The scale of Star City’s proposed hotel and apartment tower has ignited opposition, but why is nobody talking about what’s really going on? Here’s a look at how manipulating planning rules can create massive uplift in value – for private hands at almost no cost. Like money out of thin air, in fact…
“Nobody ever went broke underestimating the intelligence of the American people” is HL Mencken’s bleak assessment of public gullibility, which explains a lot about recent development in Sydney.
Perhaps “cynical disdain” better describes the Star casino’s proposal for a tower in Pyrmont. The admittedly elegant building would house apartments and a franchise of the Ritz Carlton hotel chain – and exceed current height controls by some eight-fold.
If it succeeds, Bennelong Point and the Sydney Opera House look set to be replaced as Sydney icons by two casino-owned towers, one each on headlands to the west.
The apparent contempt for the public acquired risible dimensions in a double-page open-letter spread in The Telegraph by the owners of The Star (Hilariously and perhaps unintentionally re-casting themselves as revolutionaries, prominent sporting tsars and other luminaries) joined with Star City to urge Sydney’s proletariat to rise up in support of the revolutionary project”
“Now Sydneysiders from all walks of life are rallying to get behind this … here’s your chance to join them. Doesn’t a city like ours deserve a world class hotel like the Ritz Carlton?”
It’s incendiary stuff, though perhaps not quite Lenin-worthy.
On reflection, perhaps this is really not that surprising: we are by reputation a sports-mad nation of punters. Our tolerance of the stadium’s fiasco and horse racing adverts on the Sydney Opera House sails both demonstrate our limitless fondness of ball games and betting. Dissidents risk the wrath of the mouth-foaming shock-jock thought-police and a trip to the talk-back gulags.
But what’s really happening here?
Public outrage is mainly focused on built-form issues but little attention has been paid to the central motivation: money.
More than 20 years ago, Pyrmont was redeveloped from rust-belt slum to one of the densest and most attractive suburbs in the nation.
Achieved through incremental growth over many years, it was founded on an agreement between a Labor federal government, through its Building Better Cities initiative, a Liberal state government, with detailed involvement of its planning and development agencies, private sector developers, and the Pyrmont community.
Its numerous achievements included retention of the area’s residents, precinct-wide conservation, expansion of educational facilities, extensive new residential development, a new media and technology hub for Sydney, and improvements to the peninsula’s services. The return on government dollars spent was manyfold.
One of the features of its careful planning was the distribution and scale of new towers. Initially confined to three locations on the peninsula, including the existing Star City hotel, some additional towers were added near the ANZAC Bridge.
Pyrmont is one of Sydney’s planning and development successes
Though some may quibble, Pyrmont is one of Sydney’s planning and development successes.
The urban form of Pyrmont can be conceived as the embodiment of a public good; the physical expression of the public interest; a “deal” comprising the virtuous overlap of public and private interests.
That “deal” is now done.
So why would anyone, particularly a major landholder in the precinct, wish to undo it?
Yes, it’s a Dorothy-Dixer. The answer of course is money; not surprisingly for an industry whose value-add derives mainly from its turnover.
There is nothing wrong with this motivation; no sensible business would pursue a loss. Further, the hotel component of the proposed development is urgently needed in Sydney, though not necessarily above Star City.
Land value and how planning rules can change everything
The value of urban land essentially derives from its location and its development rights.
Urban land has little intrinsic value – perhaps growing wheat – but proximity to other desirable locations and its permissible yield (what can be placed on it) are both very valuable.
Planning regulations govern what can be built.
Let’s say a tower like the Star’s is proposed for Sydney. The developer would first need to purchase suitable land in a precinct governed by planning controls that permit it to be built.
The nearest land would probably be central Sydney and could well cost hundreds of millions of dollars.
Project feasibility analysis would typically compare the total cost of a development, including the cost of land, with the likely returns that could be achieved on completion. If built, the economy would benefit overall from productivity increases resulting from the accommodation of rent-paying businesses in the new development.
These relationships govern the commercial development of most urban land.
The relationship between increased productivity and development is a little different at the edge of the city, where up-zoning is a dominant feature.
Higher land values are created “at the stroke of a pen” when government changes development controls, say, from rural agricultural land to medium density suburban housing. Instant paper-profits flow to landowners but come with the expectation of complementary services, which government usually provides.
The obvious imbalance is partly remedied by a “deal” whereby some landowner profits are redirected to government to pay for these services. From a government perspective, these arrangements are sometimes referred to as “value capture”.
Thus, productivity increases from city-edge development result from the conversion of unimproved land into residential accommodation that can be rented or sold.
As much as it is of illegal drug supply, it’s a truism of development that the greatest profits derive from the greatest risk.
This partly explains why heritage listing sometimes fails to achieve its objectives. The more stringent the listing (the lower the permitted yield in a high yield precinct), the lower the traded value of the land so encumbered, and hence, the greater the profits if the listing can be circumvented.
This logic also applies to other limits on development, such as planning controls. Massive profits await successful circumvention.
Called windfall gains, their pursuit is described as “rent seeking” behaviour and is generally regarded as a blight on productive economies.
Now consider what The Star proposes.
For urban land that is already owned, location cannot be varied, leaving only the “improvements” – what is allowed to be built on the land – as the source of value. The Star site is probably “maxed out”; built out to the maximum extent permitted by controls.
However, if development constraints can be relieved the value of land increases almost instantaneously, in the same way as occurs for city-edge land.
It appears that Star City does not propose any value capture “deal” of a kind that originally applied in Pyrmont and that normally applies to city-edge land.
Consequently, any planning consent for the proposed tower would generate a land value uplift flowing entirely to the existing land owner.
It would be analogous to manufacturing more high-value inner urban land out of thin air at almost no cost to its owner.
Where to from here?
There are at least two ways the government might address this issue. Briefly, the options are either to kill the project on built-form and planning grounds or to charge the proponents for the extra “land”.
The first way, planning grounds, might observe that the urban form of Pyrmont, as expressed in development controls, is a long established embodiment of the public interest, all as agreed by three government tiers originally involved in Pyrmont’s redevelopment.
These grounds might also seek to avoid development “precedents”, a fancy term for the practice of nearby land owners to seek similar approvals by employing the toddler rhetoric of “I want what they got”, with the consequential erosion of Pyrmont’s current urban form.
The second way would be to approve the proposal but levy the proponent by way of “value capture” an amount equal to the value uplift of the land. If that were to render the project commercially unviable then it was never viable in the first place.
Government might add that other nearby land can accommodate similar scaled development; that consent without commercial consideration would disrupt markets for that land; and that consent alone would effectively comprise an unwarranted government subsidy equal to the value of that other land.
How might the proponent proceed?
A common strategy is the ambit claim, the “try-on”, which this proposal may well be. It entails tabling a deliberately outrageous proposal to “frighten the horses”.
When public outrage subsides and sentiment has shifted a little, a lesser scheme would be tabled – say only half the height but what was intended all along – that might eventually attract consent.
Obviously, with so much value at stake decision makers will be lavishly treated to publicly invisible but vigorous lobbying.
Further public support may be sought, though perhaps with a little more sophistication than exhortations to rally for a Ritz Carlton. The two-fold objective would be to divert attention away from issues of un-earned value and to recast the development as an essential public good.
Clearly, the proposal will not go away. How high it ends up being will therefore be a good indicator of Sydney’s gullibility.
Mike Brown has worked in NSW local and state government in planning, urban design, and strategic roles for 15 years. He is also a graduate of the Masters of Urban Policy and Strategy program at the University of NSW.
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