Ira G. Peppercorn and Claude Taffin Financial and Private...

Ira G. Peppercorn and Claude Taffin Financial and Private Sector Development/Non Bank Financial Institutions

World Bank May 31, 2012

http://www.worldbank.org/

For those that do not have enough income or whose income is informal

Limits percentage of the population that can quality for mortgages

Opening too wide the access to home-ownership can be dangerous, especially if outside normal underwriting standards.

Vibrant rental markets are necessary for workers’ mobility.

Home-ownership can produce larger urban sprawl.

Peppercorn and Taffin Rental Housing World Bank

Cultural biases in favor of home-ownership

Negative perceptions of rental housing

Legal framework, especially in relation to tenant’s rights and evictions

Low rate of risk adjusted return

Lack of incentive for investors

Lack of adequate finance

Lack of formal property management


Workers in urban areas

Young professionals

Students who live in dormitories;

Those experiencing transitional events in their life

Families who cannot afford or qualify for a mortgage, some of whom might be living in poor housing conditions;

People who simply do not want to own

People sharing space with relatives

Peppercorn and Taffin

Rental Housing World Bank

Individuals who own a single or a small number of rental units

House or apartment owners that rent a room in their homes

Providers of social housing including governments and NGOs

Companies that provide housing for their workers Medium scale owners that own from 10 to 100 units Institutional owners and investors, for whom the

ownership of rental housing is a significant line of business

Property management companies Builders, contractors, materials suppliers, utility

companies, security firms and others who provide services to the owners of rental housing.


Is there a shortage of housing? Is this in the overall number of units, in the quality of the

existing units or both? If there is a shortage, is it primarily in certain urban areas? What is the relationship between rental housing prices and the

wages at particular income levels? Is the housing affordable? Who are the potential investors and what incentives do they

need? Is the legal framework fair enough? Are there major imbalances in the fiscal system that discourages

investors? Is there financing available to develop and/or improve the

housing? Are governmental subsidies available and, if so, how and for

what income levels?


Countries Cities

Africa Owners Renters Others

Owners Renters Others

Egypt 69 31 - Cairo 37 63 -

South-Africa 77 22 2 Johannesburg 55 42 3

Asia

China 84 16 - Beijing 59 40 1

India 87 11 3 Bangalore 43 55 2

Thailand 82 18 - Bangkok 56 40 4

Latin-America

Bolivia 60 18 22 Santa Cruz 48 27 25

Brazil 73 17 10 Sao Paolo 70 20 10

Uruguay 62 17 21 Montevideo 58 23 19

Developed

Countries

France 57 40 3 Paris 48 49 3

Germany 43 57 - Berlin 12 88 -

The Netherlands 57 43 - Rotterdam 26 49 25

Switzerland 37 63 Geneva 14 86

United Kingdom 69 31 - London 58 41 -

U.S.A. 67 33 - New York 34 66 -


Eviction process uncertain, cumbersome or tenant biased

Return/risk ratio favors other investments

Rent control

Taxation

Lack of cost-effective professional property management


Tenure insecurity

Unfair or no dispute resolution

Poor conditions

Lack of formal contracts

Affordability constraints


Demand: Targeted but expensive ◦ Housing assistance payments

◦ Vouchers

◦ Housing itself

Supply: Not ongoing; not deep enough ◦ Construction or up-front subsidies

◦ Direct payments to landlords

◦ Tax incentives

◦ Land and infrastructure


Illegal rental units

Poor and unsafe conditions

Lack of registration

Property tax avoidance

Pressure on public sector for subsidies and units

Poor property management systems


Policies recognize rental is an important sector

Perform an assessment of the rental sector

Review the legal framework

Review the tax system

Favor access to long-term capital

Provide targeted, effective subsidies


Compare household characteristics and housing conditions of tenants and owners.

Ask tenants their reasons for renting and the type of landlord.

Evaluate the balance between supply and demand.

Evaluate conflicts and the conflict resolution process.

Compare the costs of renting and owning (including obstacles to access to credit).

Compare rental return and risk with alternative investments (after and before tax).


Ensure that the rights of landlords and tenants

are balanced

Balance between stability for tenant and

flexibility for owner

Duration & termination of the contract

Rent setting & rent increase

Solving conflicts: Fair dispute resolution


Level the playing field between rental and other investment / ownership

Rental income & capital gains often unfairly treated

Consequences: negative impact on the rate of return; disinvestment or informal renting

A good tax model should include:

- Main expenses deductible

- Economic depreciation

- Losses offset taxes on other income


Small owner incentives, such as capital for expansion and renovation

Medium to long term capital availability, both debt and equity

Support from the public sector

- Direct lending

- Guarantees for private loans

- Partnerships.


Demand-side subsidies most effective, but

- Entail heavy fiscal commitments

- Require the collection and update of information on beneficiaries.

Supply-side subsidies may be given in several forms, including tax rebates, soft loans, and guarantees.

- Soft loans most efficient (leverage effect)

- Avoid long-term non-capped commitments,

- Governments should obtain social commitments in exchange and control owners


We do not advise governments to put the emphasis on rental instead of ownership; rather to add a rental component to their housing policy;

If they are willing to do it, they will have a number of measures to take, most are difficult, some are expensive;

And they should be taken in the right order: assessment – legal – tax – finance – subsidies.


Contacts:

Ira Peppercorn

The World Bank

[email protected]

1-202-xxx-xxxx

Claude Taffin

Dinamic

[email protected]

33-1-4490-3072

19

mailto:[email protected]

mailto:[email protected]

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