Japan
Land value capture in Japan
The most prominent land value capture instruments in the country are land readjustment and charges for development rights (Table 2.31). Land readjustment is historically important and in recent years has been expanded to programmes of urban regeneration and social infrastructure. Infrastructure levies are rarely applied, but they have been object of recent discussion and partial testing in Business Improvement Districts. There is no strict legal framework for developer obligations. Strategic land management is uncommon, as the national and local governments holds little public land available to lease and financing for land acquisition is scarce.
Enabling framework
Japan is a unitary country with two tiers of subnational governments: 47 prefectures at the regional level and 1 741 municipalities at the local level, plus 23 special wards within Tokyo (OECD/UCLG, 2019, p. 187[1]). The prefectural level consists of the metropolitan district of Tokyo, the two urban prefectures of Kyoto and Osaka, the district of Hokkaido and remaining rural prefectures. Municipalities are divided into different categories: designated cities, core cities, special cities, cities, towns and villages.
The principle of social function of property establishes that property rights shall be defined and exercised in conformity with the public welfare (Article 29 of the Japanese Constitution). There is no national policy document that guides the use of land value capture tools, but the enabling framework is found in different national laws and plans, being further specified in local ordinances.
The Japanese spatial planning system is complex, with plans at all levels of government (OECD, 2017, p. 140[2]). At the national level, the National Spatial Strategy and the National Land Use Plan provide general principles and a master concept for land use. Prefectures have their basic land use plans and master plans for urban areas within prefectures. At the local level, there are strategic master plans and land-use plans.
A range of land value capture instruments has been applied to finance urban development and renewal in the largest metropolitan areas, such as Tokyo, Nagoya, and Osaka. Many of the instruments can also be applied in provincial capitals and second-tier cities, depending on local government capacity, political will and market dynamics. Small towns and rural villages with limited market potentials are often unable to apply incentive-based instruments, being financed by national subsidy programs.
Land readjustment
Land readjustment is by far the most popular approach to land value capture under the market freehold system. In use since the late 19th century, it was formalised in 1954 with the Land Readjustment Act, last updated in 2019. Since the 1990s, land readjustment has been revised and expanded, having become associated with other programs, notably related to disaster prevention and urban regeneration.
Land readjustment is defined as a project that changes the shape of land lots and constructs or changes public facilities in order to improve local infrastructure and promote the use of residential sites within urban planning districts. It may be used for the purposes of urban expansion, urban development or renewal and disaster prevention or reconstruction. Yearly, an average of 870 land readjustment projects is conducted.
Many actors may be involved in a land readjustment program: the national government, local governments, special public bodies, private entities such as land developers and railway agencies, private landowners and leaseholders, tenants or informal residents. If local governments decide to pool and readjust plots, first they need approval from their prefecture, as it happens for urban planning decisions in general. The interest in land readjustment programs varies with the dynamism of real estate markets. They are therefore more frequent in neighbourhoods with strong demand for real estate.
For a land readjustment project to take place, two thirds of involved landowners and leaseholders must consent. Their participation is not compulsory. Once the consent level is reached, all landowners must provide their plots. If the project is of public interest, resisting property owners may have their plots expropriated, in which case they receive fair compensation. However, as landowners frequently give their voluntary consent, expropriation rarely occurs,
A share of 30-40% of readjusted plots is reserved for public improvements, such as public utilities, public spaces and transportation projects – from which landowners will benefit. Across all land readjustment projects, 110-150,000 hectares of land are reserved for public improvements per year in the country.
After readjustment, landowners receive a plot with a value proportional to the original holdings, preferably on the same location or as close as possible. Third party investors, e.g., developers, can also receive readjusted plots in return for their investment in the project.
If the original plots are smaller than a specific size or are less valuable than the original ones, landowners can be compensated in cash. The contrary, however, does not hold true: if the readjusted plots are more valuable than the original ones, they are not required to pay any compensation to the public authorities.
Moreover, the newly readjusted area typically includes the creation of publicly owned plots for sale. This is an important feature of the system, since land sales recover at least half of the costs. For instance, in the project around Futako-Tamagawa Station in southern Tokyo (2000-2015), sales of readjusted plots recovered 70% of the costs. In the projects along the Tsukuba Express Line (2000-2023), it is estimated that between 50% and 60% of the costs will be recovered. The revenues collected from land sales serve to compensate stakeholders with various claims, such as leaseholders and informal residents.
The implementation of land readjustment still faces some obstacles. Land expropriation is expensive and controversial. Areas of environmental or cultural significance may obstruct the project, since their fixed spatial configuration constitutes a practical restriction to readjustment. Resisting landowners in some cases appeal against the decision to conduct a project, engendering administrative and judicial disputes. Tenants and other affected groups also resist, fearing that they will not receive adequate compensation.
Charges for development rights
The national government, local governments and special public bodies frequently adopt charges for development rights. They are linked with Urban Regeneration Special Districts, in accordance with the Urban Regeneration Special Measure Law, introduced in 2002. Within such Special Districts, private developers may present a planning proposal for building at a higher density or height, that is, with a higher Floor Area Ratio (FAR) than the basic one defined in the zoning law.
In exchange for the higher building density, the developer pays a compensation. The compensation is in the form of provision of land, public space or public improvements, to be delivered upon project completion. The aim is to improve local infrastructure and the quality of the built space. No cash payments are allowed. As of 2012, there were 58 designated districts with special FAR permissions, many of which can apply a FAR above 10 floor buildings.
The urban regeneration programs with special FAR permissions are changing Japan’s urban landscape. High-grade commercial towers and residential buildings have been constructed with high-amenity built environments around major transportation centers. For instance, in Osaka’s Abeno Harukas development, a maximum FAR from 8 to 16 was allowed, in exchange for the provision of public and cultural facilities.
Nonetheless, some implementation obstacles remain. Many municipalities lack the administrative capacity to analyse, approve and enforce such charges. Development norms and land use regulations are regarded as unclear. Being associated with dynamic markets where higher density is profitable, the adoption rate varies with the risks associated with real estate markets. Lastly, many developers do not regard the charges to be feasible, in terms of the profitability rate of projects.
Infrastructure levy
Municipalities and special purpose bodies rarely charge landowners for the costs of a public improvement adjacent to their land. The public improvement may include public spaces, green spaces or public transportation projects. In the case of subway construction, subway agencies can receive fees from owners of the buildings which will be built over stations.
Charging the fee requires negotiation between the local authority and property owners. The local authority estimates the fee in a case-by-case manner. Costs may be equally distributed to all benefitted property owners or allocated according to the expected increase in land values, considering distance to the service, façade length, floor area and land use. The capacity to pay may be also taken into consideration. Large landowners, even if few, tend to pay more than small landowners. Some may be exempt from payment, depending on the negotiation process.
There is no defined procedure for payment and collection. The fees are collected before or upon completion of the improvement, in lump sum or in installments. Nonetheless, a significant percentage of the costs of the public improvement is recovered, for example, 50% for the Hokuso Rail Line in Chiba. For the Yokohama MM21 Line, around 30% of the land value increase was recovered.
Besides this locally-based negotiation, another recent type of infrastructure levy is Business Improvement Districts. Inspired from major US cities, such as New York, Denver and Boston, the instrument finances street-level capital improvement projects, including maintenance costs and social activities. After consultation with business owners, business district associations deliver a specific plan for the amelioration and upkeep of the area. Although limited and still less established, it is part of urban regeneration initiatives in dynamic commercial areas, especially where small business owners and local governments share a similar vision and are proactive.
The application of infrastructure levies is relatively limited and little institutionalized. Local governments or special purpose bodies apply this instrument when major developers own relatively large land parcels near public capital projects. Subway station construction is a common example. The main challenges to implementation are unwillingness or inability to pay. On one hand, there is resistance by landowners, who frequently appeal against the requirement to pay a fee. On the other hand, many landowners cannot afford to pay the fee, such as elderly or low-income households.
References
[3] OECD (2022), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 13 January 2022).
[8] OECD (2021), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 25 November 2021).
[2] OECD (2017), Land-use Planning Systems in the OECD: Country Fact Sheets, OECD Regional Development Studies, OECD Publishing, Paris, https://doi.org/10.1787/9789264268579-en.
[1] OECD/UCLG (2019), 2019 Report of the World Observatory on Subnational Government Finance and Investment - Country Profiles, OECD/UCLG.