7 March 2019

Blue-sky thinking could be the answer to London’s housing crisis


The creation of a market in air could help solve London’s housing crisis. Yes, I’m saying we should privatise the air. Don’t tell the Corbynistas.

In 1961, New York City established “transferable development rights” as part of limiting density for each block. Transferable development rights allow property owners to sell the space between an existing building height and the tallest permissible height in an area. These can be sold to the developer of a nearby property — on the same street or across the road — to build higher than would otherwise be permissible.

Think of it as like stacking unused stories from one low rise building onto another nearby higher rise building. Once it is sold, that’s it; there is no ability for the former owner to build upward and the new owner has automatic approval to build upward without further onerous planning approval. These high quality apartment blocks have great views, are more spacious, and have plentiful access to natural light.

New York has a thriving market in air rights. Hundreds of thousands of square feet are sold annually, typically for 50 to 60 per cent of the value of the land below. Between 2003 to 2011 there were 361 transfers worth billions of dollars. This is leading to denser housing development – something that is severely lacking in London. More density means more housing, lower housing prices, and less time spent commuting. When people can live closer to their jobs, they become more productive and live healthier and happier lives. It also helps the environment when people commute shorter distances and use cars less, or cycle and walk more.

Air rights help address local opposition to development by ensuring everyone benefits, not just developers. The owners of adjacent properties are financially compensated for development. The owners of historic buildings, like theatres and churches, can also unlock the economic value of their centrally located buildings by selling off the rights to the air above. This provides revenue to help preserve heritage buildings, protecting the local aesthetic and building coalitions of support.

Transferable development rights have been used for both residential and commercial development. Last year, JP Morgan Chase spent $240 million to buy the air rights above Grand Central station to expand the height of their new building in Manhattan. Grand Central is using this money to improve the station and public spaces. New York’s 432 Park Avenue, the tallest residential building in the world, required the purchasing of over 115,000 square feet of air rights.

Air rights are not just for towers and corporate headquarters. Air rights are most often used to build a few additional stories on an existing building in a height-limited residential area. For example, the sale of air rights above New York’s High Line was used to allow the development of a six-story warehouse into a 10 story condo project. That’s millions of dollars of extra value, as well as new homes and new businesses.

In practice, the creation of a market in air rights would require London’s local authorities to rezone selected blocks to a higher height, and then allow owners who do not have an interest in building up to sell their air rights to adjacent properties who do. If everyone can build higher automatically, and benefit even if they do not want to build higher, it is less likely to be opposed. This could be used together with the existing practice of building above existing properties.

While this approach may not be suitable for the entirety of the UK, or even much of London, it could serve central growth areas very well. If air rights could be bought and sold it could open up permission for thousands, if not millions of new homes.

Alternatively, local authorities could allocate and sell air rights themselves. In New York’s Chelsea district, the City Planning Commission is using the proceeds from the sales of additional air rights, priced at $625 per square foot, to support an affordable housing fund. Rather than set a specific price, the local authority could also sell to the highest bidder. Local authorities could also benefit from selling air rights above council housing and other properties. A 2014 study concluded that building above public assets alone would provide space for 630,000 new homes. These air rights could also be sold on to nearby developers.

If Britain is to solve the housing crisis, we must entirely rethink the planning process. The Town and Country Planning Act was originally written in 1947, in the context of people moving out of cities not inwards. The creation of a market in air rights would be one way to encourage necessary house building while ensuring everyone benefits.

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Matthew Lesh is the head of research at the Adam Smith Institute.