Housing and Slum Upgrading Branch DEVELOPING AFFORDABLE HOUSING FOR RENT Shelter Afrique and the Ministry of Water Resources, Works & Housing, Ghana June.

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)

Examples and case studies

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

[email protected]

Kilamba, Luanda