Financing the Flow: What Role Does Land Value Capture (LVC) Play in the Financing of Transportation Infrastructure?

Public transportation is the defining feature of many urban societies in the world. Every day, it facilitates the flow of commuters from residential zones to offices. The economy and the “livability” of cities depend on the reliability, efficiency, and affordability of these systems.

In 2025, the Singapore MRT facilitated 3.49 million trips every day (Chelvan). This was a 2.29% increase from 3.41 million daily trips in 2024. This is a greater percentage increase than that of Singapore’s other two primary public transit systems: buses and the LRT (Chelvan). In 2019, to match the rising demand for the MRT driven by rapid population growth, the Land Transport Authority (LTA) committed an additional S$60 billion to expanding and upgrading the transit system over the course of a decade (IEA). This is part of a larger trend where some of the most densely populated cities in the world are shifting towards mass transit systems that require more capital to expand.

In Hong Kong, railway trips constitute nearly half of all trips made using public transportation. In 2025, the MTR, XRL, and Airport Express, all managed by the MTR Corporation, transported 4.78 million passengers daily (Transport Department of Hong Kong). The MTR is investing US$17.86 billion to develop new railway projects in Hong Kong SAR (Yuan). Additionally, by 2025, the MTR had operated nine fully operational lines in Mainland China, covering parts of the highly populated cities of Beijing, Shenzhen, and Hangzhou.

This rapid growth is not limited to Singapore and Hong Kong. Due to increased demand driven by urban population growth, urbanization, and environmental concerns, many transit systems around the world are undergoing radical transformation. According to a McKinsey & Company report, the transport and logistics sector requires an investment of US$36 trillion through 2040, with public transportation being part of this requirement (Green et al.).

Despite transit systems having high capital investments and overhead costs, fares are often highly regulated by governments to ensure affordability. This necessitates more innovative approaches to financing and funding infrastructure, as well as ways in which more private capital can be attracted to the transportation sector. Against this backdrop, the Land Value Capture approach, especially the Rail + Property model used in Hong Kong, remains an attractive option for policymakers, economic thinkers, and financial planners alike.

This article is separated into three parts. The first part provides a basic overview of the financing and funding of transit systems. It also covers the various approaches to Land Value Capture (LVC), with short examples for each of them. The second part explores the MTR Corporation’s use of LVC to fund the expansion or upgrading of transit nodes and lines. With its flagship Rail + Property (R+P) model, the Hong Kong MTR is one of the most prominent users of LVC.

Funding, Financing, and Land Value Capture

Funding and financing are sometimes used interchangeably when discussing public infrastructure. However, they relate to different phases of a project’s timeline.

Funding answers the question of who will ultimately pay for the infrastructure. For public transportation, this includes fares, tolls for roads, rent from businesses operating in metro stations, other commercial revenue related to stations, and revenue from various LVC methods. These sources will not only pay for the initial investment required to build the infrastructure, but also the cost of maintaining and operating it. Transit systems differ from other transportation infrastructure, such as roads, since they require workers to constantly operate them.

Financing, on the other hand, deals with how to pay the upfront cost of constructing the infrastructure. Transit systems such as metros include various components, including stations or transit nodes, railway lines, depots for storing and repairing trains, and offices for coordination and administration. These all require a substantial amount of money to build.

Public infrastructure often involves three types of financing: public funding, including government funding and subsidies from taxation; debt, including loans and bonds; and equity, in the case of Public-Private Partnerships. LVC is not a different financing method on its own and will often combine one or more of these fundamental methods.

Oftentimes, the objective is to “bring back” the funding to the time when the initial investment has to be made. The bridge between these two determines whether a project is bankable—that is, whether the project will be able to generate enough revenue over a period of time to repay the initial financing.

Often, transport agencies run at a loss due to high initial costs and a government requirement to maintain low fares. For a semi-private, publicly traded company like the MTR, which does not receive direct subsidies from the government, turning to alternative financing and funding mechanisms such as LVC is a business requirement.

What Is Land Value Capture?

Public transportation infrastructure often causes an appreciation in the value of nearby properties and businesses. This can be due to many reasons, such as better connectivity and accessibility. Many retail businesses benefit from being in close proximity to transit nodes such as subway stations and bus stops due to increased local traffic.

An apartment complex located near a transit node or a major road is able to charge a much higher rent due to the ease of commuting that its location offers. A restaurant located in front of a subway station is likely to get more customers daily compared to the same restaurant located less than half a kilometer away.

This increase in revenue potential is reflected in the per-area value of these properties, which increases appreciably after the construction of transportation infrastructure near their locations. Much of this value appreciation is not captured by the developer of the infrastructure, whether that is a government agency or another public or private developer.

The objective of Land Value Capture is to capture the benefits received by nearby property and business owners by turning them into tangible financial benefits that the infrastructure developer can directly use in the development, maintenance, and subsequent expansion of the project.

The following classification of the “Mechanisms of Land Value Capture” is taken from the report Sustaining Transit Investment in Asia’s Cities by the Asian Development Bank (Abiad et al.), with the addition of one more mechanism.

Taxation and Tax Increment Financing

Tax Increment Financing (TIF) is a public financing method where the government finances a project using future tax gains. This can be used in a public infrastructure project or private projects if the developer can provide credible evidence that the development will provide widespread benefits to the community.

The first step in using the TIF method is to set up a TIF district surrounding the project. This is an area often consisting of many properties where the TIF taxes will be collected from (FHWA).

Following the development of the infrastructure, the government’s property tax revenues will increase due to the rise in property values. Government revenue from property tax is essentially frozen at the time of the establishment of the TIF district. All excess property tax, or the increment, will be diverted into a TIF fund, which will be used to repay the investment, maintain or upgrade the infrastructure.

This is best illustrated using an example. A new train station is to be built in a suburban area. At the time the TIF district was created, the value of the properties in the district was $100 million. The property tax rate is 1.5%, resulting in total tax revenue of $1.5 million.

Five years after the TIF district was created, the total value of the properties has increased to $150 million. The property tax rate stays the same, and total tax revenue increases to $2.25 million. The original $1.5 million goes to the government as tax revenue. The extra $0.75 million goes to the TIF fund to repay loans or bonds, pay dividends to investors, and expand or maintain the station and lines. This $0.75 million is the increment.

This incremental revenue can be “borrowed against” or promised to investors at the time of financing the project. This is a way to use future revenue to cover the upfront cost of the project. The increments can be used to repay loans or bonds or for debt servicing.

In pay-as-you-go models, private investors can be reimbursed by the government using TIF increments if they had used their own equity or debt to cover the upfront cost of an infrastructure development (FHWA).

One example of TIF being used in a capital-intensive project is the Chicago Red Line Extension in Chicago, United States. The project is a 5.6-mile extension of the Chicago Red Line costing about $3.6 billion (Evans; NBC Chicago). TIF is expected to generate up to $959 million in funding for the project, covering about 27% of the project cost (Evans). To achieve this, a TIF district of 1,445 acres surrounding the line extension was set up (NBC Chicago). TIF is authorized in 49 states in the United States as a method to finance infrastructure projects. Similar versions are also used in other countries.

Specific Fees and Levies

Specific fees and levies are fees paid by surrounding property owners to the developer of the infrastructure for the direct benefits they receive from the development. Some examples of these are betterment levies and connection fees.

Betterment levies are paid to the developer due to an increase in the value of properties (Abiad et al.). This is not the same as TIF increments, as betterment levies are additional fees added on top of the tax payment. Betterment levies “are considered the most direct form of value capture” (World Bank).

Connection fees are fees that private property owners pay to the developer to directly connect their property to the infrastructure (Abiad et al.). For example, a hotel or mall owner may want to connect their property to a transit node, such as a subway station, via an underground tunnel. The connection fee for this is intended to be greater than the direct cost of the connection due to considerations of the total benefits conferred to the property owner by allowing this connection (Abiad et al.).

Impact Fees and Developer Extraction

An additional way for the government to use private capital to fund transportation infrastructure is through impact fees and developer extraction.

In this method, the private property owner, when developing their property, is required to pay for or build part of a new transportation infrastructure project (World Bank). The justification for this is that the development of their property directly creates increased demand for commuting in the area, which will place additional burdens on existing public transportation infrastructure.

In the case of large infrastructure projects such as transit nodes, multiple property owners may pay for or construct the infrastructure.

Other methods include setting up a Transit-Oriented Development (TOD) or the “R + P” model, which will be covered to a greater extent in the following section.

Hong Kong’s MTR Corporation and the Rail + Property Model

As shown in the introduction, Hong Kong, a city of 7.5 million people and an average population density of 6,870 people per square kilometre, is highly reliant on Mass Transit Railway. The MTR currently has 271 km of lines connecting 99 stations for heavy rail and 68 stops for light rail (ICE; HK Government). Additionally, trains are reported to be on schedule nearly all of the time (Leong).

The MTR is also not a wholly state-owned enterprise, with the Hong Kong SAR government owning 74.45% and the rest being owned by various other shareholders (MarketScreener). The company has been listed on the Hong Kong Stock Exchange since 2000 (MTR). Since it is not a wholly state-owned enterprise and lacks direct funding from the government, it has to find its own ways of financing the massive amount of infrastructure. The MTR has planned an additional HK$140 billion investment into its rail network in Hong Kong (MTR).

The MTR has one characteristic that differentiates it from counterparts in other cities: its heavy reliance on property.

A company overview showed that in the first half of 2019, only 10% of MTR’s HK$2.7 billion recurrent profit, excluding one-off profit from property sales, came from transportation operations, while 40% came directly from property rental and 48% came from commercial businesses at stations (MTR).

Audited financial results for 2025 show an even more drastic picture. For the year ended December 31, 2025, total profits from recurrent businesses were only HK$5.65 billion, a 21.6% decrease from 2024, while profit from property development was HK$11.08 billion, an 8% increase from 2024 (Irasia). Note that the profit from these two segments does not add up to the total profit in the next paragraph due to a HK$2.06 billion loss from “fair value measurement of investment properties.”

This shows that a significant portion of MTR’s profits comes from property rather than transportation. It also shows why MTR has to rely on retained earnings and profits from property development to expand and maintain its network, in the absence of the government funding that its state-owned counterparts enjoy.

MTR Corporation closed 2025 with revenue of HK$55.47 billion, total assets of HK$398.94 billion, EBITDA of HK$27.27 billion, a market capitalization of HK$185.50 billion, and net profits of HK$14.68 billion. Additionally, its net equity-to-debt ratio is only 0.23, which is notable for a capital-intensive company that is actively investing in new projects. It shows that the MTR Corporation relies substantially on cash, cash equivalents, and equity to finance its projects.

How the Rail + Property Model Works

The R + P model solves an essential financial problem: railway projects require a large upfront cost long before the first riders pay the fare.

Public land in Hong Kong is owned by the government. In the traditional R + P model, the government provides the MTR with land development rights for land on, above, and around locations where it is planning to build new metro stations and depots (Leong). The difference between “on” and “above” will be clarified when examples of some properties are explored later.

The MTR uses a competitive tendering process to find private developers to partner with to develop properties on the land for which it has obtained development rights (Leong). The private developers pay the land premium—a one-time payment based on the “greenfield” before-rail price—to the government, with the MTR contributing on a “case-by-case” basis (MTR).

Following this, MTR builds its railway, station, and depots, while the private developers develop their properties. After the properties have been built and monetized, MTR receives the agreed-upon benefits from the private developers. This can be in the form of a percentage of the developer’s profits from property development, a one-time payment, or ownership of a section of the property (Leong).

Ownership of a section of property could include a mall on the property or specific floors in a residential or office tower. The one-time and recurrent revenue, including rent from obtained properties, can then be used to cover the operating costs of the station or line and fund future investments.

The development of a metro station or a new line increases the accessibility of the land. It offers a more convenient lifestyle to residents in nearby properties due to greater ease of commuting. This increases their willingness to pay.

Results from a study on Hong Kong revealed that property values increase by 6.5% after announcements of railway construction and a further 0.2% to 6.7% after commencement of operations (Mesthrige and Maqsood).

Without the “R + P” model or other LVC approaches, nearby property developers would be receiving this benefit without directly contributing to the infrastructure that creates it. Therefore, in an economic sense, the “R + P” model addresses a free-rider problem, where property developers who benefit from transportation infrastructure share in the cost of existing and future transport investments.

The Kowloon Station Example

Kowloon Station in Hong Kong is an example of a station built within the “R + P” framework. The Kowloon Station property development is also known as Union Square.

Union Square consists of 19 towers that were all developed using MTR’s “R + P” framework. This includes 18 residential towers spread across The Waterfront, Sorrento, The Harbourside, The Arch, and The Cullinan.

Additionally, it includes Hong Kong’s tallest tower, the International Commerce Centre (ICC), standing at 484 meters, with 231,700 square metres of office gross floor area (GFA) and approximately 310 hotel rooms (MTR).

The Elements, a luxury mall built directly on the Kowloon MTR station, has a total commercial GFA of 82,700 square metres (MTR). The Elements sits “on” the station, while the ICC, which is built above the mall, is “above” the station.

Due to this legal distinction, the MTR retains ownership of The Elements. MTR’s portfolio also consists of various shopping malls and exactly 18 floors in the Two International Finance Centre office tower (MTR).

Besides transportation and property, the MTR Corporation has also expanded into advertising, telecommunications, and consultancy services. Therefore, the MTR Corporation is a special case where a company diversifies itself to better support its primary business objectives, which also happen to be a public policy priority.

Why Hong Kong Is Particularly Suited to the R + P Model

It is important to note that the MTR does have substantial government support, albeit not through subsidies and direct funding. The government has pledged to maintain at least 50% of its stake in MTR and continue its support for the company.

Additionally, there are some characteristics of Hong Kong that make the MTR particularly well-suited to the R + P model.

Dense urban development makes railways, and public transit in general, highly demanded. This means that there is a significant revenue stream from transportation fares and commercial spaces in subway stations. It also means that the value of property could increase more appreciably due to the high reliance on transit.

The government has strong control of land development rights over a substantial amount of public land. Land is both scarce and expensive, making property development more profitable and allowing property values to rise faster.

Hong Kong also has a well-developed real-estate and property development sector, making up “roughly a quarter of Hong Kong’s GDP” (Jim and Lee). This, along with MTR’s own expertise in both railway and real estate, makes the MTR well-suited to apply the R + P model.

It should also not be ignored that in a sector so deeply connected to a city, the support of the government is often vital.

Conclusion

Despite the local characteristics that make Hong Kong unusually well-suited to the R + P model, the model can still be applied to other cities with the proper expertise and government backing. Other LVC methods, discussed above, can also be applied to provide a mode of sustainable financing for transport infrastructure.

As cities grow and many governments are already struggling with significant financial burdens, the implementation of more innovative approaches to infrastructure financing could become an important factor in determining the socio-economic success of cities and countries.

The central idea behind Land Value Capture is relatively straightforward: transportation infrastructure creates value beyond the farebox. Better connectivity can increase the value of surrounding land, attract businesses, and generate additional economic activity. LVC attempts to redirect a portion of that value toward the infrastructure that helped create it.

The experience of Hong Kong’s MTR demonstrates how this principle can be incorporated into a broader transportation and property-development strategy. At the same time, the model’s success depends heavily on local conditions, including land ownership, urban density, property markets, government support, and institutional expertise.

For cities facing the growing financial demands of modern transportation infrastructure, LVC therefore represents not a single financing solution, but a collection of mechanisms through which the wider economic benefits of infrastructure can contribute to its long-term funding and development.

Bibliography

Abiad, Abdul, Kathleen Farrin, and Chris Hale. Sustaining Transit Investment in Asia’s Cities: A Beneficiary-Funding and Land Value Capture Perspective. Asian Development Bank, Apr. 2019. doi:10.22617/ARM190085-2.

Amirtahmasebi, Rana, et al. Regenerating Urban Land: A Practitioner’s Guide to Leveraging Private Investment. World Bank, 2016. doi:10.1596/978-1-4648-0473-1.

Chelvan, Vanessa Paige. “More Rides on MRT in 2025 as LRT Use Fell; Bus Ride Numbers Still below Pre-Covid-19 Levels.” The Straits Times, 30 Jan. 2026. Accessed 28 Aug. 2026.

Chicago Transit Authority. 2026 Budget Recommendations. Chicago Transit Authority, 2025. Accessed 28 Aug. 2026.

Evans, Maxwell. “Red Line Extension TIF Approved, Sending Nearly $1 Billion to Far South Side Project over 35 Years.” Block Club Chicago, 14 Dec. 2022. Accessed 28 Aug. 2026.

Federal Highway Administration. “Tax Increment Financing.” Center for Innovative Finance Support, U.S. Department of Transportation. Accessed 28 Aug. 2026.

Green, Alastair, Ishaan Nangia, and Nicola Sandri. “The Infrastructure Moment.” McKinsey & Company, 9 Sept. 2025. Accessed 28 Aug. 2026.

Hong Kong Special Administrative Region Government. Hong Kong: The Facts—Railways. GovHK. Accessed 28 Aug. 2026.

Institution of Civil Engineers. “Hong Kong Mass Transit Railway.” Institution of Civil Engineers. Accessed 28 Aug. 2026.

International Energy Agency. “Land Transport Master Plan 2040—Rail Expansion Programme.” IEA Policies Database, 2019, updated 8 Apr. 2026. Accessed 28 Aug. 2026.

Jim, Clare, and Selena Li. “Hong Kong Property Sector Clouded by Rising Debt Repayment Risks.” Reuters, 18 Aug. 2025. Accessed 28 Aug. 2026.

Leong, Lincoln. “The ‘Rail plus Property’ Model: Hong Kong’s Successful Self-Financing Formula.” McKinsey & Company, 2 June 2016. Accessed 28 Aug. 2026.

MarketScreener. “MTR Corporation Limited: Shareholders, Shareholding Structure.” MarketScreener. Accessed 28 Aug. 2026.

Mathur, Shishir, and Adam Smith. “Land Value Capture to Fund Public Transportation Infrastructure: Examination of Joint Development Projects’ Revenue Yield and Stability.” Transport Policy, vol. 30, 2013, pp. 327–335. Elsevier, doi:10.1016/j.tranpol.2013.09.016.

MTR Corporation Limited. “Investor’s FAQ.” MTR Corporation Limited. Accessed 28 Aug. 2026.

MTR Corporation Limited. Investor Presentation. Jan. 2020. Accessed 28 Aug. 2026.

MTR Corporation Limited. Investor Presentation. Jan. 2025. Accessed 28 Aug. 2026.

MTR Corporation Limited. “MTR Corporation Announces 2025 Annual Results: Advancing New Railway Projects with over HK$100 Billion Investment to Support Hong Kong’s Development.” Irasia, 12 Mar. 2026. Accessed 28 Aug. 2026.

NBC Chicago. “Lightfoot, CTA Officials Unveil New Funding Plans for $3.6 Billion Red Line Extension Project.” NBC Chicago, 17 Nov. 2022. Accessed 28 Aug. 2026.

Transport Department, Hong Kong Special Administrative Region Government. “Railways.” Transport Department. Accessed 28 Aug. 2026.

Vassallo, José Manuel, and Laura Garrido. “Transport Funding and Financing: A Conceptual Overview of Theory and Practice.” Handbook on Transport Pricing and Financing, edited by Alejandro Tirachini, Daniel Hörcher, and Erik T. Verhoef, Edward Elgar Publishing, 2023, pp. 273–294. doi:10.4337/9781800375550.00022.

Wadu Mesthrige, Jayantha, and Tayyab Maqsood. “Transport Infrastructure, Accessibility and Residential Property Values: Evidence from Hong Kong.” Built Environment Project and Asset Management, vol. 12, no. 2, 2022, pp. 163–179. doi:10.1108/BEPAM-01-2021-0019.

Yuan, Shenggao. “MTR Charts Strategy under 15th Five-Year Plan with Two Decades of Commitment.” China Daily Hong Kong, 23 Mar. 2026. Accessed 28 Aug. 2026.