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Housing and Slum Upgrading Branch
DEVELOPING AFFORDABLE HOUSING FOR RENTShelter Afrique and the Ministry of Water Resources, Works & Housing, Ghana
June 2nd 2015, Accra, Ghana
Rental Housing: Lessons from International Experience
UN-Habitat Mandate
UN-Habitat is committed to supporting governments to promote sustainable urbanization and adequate housing for all
Piloting innovative housing mechanisms
Normative
Operational
UN-Habitat promoting Rental Housing
Repositioning ‘Housing at the Centre’
Towards a new Global Housing Strategy • Principles and Framework• Resolution • Govts. reassuming a
leading role
Habitat II
2012 2013 2016
Housing at the Centre – New Urban Agenda of the 21st century
Review of Global Shelter Strategy• Regional
assessments• Global review• Roadmap
Habitat III
CITIES PEOPLEPOLICY
THREE KEY MESSAGES FROM THE OUTSET: Cultural preferences change Rental Markets are diverse Rental offers flexibility, wealth and affordability
FOCUS OF THE PRESENTATION
The main players – landlords & tenants Rental setting and regulation Finance for rental housing Tax issues and incentives Subsidies Case examples
Rental Housing: experiences & lessons
Two main players - landlords
Individuals and small scale owners: are the majority and often operate informally; look for complementary income; need quick procedures for resolving problems.
Institutional owners: have long-term profit purposes; closely monitor risk and capital returns; tend to own a large number of units in one building to benefit from economies of scale.
Nonprofit, including governments: often target low income groups; have specific modes of allocation and maximum rents; have various levels of government involvement.
Two main players - landlords
The common trends: A move toward a market-based approach,
rather than an approach where the government finances and manages public housing
Establishment of housing association/management agency that deal with stock allotment and management
Governments participating through:
provision of the land free of cost for social housing incentives to private developers to create stock
Tenants by choice: housing starters, young couples and singles who
want to remain mobile; students; empty nesters who want to downsize after their children have grown; persons who, for work or personal reasons, prefer a short-term residence.
Tenants by constraint (are the majority): low-income households; slum dwellers; workers who
migrated for employment reasons; immigrants; working families with no access to credit (informal workers).
Two main players - tenants
Trends: • Increase of informality with positive and negative
consequences• Tenant’s main concerns: affordability, stability
of tenure
Rent setting and regulation
Improving the policy and legal framework is the first priority (time-consuming, technic and political challenging)
Main regulated areas: RENTAL CONTRACTS - QUALITY OF THE STOCK - RENTAL CONTROLS
Quick procedures for resolving problems and efficient arbitration systems
Right balance between the core legislation, which needs to be stable over time, and other rules, which need to be flexible and adaptable (inflation)
Right balance needed – can inhibit the sector Reforms and regulations need to be regularly
reviewed
Rent setting and regulation
Risks and protection mechanisms: Landlords exposure: rent default, damage to the
property, repossession of the property Protection: Deposits (in some cases prohibitive in
Africa), screening (regular income and references - vulnerability), insurance (can be provided by a company or third party’s guarantee – e.g. parents); efficient arbitration systems.
Tenant’s exposure: tenure instability and the risk of being displaced, lack of maintenance, and rent increase Protection: laws/regulations recognizing or ensuring
legal security; housing voucher and subsidies (in case of displacement); enforceable contracts; minimum standards; rules for termination of contract.
Rent setting and regulation
Rent controls: is it an option? represent a genuine effort to help tenants cost the state nothing, as they placed the financial
burden on the landlords in recent years, rent controls have been discredited -
negative effects on the rental housing supply However, governments to be careful when removing
rent controls: need systems in place to protect tenants from sharp increases
Example: Artificially low rents in Egypt to the disadvantage of landlords and impacting on usage of stock - has one of the highest rates of vacant houses in Africa.
Finance for rental housing
Currently depending on high levels of equity (large-scale) and own savings (individuals)
Different demands and priorities coming from different landlords
Small scale landlords - Short-term loans for construction or renovation, but also long-term capital is also helpful to individual owners who would like to purchase or renovate other units
Equity capital or long-term debt from banks or government rarely available -- can be important in filling any financial gap
Long-term capital is essential: Capital markets can be tapped through bonds - still
underdeveloped in Africa Insurance products and credit enhancement can
make investment in residential rental housing more attractive and capital more readily available to developers
Finance for rental housing
Even when financing is available, some type of additional subsidy is needed
Governments to step in: Enabling and guaranteeing loans to social housing institutions With assistance or with supply-side subsidies. These could include:
Bonds issued for multifamily development (United States) Housing development funds, to make financing available to
developers Stimulation of rental income guarantee or insurance schemes Grants, land, or infrastructure provided free or at a reduced
cost in exchange for keeping rents affordable for certain income populations
Capacity - Lenders need the personnel, intellectual capital, and systems needed in this type of investment.
Information on housing markets in general - and rental markets, in particular is needed.
Tax issues
From a tax perspective, investment in rental housing needs to be on an even playing field with similar investments
Should not carry a higher tax burden than other real estate in such elements as allowable deductions and depreciation periods
Tax codes are complex: overall rate + deductions, depreciation, capital gains, and other factors
Good balance needed: If the tax burden is too heavy, investors will find
alternative ways of earning returns on capital Individual or small owners can find ways to keep their
properties out of the formal rental sector
Tax issues
Common tax codes affecting rental property ownership:
Capital gain tax: when high may help reduce speculation, disinvestment
or informality to limit speculation, short-term gains are taxed more
heavily than long-term gains a middle ground: alleviate the capital gains tax after the
first years to improve the total return for long-term investors
Property taxes: due from the owner based on the assessed value of the property or on its rental value
Depreciation allowance and accelerated depreciation: usually available to companies (Germany)
Tax incentives
Taxation is a tool that governments can use to encourage investment in rental housing
Mortgage interest deduction: applicable not only to the purchase of the main residence but also to other residential real estate, up to the maximum loan amount
Tax incentives to formalization: policy to move properties from the informal sector to the regulated sector must be careful not to be punitive: providing temporary tax exemptions to properties in
the informal sector incentives to put the properties into safe, habitable
condition financial incentives for property improvement
Governments can use taxation to encourage the development or of insurance markets for both owners and tenants
Subsidies
Supply-side subsidies (SSS): tax abatements - subsidized loans - direct grants - land /infrastructure - guarantees for loans for investors
Subsidize the cost of loans, construction, building management and maintenance
Grants have an immediate budget impact, whereas tax incentives can be used over a long period
Direct up-front subsidies are probably the simplest and most transparent ones – shorter-term commitments than loan guarantees
SSS shall be conditioned to social commitments – low-income target groups, lower-than-market rents, good valuation of the subsidy cost in relation to the social benefits that are achieved.
SSS hardly serve low-income groups - additional demand subsidies needed
Subsidies
Demand-side subsidies (DSS): assistance payments and vouchers DSS provide direct financial support to the tenant Shall be designed to be transparent, efficient, fair, and
clearly targeted to specific populations Housing allowances or vouchers are an effective way to
make rental housing affordable to low-income households Require information on beneficiaries: household income,
rent levels, type of household or the family size Shall be carefully designed to avoid the creation of
poverty traps, inflationary effects Shall be simple and transparent so that beneficiaries
understand how they are calculated Have less effect on housing supply and should be
combined with supply-side subsidies
Promoting rental housing through Policy
1. Acknowledge and understand existing rental practices
2. Get rental housing on the larger urban policy agenda
3. Work out practical, flexible rental housing policies and regulations:
Flexible to cover a wide range of target groups and rental housing types
Adjustable standards to produce a wide variety of rental options
Approving these adjustments should be kept as simple and straightforward as possible (simple rental contract templates, cheap arbitration and conciliation service for landlords and tenants)
4. Mobilize finance to improve and expand rental housing (subsidies or tax incentives - credit facilities or subsidies for poor landlords)
5. Encourage large-scale and small-scale investment in rental housing - (increase tenants’ “ownership” of a project: informal sector, participation, get CBOs and NGOS on board)
Case India
Case Study-1: Rental Housing Scheme by MMRDA (Public-Private) Since 2008, under the new Housing Policy, Government of
Maharashtra (GoM) with private sector participation and Mumbai Metropolitan Regional Development Authority (MMRADA) as Project Implementation Authority (PIA)
Pioneer in experimenting relaxation of floor space index (FSI) and offering transferable development rights (TDRs) to make more space available in its highly congested environment
Case Study-2: Rental Accommodation by Aarusha Homes (Private) Private company that provides rental housing solutions to low
and middle income group for short term stays Emerged as an entrepreneur that runs the ‘retail model’ of rental
housing, catering to migrants from low to middle income groups on a first come first serve basis
Does not own any of its rental property stock and properties are acquired from land owners on a lease period of 3-9 years
Case South Africa
Johannesburg Housing Company (JHC) Launched in 1995 - has led a pioneering path in the
development of social housing in the Johannesburg inner city – and at a national level
Over the past 20 years has developed more than 4000 rental housing units and today provides homes to more than 12 000 people in low to middle income communities
It has built up a portfolio of 35 buildings – across the inner city and, most recently, reaching into Greater Johannesburg in response to the continuing demand for housing from a fast growing urban population
Financial investment of around R700 million to date Operates as a private sector, non-profit, social housing
institution
Microfinance for rental housing supply
Formalization of rental stock, support to small-scale landlords
Assisted incremental housing + microfinance Improve quality of the stock Provide affordable rental options
IFC and Lafarge in several countries in Africa, India and LA