More On 2012 Land Values

Ken and his property market advisor

We've already blogged news of the latest "black hole" in the budget for the 2012 Olympics, but it's instructive to examine the background in a bit more detail.

The new problem arises because the land on which it's being held will not produce anything like the price envisaged when it's finally flogged off to private developers. Whereas land expert Ken Livingstone had asserted it would raise £2bn, the property industry view is that it will raise less than half that.

This should surprise nobody, in the sense that Livingstone's self-serving financial pronouncements are no longer taken seriously by anyone in the first place. But for what it's worth, last summer he claimed the sale would raise £2bn because London land values would go on rising at 20% pa for years to come.

Even at the time his own London Development Agency said the figure would be only £800m. But that wasn't what Livingstone wanted, so it seems he just came up with his own figures.

Who stands to lose? A big loser will be those lottery "good causes", which have been raided to make a massive "loan" to the Olympics. The loan will never be repaid. The other loser will be the London Development Agency, or in other words, the taxpayer.

It all goes back to the initial budget fiasco. As BOM readers will know, that saw public funding soar from the ludicrously low £2.275bn published pre-bid, to a figure four times that.

The revised £9.325bn was announced last March by Culture Secretary Tessa Jowell (see previous blogs, eg here). Announcing the figure was bad enough, but even worse for the DCMS culturati was the need to raid the lottery "good causes" fund for another £675m. That took the total Olympics raid on good causes to £1,085m. And it was on top of a further £1,010m always meant to be coming from special Sports and Olympics lotteries.

So the total planned take from lotteries was pushed up to £2.2bn, all of it effectively diverting funds from the culturati's cherished "good causes".

In an effort to hide their embarrassment, back in June, Livingstone and the DCMS cobbled together a revised Memorandum of Understanding. That set out the various budget contributions, as follows (PSFP refers to the original 2003 pre-bid Public Sector Funding Package):

• Olympic Lottery: £750 million as per the PSFP
• Sports Lottery: £340 million as per the PSFP
• National Lottery: £1,085 million ie an increased provision of £675 million
• Mayor: £925 million ie an increased provision of £300 million (not funded from increases in Council Tax or Fares)
• LDA: £250 million as per the PSFP
• Government: £5,975 million additional provision (including provision for wider security and Policing)
• Total funding provision £9,325 million

Of course, the big loser was the general taxpayer, now on the hook for £6bn. The original £2.375bn was all supposed to come from the Olympic Lottery (£750m), the Sports Lottery (£340m), the National Lottery (£410m), the Mayor (£625m), and the London Development Agency (£250m).

But the raid on the National Lottery also increased by a chunky 165%. And the Mayor was also committed to finding another £300m without increasing Council Tax or public transport Fares. Obviously some of that will have to come from much higher Congestion Charges, but how much easier to rely on soaring land values.

Which is precisely how the DCMS and Livingstone cooked up the idea of saying that the extra money being taken from good causes would get repaid post-Olympics from land sales. If land prices were assumed to rise enough, then circles could be squared, and castles of sand would become reboubts of fiscal probity.

So last June's Memorandum spelled out exactly how these assumed proceeds would be divied up between the parties. The first slice of £650m would all go to the LDA, to repay their costs in acquiring the land in the first place. The second- amazingly precise- slice of of £631m would be split £506m to partially repay the Good Causes fund, and £125m to the LDA. The third- equally precise- slice of £544m would be split £169m to Good Causes, and £375m to the LDA. Thereafter everything was to go to the LDA.

Let's just register those land acquistion costs. The LDA paid £650m for the site, and to our knowledge that has never been included in the declared 2012 budget. On closer inspection, the Memorandum also identifies £500m of LDA "costs associated with the remediation and disposal of land and buildings within the boundary of the Olympic Park, including fees and holding costs relating to those disposals". Which is another £500m not included in declared budget.

So on our reckoning, the official budget should now be increased by £1,150m for undeclared LDA land costs: the £9.325m official budget should read £10,475m.

Let's do the sums on the assumed land profits. Starting from the £650m purchase price paid out by the LDA, adding £631m for the second slice, plus £544m for the third, gives us a grand total of £1,825m. So to repay the Good Causes fund and the LDA in full, the land will have to appreciate by £1,175m, or an eye watering 80%. With the commercial property market already in trouble, that looks highly unlikely.Indeed, there's a fair chance the market will actually fall.

Bottom line?

First, we've discovered yet another £1,150m of costs, taking the official budget to £10.5bn. Second, the additional money grabbed from the Good Causes fund will never be returned in full. Third, even the LDA is most unlikely to get back more than a part of what it's stumping up. And with an estimated £500m needed to decommission the site, taxpayers should ask themselves who will then pay?