THE LEGAL AND FINANCIAL FRAMEWORK OF AN EFFICIENT PRIVATE RENTAL SECTOR: THE GERMAN EXPERIENCE

Similar documents
How should we measure residential property prices to inform policy makers?

Prof. Dr. Stefan Kofner, MCIH

Real Estate Economics MBAX 6630 Course Syllabus for Fall 2013

RECENT DEVELOPMENTS IN HOUSING FINANCE IN LITHUANIA

Real Estate Economics MBAX 6630 Course Syllabus for Fall 2015

International Seminar on Strengthening Public Investment and Managing Fiscal Risks from Public-Private Partnerships

The role of policy in influencing differences between countries in the size of the private rented housing sector Professor Michael Oxley 26/2/14

NSW Affordable Housing Guidelines. August 2012

Messung der Preise Schwerin, 16 June 2015 Page 1

End of fixed term tenancy policy

The German housing market and housing finance system

Rental market underdevelopment in Central Europe: Micro (Survey) I and Macro (DSGE) perspective

Structure, Funding and Regulation of the Rental Market in Germany

Filling the Gaps: Stable, Available, Affordable. Affordable and other housing markets in Ekurhuleni: September, 2012 DRAFT FOR REVIEW

SOCIAL HOUSING THE WAY FORWARD

State of the Johannesburg Inner City Rental Market

Sector Scorecard. Proposed indicators for measuring efficiency within the sector have been developed for the following areas:

The Investment King of Higher & Better Returns. Income for Life

Applying IFRS. Impairment considerations for the new leasing standard. November 2018

Housing market and finance

Filling the Gaps: Active, Accessible, Diverse. Affordable and other housing markets in Johannesburg: September, 2012 DRAFT FOR REVIEW

Cross Keys Homes Tenancy Policy

ESDS 31 st October 2011 Professor Paddy Gray and Ursula Mc Anulty University of Ulster

How Severe is the Housing Shortage in Hong Kong?

Housing Credit Modernization Becomes Law

GENERAL ASSESSMENT DEFINITIONS

HM Treasury consultation: Investment in the UK private rented sector: CIH Consultation Response

Oil & Gas Lease Auctions: An Economic Perspective

Subject. Date: 2016/10/25. Originator s file: CD.06.AFF. Chair and Members of Planning and Development Committee

In December 2003 the IASB issued a revised IAS 40 as part of its initial agenda of technical projects.

Macro-prudential Policy in an Agent-Based Model of the UK Housing Market

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2017

Tenancy Policy. 1 Introduction. 12 September Executive Management Team Approval Date: Review date: September 2018

This version includes amendments resulting from IFRSs issued up to 31 December 2009.

A Dozen Questions and Answers about Affordable Home Ownership Programs

Definitions. CPI is a lease in which base rent is adjusted based on changes in a consumer price index.

Retail Acquisition Example

Clipper Realty Inc. Announces Third Quarter 2018 Results Reports Record Revenues, Income From Operations and Adjusted Funds From Operations

FOR IMMEDIATE RELEASE

Front Yard Residential Corporation Reports Third Quarter 2018 Results

PROJECT FINANCE & APPRAISAL Translating the Value of Regenerative Design into Real Estate Speak. Matt Macko Environmental Building Strategies

Extending the Right to Buy

Low Income Housing Tax Credits 101 (and a little beyond 101) James Lehnhoff, Municipal Advisor

Course Number Course Title Course Description

HAVEBURY HOUSING PARTNERSHIP

Public Housing Plan Glossary of Terms. A Additional places. B Base. C Case Management

Social rents policy: choices and trade-offs

SHEPHERDS BUSH HOUSING ASSOCIATION UNDEROCCUPYING AND OVERCROWDING POLICY

ROLE OF SOUTH AFRICAN GOVERNMENT IN SOCIAL HOUSING. Section 26 of the Constitution enshrines the right to housing as follows:

In December 2003 the Board issued a revised IAS 40 as part of its initial agenda of technical projects.

Frequently Asked Questions: The Social Housing Rent Settlement from 2015

The balance between landlords and tenants Restrictions on contractual freedom in the three Nordic EU-members

In December 2003 the Board issued a revised IAS 40 as part of its initial agenda of technical projects.

County Survey. results of the public officials survey in the narrative. Henry County Comprehensive Plan,

Front Yard Residential Corporation Announces Transformative Acquisition and Reports Second Quarter 2018 Results

KATHERINE S HOUSE, DUNSTABLE STREET, AMPTHILL, BEDS, MK45 2JP TEL: FAX: (01525)

Affordable Housing Initiatives:

Ira G. Peppercorn and Claude Taffin Financial and Private Sector Development/Non Bank Financial Institutions World Bank May 31, 2012

Housing as an Investment Greater Toronto Area

FOR IMMEDIATE RELEASE

Minnesota Community Land Trust Analysis Prepared for the Minnesota Housing Finance Agency. Nick Petersen Research Intern

London Borough of Barnet Temporary Accommodation Procurement Policy

The Impact of the financial Crises on Housing Cooperatives in Europe

COMPARISON OF THE LONG-TERM COST OF SHELTER ALLOWANCES AND NON-PROFIT HOUSING

INTRODUCTION TO FEDERAL LOW INCOME HOUSING TAX CREDITS. 1. Applicable Percentage

Rents for Social Housing from

The private rented housing sector: The UK and ideas from other countries

EY s Spotlight on Telecommunications Accounting

Improving valuations and unlocking sector capacity

Part 1. Estimating Land Value Using a Land Residual Technique Based on Discounted Cash Flow Analysis

Re: FASB Exposure Draft, Proposed Statement of Financial Accounting Standards, "Business Combinations, a replacement of FASB Statement No.

Do private landlords really have a role? Catherine Jamieson Head of the Homelessness Partnership Glasgow City Council

UNDERSTANDING DEVELOPER S DECISION- MAKING IN THE REGION OF WATERLOO

EN Official Journal of the European Union L 320/373

Welsh Government Housing Policy Regulation

Consultation Response

14.471: Fall 2012: Recitation 4: Government intervention in the housing market: Who wins, who loses?

Lancaster Commercial & Industrial Market Overview. February 14, 2018

Business Combination. CA Yagnesh Desai. Compiled by CA Yagnesh 1

RAD. How will RAD impact me? Frequently Asked Questions. You will still pay 30% of your adjusted income! Will I be eligible for the new program?

The South Australian Housing Trust Triennial Review to

SUMMARY. Christian Donner THE END OF AUSTRIAN "WOHNBAUFĂ–RDERUNG" Outlines for a Comprehensive Housing Policy

MANUFACTURED HOME PARK LOAN PROGRAM TERM SHEET

Basics of Commercial Real Estate Transactions Day Two

Guide to Appraisal Reports

Real Estate Reference Material

Lease-Versus-Buy. By Steven R. Price, CCIM

Housing Costs and Policies

DIFFERENCES BETWEEN THE HISTORIC REHABILITATION TAX CREDIT AND THE LOW-INCOME HOUSING TAX CREDIT

Consultation on Increasing Housing Supply in Ontario: A guide for Ontario s co-op housing sector

ACCOUNTING FOR ACQUISITIONS RESULTING IN COMBINATIONS OF ENTITIES OR OPERATIONS

Overcoming the Split Incentive Barrier in the Rental Housing Market: Germany s Approach of Green premiums in Rent Regulation

National Rental Affordability Scheme. Economic and Taxation Impact Study

Localism and the future of affordable home ownership. Cornwall Council. Louise Dwelly Strategic Affordable Housing Manager

Review of rent models for social and affordable housing. Submission on the Independent Pricing and Regulatory Tribunal Draft Report

Progress through Technology Evaluation and Utilization of Business Results Research and Development-Innovation

.01 The objective of this Standard is to prescribe the accounting treatment for investment property and related disclosure requirements.

City of Sebastopol Housing Subcommittee HOUSING ACTION PLAN SURVEY RESULTS From May 22, 2016 Meeting

Public Storage Reports Results for the Quarter Ended March 31, 2017

A matter of choice? RSL rents and home ownership: a comparison of costs

Transcription:

THE LEGAL AND FINANCIAL FRAMEWORK OF AN EFFICIENT PRIVATE RENTAL SECTOR: THE GERMAN EXPERIENCE Presenter: Prof.Dr.rer.pol. Stefan Kofner, MCIH Budapest, MRI Silver Jubilee 3. November 2014

MRI Silver Jubilee 2 Table of contents 1. Introduction: Why to have a substantial PRS? What is an efficient PRS? 2. Demand for and supply of private rental housing 3. Regulation of the PRS 4. Subsidization of the PRS 5. Conclusion

MRI Silver Jubilee 3 Table of contents 1. Introduction: Why to have a substantial PRS? What is an efficient PRS? 2. Demand for and supply of private rental housing 3. Regulation of the PRS 4. Subsidization of the PRS 5. Conclusion

1. Introduction MRI Silver Jubilee 4 Merits of a substantial PRS Mobility allocation of labour force economic growth trade-off between mobility and security of tenure: a large PRS accompanied by low mobility of the workforce? less accentuated housing cycle and lower volatility of house prices stability of the financial sector macroeconomic stability Competition between tenures: choice, innovation small gap is better Can social housing and homeownership Efficiency of subsidization? be subsidized more efficiently? Efficiency of investment / management (?) Scale effects Less urban sprawl Other question: Which structure (mix of tenures) is preferable?

1. Introduction MRI Silver Jubilee 5 What is an efficient PRS? An alternative to homeownership An alternative to social housing in terms of availability, quality and quality differentiation Efficiently regulated and subsidized: The sector must be competitive Is the tenure mix a policy target or the result of anonymous market forces? Definition of "efficiency": Given level of tenant protection with minimal impairment of market functions and hence minimal need for compensating subsidies. A substantial number of households has to decide pro renting and against homeownership (Rent or buy-decision).

MRI Silver Jubilee 6 Table of contents 1. Introduction: Why to have a substantial PRS? What is an efficient PRS? 2. Demand for and supply of private rental housing 3. Regulation of the PRS 4. Subsidization of the PRS 5. Conclusion

2. Demand and Supply MRI Silver Jubilee 7 Determinants of the Rent or buy-decision Politically suggestible Mr. Spock s investment calculus (Current) relative prices (rents vs. house prices): Saved rent payments + Maintenance costs / house price * 100 = Homeownership cap rate (static model) Relative transaction costs (moving in / moving out) Public subsidies (Buying vs. renting) Financial conditions (interest, avail. of credit, LTV credit terms dynamic) affordability Expectations about future prices (rent development, capital gains, interest rates) Cash flow modelling Individual risk exposure: labour market position, interest rate, divorce, portfolio mix individual discount rate General tenancy risk: influences RRR Buying should not be too attractive as compared to renting. Sector has to be attractive for investors as well! Security of tenure (!) Product differentiation and availability in the two sectors (size, quality, neighbourhood, central / decentral location, school districts) Income, equity capital ( past savings): relative to house prices affordability Tastes and preferences (e.g. property ladder, once in a lifetime) path-dependent? Household composition and socio-economic characteristics Stage in the familiy life course (marriage, divorce, separation, aging, health issues)

2. Demand and Supply MRI Silver Jubilee 8 To square the circle PRS must be attractive for investors and tenants (given the alternative of homeownership) as well Most potential tenants want a long term perspective dismissal protection and protection against sudden rent increases Investors want a reliable, competitive and risk-adequate after tax rate of return on their investment otherwise they do not invest or transform rental units into condominiums Need for balanced regulation and subsidization of the PRS Regulation has to be compensated by sufficient incentives for new residential development and modernization of the existing housing stock also incentives to keep the dwellings in the PRS RRR

2. Demand and Supply MRI Silver Jubilee 9 Supply side Incentives for private investors to engage and stay in the rental sector (new development or investment in existing stock) Investment calculus: profitability of housing investment as compared with alternative investments

2. Demand and Supply MRI Silver Jubilee 10 Determinants of the investment decision Expected future rent revenues (location, demand and rent regulation) Expected future tax payments RRR (Required Rate of Return): Return from alternative investments (e.g. government bonds) Risk assessment (absolute and in comparison with alternative investments) inflation experience Political uncertainties Restrictions on disposal (tenancy laws) Let us design an adequate regulatory framework together with a compensating subsidy system! Expectation of rising rents: - More households decide to become homeowners - More investors decide to build or buy - Prices for land and existing houses rise

MRI Silver Jubilee 11 Table of contents 1. Introduction: Why to have a substantial PRS? What is an efficient PRS? 2. Demand for and supply of private rental housing 3. Regulation of the PRS 4. Subsidization of the PRS 5. Conclusion

3. Regulation MRI Silver Jubilee 12 Legal framework: target system General and asymmetric dismissal protection requires some kind of reference rent a necessarily (somewhat) artificial market-oriented rent concept characterized by adequate quality and spatial differentiation no rent-capping effect in the long run only limited degree of market split: fluctuation (mobility!), waste of space minimum delay of the adjustment process of the housing market after a shock event (self-regulating system) market clearance limited retardation dependent on degree of excess demand minimal distortion of investment incentives: some is inevitable minimal distortion of the allocation function of rental prices minimal need of discretionary political interference limit the side effects of the drug "market rent" only for new leases, if at all one cannot refer to those rents; they do not represent the whole market and tend to be higher than rents in ongoing contracts

3. Regulation MRI Silver Jubilee 13 Freedom of contract environment? Why should the parties not agree upon leases with protection against dismissal and rent ceilings if freedom of contract was granted? On a tight market, the landlord dictates the terms, e.g. German cities before 1914 The landlord will require compensation in the form of a higher initial rent. Voluntary dismissal protection can not work without a reference rent.

3. Regulation MRI Silver Jubilee 14 Regulation: outstanding issues Construction of the reference rent purely empirical: objective, but hardly feasible purely normative: political football; dysfunctional outcome probable a mixture of empirical and normative elements Retardation mechanism Related to reference rent itself: No time dimension: update rate, reference period mix of newly agreed, increased and unchanged rents Outside the reference rent: rent caps with relation to reference rent or contractual rent Application range only for existing leases or for both, existing and newly signed leases Sample range: - only new leases: not representative - new and existing leases (if raised): self-referentiality normative shares to limit influence of fluctuation? new leases difficult to monitor, exemptions for newly constructed dwellings and comprehensive modernizations may be required investment incentives Leading and valve function of new leases If we do not cap rents in ongoing tenancies too much, we can refrain from limiting rents for new leases.

MRI Silver Jubilee 15 Table of contents 1. Introduction: Why to have a substantial PRS? What is an efficient PRS? 2. Demand for and supply of private rental housing 3. Regulation of the PRS 4. Subsidization of the PRS 5. Conclusion

4. Subsidization MRI Silver Jubilee 16 Subsidization Application range only investment in new residential real estate new investment and modernization new investment, modernization, acquisition and holding of existing dwellings (requiring minimum holding periods) Instrumental alternatives Application range also dependent on housing need Do we need a permanent subsidization? Justification: acts against pressure to convert into condos Depreciation allowances: hidden subsidy, regressive distributional effect if income tax is not flat Subsidized loans: may have a desired influence on distribution (less interest expense) Investment allowances: to be paid gradually in small portions? Different instruments are attractive for different groups of investors: Instrumental choice affects the structure of the supply side Long term subsidization with a wide application range

4. Subsidization MRI Silver Jubilee 17 Degree of subsidization Theory: compensate the present value of the lost rental income - tailored to the project We do not / cannot know the market rent! Rent controls may be ineffective in low demand regions, hence no losses Economic incidence of subsidies, esp. in tight markets housing land prices No efficient solution imaginable: considerable deadweight losses inevitable keep market distortions by regulation on a low level

MRI Silver Jubilee 18 Table of contents 1. Introduction: Why to have a substantial PRS? What is an efficient PRS? 2. Demand for and supply of private rental housing 3. Regulation of the PRS 4. Subsidization of the PRS 5. Conclusion

5. Conclusion MRI Silver Jubilee 19 General recommendations limit market interference via regulation (rent controls) Because the heavier the market distortion, the more expensive it gets to compensate it (progressive dependence) and the higher the deadweight losses Social housing may be more efficient: rent controls and subsidies tailored to the project Shall we tailor general subsidies for rental housing (without price ceilings and occupancy obligation) to the project, i.e. dynamic cost recovery rent? In this way, one could allocate the subsidies according to regional needs. make interest rate dependent on development of contractual rent (= reference rent); initial interest rate as well as current interest yield Osten: Gebietskulisse für Investitionszulage

5. Conclusion Costs of land 1.175.000,- MRI Silver Jubilee 20 Construction costs 4.835.125,- Capital investment 6.010.125,- Financing structure 1.502.531,- Equity capital 4.507.594,- Debt capital Dependent variable * 1 Rounding differences: effective interest rate is 3,012 %. 901.519 * 4,0% + 601.013 * 6,5% = 75.127 2.989.482 * 3,0% * 1 + 1.518.112 * 4,5% = 158.360 1% Capital costs 233.486 Depreciation + 48.351 Other operating expenses * 2 + 39.973 * 2 Administration, Maint., Loss of rent risk Cost recovery rent per year = 321.810 = Local Reference Rent