settled down level of blighting is evident, and even then to

still suffer a loss. This is not one or two years but more like two decades

It is probably sensible for HS2 Ltd to retain the properties that it purchases. If their informed

judgement is that the fall in market values will reverse, HS2 Ltd are better renting rather than re-

selling until property values reflect the long term impact. This is the approach they are currently

taking with properties purchased for HS2 under EHS.

9. Role of mortgage lenders

Most purchases require a lender to provide sufficient funds for the purchase. The quantum of

money they will advance normally depends on their view of the value of the property, which is

established by survey. Similar arrangements apply if an owner wishes to re-mortgage.

If a lender takes the view that a property cannot be relied upon to realise its unblighted value if

sold, they can be expected to base their lending on a lesser sum (or ask for a larger deposit).

Many purchasers will be unwilling or unable to make up the difference between the blighted

valuation and unblighted one from their own resources – particularly as the lender’s conduct

suggests caution.

It is consequently important to the ability of a scheme to sustain a freely moving and unblighted

property market that it is accepted as ensuring unblighted values by lenders.

Advice has been obtained from both CML and BBA on how mortgage lenders would be inclined

to view the existence of the various schemes. They responded to confirm that neither the

Hardship Scheme nor Compensation Bond options in the consultation would have met their

lenders’ requirements, but expect the Property Bond approach would. This was referred to in

the Government’s now overturned January 2012 decision on compensation27

The Central Railway Property Scheme secured the support of mortgage lenders and viewed

this factor as critical to its success.

The National Association of Estate Agents (NAEA) also confirmed the importance of the role of

the mortgage lenders. They also provided express support to our approach in 2011 and have

again in 2012.

As expected mortgage lenders cannot regard the unblighted price as a realistic assessment of

potential future realisations under hardship type scheme arrangements.

27

Review of Property Issues, paragraph 28, January 2012


10. Final compensation for those who stay

The Property Bond focuses on compensating those who wish or need to move. Those who

stay would currently only be eligible for ‘Part 1’ statutory compensation (which is for nuisance ie

‘physical’ factors only under the Land Compensation Act, 1973).

This situation can be redressed by adding a ‘buy back’ process to the proposed Property Bond.

It would oblige HS2 Ltd to compensate the full loss in market value consequent on the

existence and operation of the railway, where properties have not been previously purchased

by HS2 Ltd under the scheme.

This was the approach that Central Railway adopted i.e. for those who chose not to move after

the railway was operational the company would buy the arrangement back for cash. Mortgage

arrangements would probably need to address this with, in some cases, a requirement that the

payment be used to reduce the borrowed sum.

Entitlement to final compensation would need to be excluded from properties sold by the

promoter at blighted values. An interaction with the Land Compensation Act would need to be

resolved eg

By such sales specifically precluding anyone from also benefiting under the Act or

Any such payment being assigned to the promoter (as a ‘condition of sale’ by the promoter

when he sells at blighted values).

Evidence from Central Railways

The Central Railways Property Bond was developed with the same aims as is proposed for the

HS2 scheme: to compensate fairly, restore market confidence and avoid opposition fuelled by

fear of an uncompensated loss. Over 1,500 Bonds were issued and one third actively traded (in

re-mortgaging, or passed onto the next purchaser with a sale). Getting the mortgage

companies on board was critical to its success. A summary of the scheme was part of HS2AA’s

2011 and 2012/3 consultation responses.


Appendix 2: Estimating the cost and degree of blight

CBRE’s report28 estimates the blight resultant from the March 2010 announcement of the

preferred route. However, CBRE do not make an estimate of the total losses that property

owners suffer as a result of blight.

It is CBRE’s view that generalised blight is fuelled by uncertainty and a lack of knowledge as to

the final degree of nuisance and loss of amenity. They contend that typically blight is greatest

following the announcement of a scheme and during construction, falling to a more modest level

when the infrastructure is complete and operational. This is the generally accepted life-history

of a project’s generalised blight. It is therefore follows that their view would be that the estimate

for blight following the announcement is for a level that approaches the maximum figure.

Notwithstanding for HS2, with at least 17 years from announcement to operation, the duration of

the period of maximum blight is more than a decade.

Maximum Cost of blight

Although CBRE do not estimate the total cost of blight, by combining various facts and

estimates that CBRE make in their report it is possible to derive an estimate.

Losses in value for Zone A properties

near HS2 on surface near HS2 in tunnel

Properties sold/quarter 1,684 363

Average value £270,000 £574,138

Average loss (Zone C- Zone A) 8.50% 16.0%$

Postcode sectors (est.)# 77.6 16.7

Total properties (est.)## 217,309 46,774

Total value loss (est.) £5.0bn £4.3bn

$ based on the weighted average of the two tunnels separately

# Assuming 21.7 sales per postcode sector

## Assuming 2,800 dwellings per postcode sector

The numbers of properties involved are considerably greater than those receiving individual

communications from HS2 Ltd concerning the 2011 property blight consultation (the 172,000),

or 2012 (43,000). However, if the value losses are concentrated into a smaller number of

properties, this would simply imply a larger average value reduction.

These estimates include those properties that will be needed to build HS2, but it is unlikely that

such properties would be sold in the post-announcement period (as the reduction in value is

likely to have been too great), so although in theory they are included in Zone A, they are

unlikely to have contributed to the estimate of the loss in value.

These figures suggest blight of some £5bn in Phase 1, if we accept CBRE’s view that the

losses for properties in the vicinity of bored tunnels are not robust. This might, on a

conservative basis, represent perhaps £10bn as a figure for the whole Y.

28

‘High Speed 2 Blight Study, CBRE, December 2010

https://www.gov.uk/government/publications/houses-and-other-properties-along-the-proposed-hs2-route


Eventual blight

CBRE believe that the eventual level of blight will be modest. This is the general expert view. It

is also the view expressed by the DfT29.

For the purpose of costing compensation schemes it is the net cost that needs to be considered

not the initial purchase price, when the promoter purchases properties.

The net cost is discussed on Page 6 of the main report and the basis set out in the box on page

7. Figures are not available but the conclusion is the cost of a Property Bond Scheme should be

substantially less than the £5bn blight estimates for Phase 1 from the CBRE report (or some

£10bn for the full Y) as this takes

No account of blight reducing from almost 20% (see below) to something modest by the

end

No account of the level of blight being reduced from the level shown to exist now (as a

result of improved market confidence)

The promoter will minimise the costs of operating such a scheme by re-selling when property

values have recovered (as much as they are going to), so the loss carried by the promoter is

the difference between purchase and sale, taking account of maintenance and management

costs together with rental incomes. The Government is ignoring the cost of capital for HS2.

It is considered that a property bond arrangement could generally maintain the open market

values, and hence limit the need for the promoter to actually purchase properties, because the

bond gives purchasers – and crucially mortgage providers – the confidence to purchase and

lend at unblighted values.

Average level and extent of blight

HS2AA have done a separate critique of our concerns with the CBRE Report30. We consider

that the report misrepresents their results about the true level and extent of Phase 1 blight.

We demonstrate from the CBRE report:

The true loss in property value (the difference between Zone A and Zone C figures,

which acts as ‘control’) is 8.5%, with a bigger loss in rural areas (12.1%) than urban

(4.9%).

This loss in value is averaged over many more properties than are really affected by

HS2 (in Zone A) because of the post code basis used. Were all the effect on value

concentrated so the average outer distance was 1 km instead of the 2.29 km used, this

would give an average loss of 19.5% ie just under 20% on average (or 27.7% rural,

11.2% urban)

29

Simon Burns, Minister of State for Transport, on BBC Newsnight programme on Compensation, 12 April 2013 30

Review of CBRE Study into HS2 Blight, April 2013


The table below summarises our analysis

HS2 on surface Change in property value

All property types Zone A Zone C Impact of HS2 Impact if all within 1km##

Urban and rural

(1)Urban

(2)Rural

-1.3%

+2.3%

-4.9%

+7.2%

(no figures given)

-8.5%

-4.9%#

-12.1%#

-19.5%

-11.2%

-27.7%

# using the combined ‘urban and rural’ Zone C value as the control

## assuming proportional reduction for ‘Urban’ and ‘Rural’ as for the average combined figure.

CBRE say they have reservations with their figures in relation to blight over tunnels (as distinct

from round portals), suggesting that it is due to other factors than HS2 and they conclude that

there is no blight effect over bored tunnels. The figures are below.

HS2 and tunnels Notes

All property types Zone A Zone C Impact of HS2

All four portals Over both tunnels

Euston tunnel

Chiltern tunnel

-9.2% +2.4%

-3.4% -0.7%

+4.8% +4.8%

+10.9% +26.4%

-14.0% -2.4%#

-14.3% -27.1%

Unclear why combined tunnel results differ as much as they do from below.

Some post codes excluded (counted as HS2 on surface and not tunnelled)

# The weighted average of the separate figures for the two tunnels is -16.0%

There is certainly a lack of clarity about what CBRE are reporting concerning property sales

near tunnelled sections, but the analysis that gives the numbers of properties involved for the

two tunnelled sections appears to offer robust evidence that there is a large reduction in price

due to HS2. While it is counter-intuitive that tunnels would create a higher level of loss, CBRE

do not offer convincing reasons why the tunnel results should be discarded while the surface

ones should not.

Documents

Modernising compensation with a Property Bond solution€¦ · Modernising compensation with a Property Bond solution 1. Introduction HS2AA strongly advocate that the compensation