HOUSING FINANCE IN EMERGING MARKETS

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HOUSING FINANCE IN EMERGING MARKETS

• March 15-17, 2006 - Washington D.C.
• Dynamize Residential Rental Markets
• in Morocco
• by Claude Taffin

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Topics to be discussed

• 1/ Why rental market should be dynamized?
• - need for rental housing?
• - rental sector and housing policy in
  Morocco
• - main findings of a study.
• 2/ How to attract private investors to the
   free  rental market?
• - the legal framework (conflicts rents)
• - the tax treatment.
• 3/ Special requirements for social housing
• - actors, incentives, finance.

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Need for Rental Housing ?

• Many countries encourage home ownership
• - assistance can be directly provided to
  theend user ? more efficient, better targeted,
• - coincidence with households choice
• social promotion security.
• Rental housing is necessary
• - for those with no access to credit (low or
  irregular income, the elderly, etc.),
• - the young and the mobile.

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Rental Sector in Morocco

• Share of rental housing in urban stock decreases
  42 in 1982, 27 in 2000.
• Size 1 million units 16 are vacant
  (concentrated in apartment buildings).
• 90 belong to individuals.
• New investment is low and by individuals only
  (build a house and rent a floor).
• Social housing stock small (50,000 units), old,
  poor maintenance very low rents.

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Housing Policy in Morocco (1)

• Main support is supply-side tax relief for
  developers
• - mass-production (2,500 units in 5 years),
• - social housing less than 200,000 Dh per
  unit.
• Home ownership now only supported through new
  guarantee funds (2004).
• Subsidized loans ended in 2004 upfront grants
  turned down.
• Housing savings plans to be created soon.

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Housing Policy in Morocco (2)

• Many other tax relief or rebates for homeowners
• - no VAT on self-construction,
• - 75 rebate on the base for local taxes,
• - mortgage interest (may include equity) tax
  relief,
• - 50 discount on transfer tax,
• - no capital gain tax (after 10 years)
• Tax treatment of rental housing
• - income tax upper rate is 44 (rapidly
  reached),
• - 40 flat rebate on rental income (before
  income tax) for amortization and all other costs,
• - 3 year income tax relief for new rental
  housing.

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Housing Policy in Morocco (3)

• Imbalanced landlord-tenant relationships
• - many defaults (but lack of data),
• - lengthy procedures,
• - notice and eviction difficult.
• No rent increase possible if no improvement works
  (perverse effect high initial rent).
• Easier management in traditional houses
  no payment no access to water.

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Main Findings of the Studythe Rental Market

• The key issue is
• - Global supply is sufficient but unsuitable
  for the demand, which is mainly low-income
• - Resulting in high vacancy rates in
  (expensive) apartment buildings
• The study included sample surveys (investors,
  tenants and real estate agents)
• - Main reasons for being a tenant unable to
  buy and living close to work place.

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Main Findings of the Studythe Investors

• ¾ investors own 1 or 2 units.
• Lack of financing 90 equity.
• Rates of return
• - gross income return 5.4,
• - net income return (before tax) 4.8,
• - net total return (incl. capital growth)
  7.5.
• Not so bad, but great variability (small sample
  size).
• Higher quality lower return (as usual).
• Need to include impact of income tax and
  comparisons with other investments.

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Main Findings of the Studythe Legal Framework

• Some other results of the survey
• - 69 of contracts are written.
• - 57 tenants 94 landlords are satisfied!
• - 32 tenants 40 landlords have had conflicts
• - These conflicts have various causes rent
  revision, payment delays, maintenance,
  repossession
• - More conflicts in low-standard housing.

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Main Findings of the Studythe Real Estate
Agents

• 75 tenants found their home through an agency.
  But
• - Agencies are recent and small.
• - Their main activity is transaction
• (75 rental and 25 sale).
• - Very few are rental managers.
• - Lack of organization and professionalism.

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Policy Choices

• To dynamize the rental market
• - improve the legal framework,
• - improve (risk, return) couple,
• - improve professional intermediation.
• Need a new  social housing sector ?
• - with specific operators or not,
• - with specific finance or not,
• - with what subsidies?

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Private Investors and Rental Market (1)

• Sine qua non condition to attract private
  investors improve the legal framework.
• Most investors are individuals
• - they need security (payment defaults are
  statistical data for large investors, can be a
  financial disaster for a small saver)
• - their time horizon is limited (need quick
  and fair- procedures in case of problems)
• - they must be able to recover the property
• (a house is not a Treasury bond).

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Private Investors and Rental Market (2)

• Rent setting and rent increase
• - Initial setting should be free
• - Increase should be possible how (free or
  capped by an index) and when?
• ? example new index in France (60 CPI,
• 20 construction cost, 20 maintenance cost).
  
• Keep connection with market level if not,
  landlords lose return and tenants lose mobility.
• - Free rent when tenant moves?
• - What to do when he does not and market goes
  faster than the index?
• Need for transparency.

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Private Investors and Rental Market (3)

• Rental income needs a fair tax treatment.
• Leveling the playing field between rental and
  ownership?
• Compare net return with other investments
• - Is the level of risk similar?
• - Liquidity is not
• - Managing a rental property is more
  difficult than a financial asset.
• Resist temptation real estate does not move, so
  I tax it (investor can go away!).
• Add (tax) incentives only if necessary.
• ? example to reduce vacancy.

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 Social Housing Sector Pros

• Enables to offer decent housing to low income
  households and minority groups.
• There is no (or little) alternative
• - institutional investors prefer to invest in
  commercial real estate (more profitable),
• - individuals are reluctant to house tenants
  that they would not choose by themselves who
  belong to a different social group.

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 Social Housing Sector  and Cons

• Often proves to be costly and inefficient.
• Segments the housing market and creates ghettos.
• Global trend towards reducing its role from East
  (mass privatization) to West (sales to sitting
  tenants in UK, standardization in Germany,
  increasing tenure mix in underserved areas
  through urban renovation in France).
• ? Last resort solution if others do not work.

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Private Investors and Social Housing (1)

• Social rented housing implies
• - maximum rent, maximum income (or priority
  groups), allocation procedures
• - long-term commitments.
• Individual investors will accept only light
  constraints.
• Private companies may accept heavier constraints,
  but need long-term low price finance
• - either market (one time for all)
  subsidies,
• - or off-market recycling short-term
  savings.

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Private Investors and Social Housing (2)

• Tax (or other) subsidies should be in proportion
  to social commitments
• - Bad case Robien mechanism (France),
• - Better case (?) LIHTC (USA).
• End of commitments always is a tricky issue
  (especially when the investor is an individual).

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Conclusion (1)

• Most difficult (technical political) but top
  priority improve legal framework
• - need to be simpler and clearer,
• - must allow rent increase, accelerated
  procedure (arbitration committee), property
  recovery.
• Need for transparency improving professional
  intermediation.

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Conclusion (2)

• Next come financial issues
• - improving (risk, return) couple tax
  incentives, insurance,
• - then, financing investors will be easier.
• And time to answer the question(s)
• - do we need/want social housing?
• - by whom and for whom?
• - how to finance it?
• - how to subsidize it?