March 2021
Rent as a type of tenure in Latin America and the Caribbean has presented a sustained increase since 2000, particularly in Colombia, Chile, Honduras and Costa Rica, where this type of tenure has increased dramatically. According to ECLAC, by 2019, 21% of urban households in LAC lived in rental housing. The advantages offered by rental housing compared to ownership, are increasing. Rent provides flexibility for the investment of own resources in other assets and facilitates households according to changing work demands and life preferences. However, leasing is also often the only way out for low- and middle-income households. The high prices of new homes, barriers to access and pay to financial systems, the difference between increase in wage income and housing values, changes in household composition, results in the only way for many to inhabit a decent home.
Rent as a housing option should be as desirable, legitimate, and affordable as owning a property. Countries as Argentina, Brazil, Chile, Colombia and Peru have implemented rental subsidy policies. In all cases, despite a high demand, offer of social housing for rent is low. To discuss the role of the State in promoting rental policies, the Platform for Urban Habitat and Housing Practices (UHPH) organized the webinar Incentive Policies for rented social housing, on March 10. The event was attended by government, academia and private sector´s actors from the region and the world, who shared their experiences, lessons and recommendations, following below.
Governments Experiences
Carlos Marambio, head of the Housing Policy Division of the Ministry of Housing and Urban Planning of Chile, reported how in the Chilean case, housing prices have increased above wages, resulting in acquisition of housing being difficult. The "social outbreak" of 2020, combined with achieving suitable housing for the program, highlighted the importance of provision of decent housing in the country. Thus, several years ago Chile implemented the Rental Subsidy (Subsidio de Arriendo) that assists vulnerable families to access decent rents.
In order to overcome the lack of available housing for the program, the government has developed social housing on public lots, fully financed by the state. Buildings not being at use were selected to assign them to social housing rental schemes. The government goal is to provide new units to the social rental program, owned by the State and managed by tendered specialists, as to offer incentives that increase attractiveness of this policy for private developers.
Chile implemented a strategy similar to that implemented by South Korea 40 years ago. Former deputy minister and professor at Seoul's Sogang University, Kyung-Hwan Kim, explained how the country has adopted a multi-facet strategy in which subsidies have been provided for home acquisition, remodeling or rentals. Regarding this last component, Professor Kim highlighted that the South Korean State has built and purchased units to be used for social rental, achieving an inventory of 1.58 million units for contracts of up to 10 years, which currently represent about 7.5% of the total of the country's housing units. This was hard for the State, which normally contributes 70% of the value of the units to be built (30% with government resources and 40% from the housing fund), while tenants and developers contribute 20% and 10%, respectively. For the next few years, the government will continue to support this same strategy and proposed reaching 2.4 million units for social rents for contracts of up to 30 years, reach middle-income households, increase the size of units, and promote social integration through mixed projects that have social and marketable units.
Mrs. Patricia Val, general manager of Alokabide - a Basque government company aimed at promoting social rental housing - shared the experience of Bizigunde, the program through which unoccupied private homes are obtained to be used for social rentals. For this, the company establishes an usufruct contract for the property, directly with owners of the units, who rent them to program´s beneficiaries for a lower price than market price. Thus, there is a subsidy from the State within the difference between the price paid by the company to owners of the properties, and the price paid by the beneficiaries who rent them. Providing units for the program is attractive to private individuals because they receive a guarantee on monthly rental payment, as that the property will be returned in optimal conditions, once the contract ends. Beneficiaries have access to quality homes, with good locations and at lower prices than market prices, which in no case exceeds 30% of their income. For the government, this option is desirable as it offers citizens affordable rents at a lower fiscal cost than the construction of new homes would entail. This represents an immediate solution that optimizes the existing urban land.
Bets and requests from the regions private sector
Some investment funds in the region have carried out real estate developments for rent for periods of at least 20 years. Chile, Colombia and Mexico are destinations where private investors have ventured into this business model. Pedro Gómez, from CCLA investment group - that has assets in the three aforementioned markets - highlighted that during its first years of operation they found that regulation for rentals in the region is not designed for institutional developments aimed at this type of projects. Also, that urban regulation in some cities has requirements that are not necessary in the context of projects destined for rent, such as a minimum number of parking spaces for each unit. He recommended that regulation of rental contracts provides significant protection to tenants, as restitution processes are complicated, and discourage private investment in this type of property.
Rodrigo Suárez, COO of Hasta Capital -a capital fund specialized in the development, investment and management of residential properties for rent in Latin America and the United States-, agreed that legal instability, both in the regulation for development of private social rentals projects, as in operation, are of the main barriers to scale-up these projects. He also highlighted that the lack of understanding the business, conceptually, belittles the fact that fixed costs in housing production are high. Thus, in the absence of direct subsidies on construction supplies, the scalability of future developments depends on factors as subsidies to users and regulations that minimize the risks inherent to the business. Nevertheless, both CCLA and Hasta Capital agreed that indirect subsidy schemes should be considered to encourage the production of these homes through, for example, interest rate subsidies on construction credits to facilitate financing of developments.
Some final things to consider
Finally, Professor Alan Gilbert, an expert in urban planning at the University College of London (UCL), gave some considerations on the models of social rental housing, foreseeing its expansion in the region. First, he insisted that the belief in the region still prevails that home ownership is more desirable over rented home. In other words, people aspire to buy a home and, if they cannot, they resort to renting as a second option. However, their income in many cases sentences them to low-quality housing, usually without even legal based leases. Second, the construction of public housing for rent has a fiscal cost that few governments in the region can afford. Third, social rental provides incentives for builders and for the financial sector that must be carefully considered with respect to the interests of tenants and their ownership of the property. Fourth, rental subsidies can raise market prices, by incorporating the subsidy into the homeowner’s payment aspirations. Fifth, there is an increase/appreciation in the price of houses while not subject to appreciation taxes, as opposed to other types of capital assets, a situation that should be analyzed to improve the fiscal capacity of governments in investment of social housing rental.
References
CEPALSTAT (2021). Households according to housing tenure status, by urban and rural area. From: click here