HOUSING FINANCE IN EMERGING MARKETS

1. HOUSING FINANCE IN EMERGING MARKETS March 15-17, 2006 - Washington D.C. Dynamize Residential Rental Markets in Morocco by Claude Taffin

2. 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.

3. 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.

4. 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.

5. 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.

6. Housing Policy in Morocco (2) • Many other tax relief or rebates for home–owners: - 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.

7. 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.

8. Main Findings of the Study:the 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.

9. Main Findings of the Study:the 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.

10. Main Findings of the Study:the 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.

11. Main Findings of the Study:the 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.

12. 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?

13. 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).

14. 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.

15. 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.

16. « 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.

17. « 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.

18. 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.

19. 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).

20. 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.

21. 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?