HOUSING FINANCE IN EMERGING MARKETS POLICY AND REGULATORY CHALLENGES :

1. HOUSING FINANCE IN EMERGING MARKETS POLICY AND REGULATORY CHALLENGES : March 10-13, 2003 - Washington D.C. Social Rental Housing Finance by Claude Taffin

2. 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.

3. 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.

4. 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.

5. 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).

6. Market rent - affordable rent :how to fill the gap ?

7. Lowering the equilibrium rent The equilibrium rent is the value of the rent for which the discounted cash-flow is equal to zero.

8. Example : Share of various subsidies in France (% of building cost)

9. 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.

10. 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).

11. 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.

12. 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.

13. 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.

14. 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 .

15. 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.

16. 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).

17. 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.

18. 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).

19. 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.

20. 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).

21. 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.

22. 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”).

23. 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.