HOUSING FINANCE IN EMERGING MARKETS POLICY AND REGULATORY CHALLENGES :

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HOUSING FINANCE IN EMERGING MARKETS POLICY AND
REGULATORY CHALLENGES

• March 10-13, 2003 - Washington D.C.
• Social Rental Housing Finance
• by Claude Taffin

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Why do we need Social Rental Housing ?

• Most countries encourage home ownership
• and they are right because
• assistance can be directly provided to the end
  user ? more efficient, better targeted,
• the occupants are responsible for the
  maintenance of the building,
• it is also the tenure that a majority of
  households prefer
• social promotion security.

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Because everyone cannot buy his home

• Even in countries which efficiently support home
  ownership, households with low or irregular
  income cannot afford it or do not even have
  access to credit.
• Also, among those who could afford, some prefer
  to be tenants to remain mobile
• (ex students, young unmarried workers).
• Other obstacles to home ownership absence of
  clear right of property or of an efficient
  registration system.

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Social rental housing

• Can be defined by the existence of specific
  conditions of eligibility
• - maximum income or priority groups, allotment
  procedures,
• - instead of market (supply and demand).
• Permits to offer decent housing to
• - households with low income (very low or
  irregular
• income may be more difficult),
• - immigrants and other minority groups.
• Is a way to increase the housing stock in case
  of shortage (mass production) and can be a
  counter-cyclical instrument to boost economy.

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Housing allowances vs  aid to bricks and
mortar 

• Housing allowance is more equitable but has
  drawbacks
• - administrative complexity,
• - heavy budget commitments (social risk),
• - poverty trap.
• Subsidies to investors are less efficient
• they may create life-long benefit (additional
  rent is seldom used) for tenants and long-term
  liabilities (including credit risk) for the
  State.
• Many E.U. countries use both in variable
  proportions (France 3/4 housing allowance).

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Market rent - affordable rent how to fill the
gap ?
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Lowering the equilibrium rent
The equilibrium rent is the value of the rent for
which the discounted cash-flow is equal to zero.
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Example Share of various subsidies in France (
of building cost)
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Social rented housing finance

• Main issues to be discussed are
• - who provides SRH (public entities, private
  non-profit, other) ?
• - how are investors funded (off-market, market
  through intermediate, market in direct) ?
• - how are their loans secured (State,
• mutual, usual collateral) ?
• A few examples classified according to the level
  of State intervention.

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Heavy State intervention Algeria

• Social rented housing in Algeria may not be
  significantly
• larger than in Morocco and Tunisia (10 -15 of
  the stock), but it has a larger part in housing
  construction ( 50 ).
• New construction roughly compensates for sales
  of existing stock (at low price).
• Social rented housing is publicly owned and
  managed (OPGI). Production is highly subsidized
  
• - public land is sold at 20 of its value to all
  social housing programs,
• - land equipment and construction cost are 100
  subsidized,
• -VAT on any housing construction is 7 instead of
  14.
• ? rents are very low (also poor rental
  collection).

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France an original off-market funding

• Current loans to finance social rental housing
  are
• very long term (construction/land up to 35/50
  years),
• guaranteed by local authorities (most often),
• funded by (short term) deposits on A saving
  booklets,
• distributed only by a State subsidiary
  multifunctional financial institution Caisse des
  dépôts et consignations,
• at a rate of 4,2 that only depends on the
  interest paid to A booklets owners (3 1,2
  margin).
• 75 of French people own a A booklet. Rate is
  fixed by the State. Deposits on A booklets are
  indirectly subsidized twice they are tax free
  and guaranteed by the State.

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France a double guarantee system

• Investors are either public entities or
  non-profit private companies (50 - 50 ).
• Only them can benefit from special CDC loans.
• They are guaranteed by local authorities (95 )
  when this free guarantee is not available (5
  ), they are guaranteed by a mutual fund (CGLLS)
  and pay a 2 fee.
• In practice, none of these guarantees is ever
  called on an individual (program) basis. CGLLS
  and all local authorities involved may be called
  on a general basis to rescue a landlord in
  financial distress.

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Poland (1)

• Investing in new social rental housing is not a
  priority in Eastern and Central European
  countries. On the contrary, their main efforts
  aim at
• - developing financial sector,
• - encouraging private investment in housing,
• - selling the public rental stock to sitting
  tenants,
• - financing repair and upgrading of the housing
  stock.
• However, Poland is involved not only in
  renovation but also in supporting rental
  building.

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Poland (2)

• The national Housing Fund (financed by the
  central budget) co-finances rental construction.
• Social housing associations (non-profit
  private municipalities) are eligible to
  long-term (30 years) indexed loans at subsidized
  interest rates (half of market level), under the
  TBS programs, provided by a State bank .

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The United Kingdom

• Municipalities own social rental housing but are
  selling it to Housing Associations (private,
  non-profit) which are now the only investors in
  the social rented sector.
• HA receive subsidies from the State budget and
  borrow the rest from THFC (The Housing Finance
  Corporation).
• THFC is an independent, specialist, non-profit
  organization it funds itself through the issue
  of bonds and by borrowing from banks.
• THFC was created after HA faced difficulties in
  individual market funding for their most social
  projects.

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Germany

• Social rent (below market) is now limited to the
  loan period ? social rental housing stock has
  sharply decreased in the recent years (from 8
  millions to 2,5).
• Investment in social rental housing is now
  opened to all private investors.
• Investors are financed
• - either by a mortgage bank (market loan)
  they receive operating subsidy or tax relief
  from federal regional Governments,
• - or through a subsidized loan (0 interest) by
  a regional public bank (which has no direct
  access to market and is funded by mortgage banks).

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The Netherlands

• Drastic change in 1995 end of State loans
  cancellation of mutual commitments between State
  and social landlords.
• Since then social landlords are no more
  subsidized they finance themselves through
  commercial banks or directly on the market.
• Rent increase in zones where housing demand is
  strong were supposed to compensate for the end of
  subsidies.
• But rent increase results in more expansive
  personal allowances and pressure from tenants to
  buy their home.

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Finland

• Investors are either municipalities or
  non-profit orgs.
• The Housing Fund (ARA) provides
• - direct subsidized financing (ARAVA housing),
• - subsidization of privately financed loans
• (in both cases, loan period 35 years, LTV ratio
  up to 90-95).
• ARA is managed by the Central Government but
  receive no budget assistance it was provided a
  portfolio of loans (State housing loans) without
  the matching funding liabilities.
• Its other sources of funding are direct
  borrowing on the capital market and
  securitization (not counted in Govt debt).

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Social rented housing and private finance

• Private finance is now frequently used by social
  landlords in E.U. countries except in France.
• However, specific intermediaries are needed
  (United Kingdom, Netherlands) to help access
  capital market and secure loans.
• Efficiency of loan guarantee systems is a major
  issue.

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Loan guarantee systems (1)

• Loans to social rented housing are specific
• long term (30 years and more)
• difficulties to raise matching funds,
• high loan to value ratio,
• but low risk a variable part of the rent is
  paid by the State ( housing allowances).
• Social landlords also may be specific
• if they are public, it is impossible to call
  mortgage guarantee (at least in France).

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Loan guarantee systems (2)

• When mortgage guarantee can be used, the
  valuation of properties is uneasy (mark to which
  market ?).
• The rating of social landlords by rating
  agencies may be unfair (their rent policy can
  seldom be based on purely financial criteria).
• A danger increasing regional imbalances (inside
  a single country) may result in higher funding
  cost for investors in the poorer regions.

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Conclusion (1)

• The mutual Fund approach (United Kingdom,
  Netherlands) seems to be the right way but it is
  difficult to combine inexpensive access to market
  finance and leaving nobody outside.
• Social landlords cannot totally do without the
  support of National or local Government as
  depending too much on housing allowance also have
  drawbacks (poverty traps).

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Conclusion (2)

• However, there is a number of ways to limit the
  recourse to public intervention.
• Increasing self finance, through resale of
  paid off programs (though fair pricing is
  uneasy).
• Favoring a global approach
• - for rent setting (according to market
  levels, not to financing),
• - for financing (shift from program finance
  to corporate finance),
• - hence, for risk evaluation.