Rental Housing Policy
Strategies and Best Practices for
Emerging Markets
International Housing Finance Course
Wharton School, Philadelphia
June 2007
Hans-Joachim Dübel, Finpolconsult
Preface: Why Rental Housing?
Demand Factors – Shelter for the Young, the
Mobile, the Poor & Access to Finance
Observations
The rental sector creates strong utility for
specific groups.
 Young households are the main
private renter class (ownership ratios
at retirement broadly similar);
 Insufficient rental supply discourages
mobility and encourages migration
abroad (e.g. Romania).
Rental landlords provide implicit access
to finance to the poor:
 operate analogous to mortgage
lenders (borrow short, lend long);
 Rental = low-cost temporary tenure
option (no downpayment, almost no
transactions costs);
 Self-targeting to the poor.
Relative subsidies (owner-rental) have
strong demand impact.
Share of Young Households Living in Private
Rental Units, %
- Six Transition Countries
35.0
30.0
25.0
Poland
Lithuania
20.0
Serbia
Russia
15.0
Armenia
Romania
10.0
5.0
0.0
Total
Starters
Young families
Source: World Bank study Dübel/Brzeski/Ellen
Hamilton, LSMS dataset
Supply Factors – City Structures &
Infrastructure Policies, Coordination Issues
Building Density and Tenure Structure in EU
Countries and the United States, ca 2004
Apartment & hostel buildings
Non owner-occupied tenure
70
60
50
40
30
20
10
Sp
ai
n
an
y
er
m
G
Fr
an
ce
ar
k
en
m
D
ta
te
s
S
ni
te
d
U
et
h
N
U
ni
te
d
K
in
g
er
la
nd
s
do
m
Ire
la
nd
0
Sources: Statistics on Housing in the European
Union, U.S. government sources.
In the West, countries with dense cities and
tight infrastructure policies feature a strong
rental sectors, and vice versa.
 US 1920/30s: Robert Moses & Levittowns
determined homeownership ratio more
decisively than FHA-Fannie Mae-System.
 ‘Italian’ city concept & greenbelt policies
created dense rental cities in Europe
(France, Germany, Russia).
 Feedback effect on housing finance
system: corporate (Germany) vs. retail
(United States) finance dominance.
Yet, there are countries in Asia with high
ownership ratios in multi-family stock (China,
Korea).
 At the same time, micro-privatization of
apartment stock in transition countries
largely failed (no maintenance)
 What is the relevance of objective
coordination problems vs. cultural issues?
Rental Sector Development Issues
& Overall Strategy
Rental Sector Issue Hierarchy defines
Strategy Scope & Sequencing
Establish Policies
Build legal & tax
framework
Build transactions
infrastructure
Develop institutions
Develop markets
Macro stability
Tenant-landlord relations
Land/lien registries
Small investors
PPP schemes
Rent (price) reform
Condominium/co-op law
Enforcement/eviction
Corporate investors
"Social housing"
Utilities reform
Housing company law
Conflict settlement
Rental housing finance
Affordability support
Interest rate policy
Banking/securities law
Banking/securities supervision
Intermediaries/wholesale
Debt markets
Real estate taxation
Housing comp supervision
Property managers
Equity markets
Gov credit policy
Successful reformers (e.g. Poland, Spain, Colombia) have addressed the policy, legal & tax
issues first.
Note: Ill-designed policies can destroy rental sectors (e.g. rent controls)!!
Next step is the development of transaction infrastructure and institutions capable to fund/risk
manage and maintain rental properties properly. Note: rental investors take similar risks as
mortgage lenders: borrow short, lend long!
Public or PPP rental housing programs that develop the market should follow
after basic reform steps incentivizing the private sector, not as substitute!
if there is evidence of failure of private or non-profit investors to deliver.
Our Focus Today: Issues & Best Practice
Solutions in 4 Key Strategy Areas
1. Rational legal framework (legal formalization)
2. Rational tax treatment (economic formalization)
3. Sustainable & diversified investor & funding base,
efficient collection & maintenance (institutions)
4. Rental subsidies
1. Legal Framework
Rent decontrol
 Liberalization of new rental contracts;
 De-grandfathering strategy for old contracts.
Reformulation of rental law, tenant-landlord relations
 Definition of tenure forms and termination options;
 Rent setting & adjustment rules (‘soft’ rent controls);
 Contract enforcement options.
Conflict settlement, contract enforcement infrastructure.
Who lives in Rent Controlled Units? Poor and Rich
alike! Prague/Czech Republic
Distribution of rent advantages even more biased towards highincome.
Source: Sunega, Karls University Prague, 2001.
Horizontal Equity and Rent Controls:
Rent-to-Income Ratios in Cairo/Egypt
Rent-decontrolled tenants burden are between 4 and 16 times higher
than rent-controlled tenants.
Source: Dübel/Finpolconsult, based on USAID-sponsored Household Survey, 2006.
Intergenerational Distortions from Rent
Control: Ramallah, West Bank
Rents paid by households with their contracts closed in year …
100%
90%
80%
< 1970
70%
1970 - 1982
60%
1983 - 1987
50%
1988 - 1993
1994 - 1998
40%
30%
20%
10%
0%
< 100 JD
100 - 199 JD
200 - 299 JD
300 - 399 JD
> 400 JD
Source: Massar Associates (1998), based on 506 household interviews.
Efficiency: Rent Control Blocks Housing
Demand, Filtering Down of Housing Units
Tenure demand
Homeownership
Mortgage
subsidies
Undistorted
relative
prices
First-time home
Private rental housing
Rent controls
Public rental housing
Rent subsidies
Subletting/informal
Rent free
Household income ~ age
Source: Dübel
Rent Decontrol Strategies
TYPICAL DECONTROL SITUATION:
New contracts are fully liberalized (due to rental shortages);
(Old) contracts closed prior to law grandfathered (bequeath often possible);
In extreme cases whole building cohorts remain grandfathered (New York).
BEST PRACTICE:
Move all contracts quickly to operating cost coverage (incl. necessary capital
repairs);
Condition right to bequeath to raise in rent to cost-covering levels, or at least
significant rise;
Further adjust rents gradually, with quid-pro-quos (higher rents against
landlord investment);
Identify and support needy tenants.
Case Spain: Treatment of NEW Contracts
-
-
Fully liberalized in 1984 (BOYER DECREE); resulted in chaotic
short-termism and high rents.
In 1994 (URBAN TENANCY ACT) again soft re-controlled
- Min tenure 5 years;
- Rent adjustment follows Consumer Price Index;
- Allowable rate increases after new investment defined
= MINIMUM of
- (civil code interest rate +3%) * investment costs,
- or 20%.
Case Spain: Treatment of OLD Contracts
De-Grandfathering
- 1984: limitation of subrogation
- Subrogation INTERVIVOS – abolished;
- Subrogation MORTIS CAUSA – kept, but limited to 2 generations.
- 1994: gradual recapturing of foregone inflation/depreciation charges
for all OLD tenancies allowed according to a GRADUATED RENT
INCREASE schedule.
- 1994 SPECIAL treatment for LOW-INCOME TENANTS:
- Low-income tenants stay under rent control;
- Landlords housing them are supported through tax deduction of
foregone depreciation.
NOTE: tax deduction only introduced in 2004, significant delay.
Cases Russia/Latvia/East Germany/Poland:
Phased Decontrol Process

First phase: move existing contracts swiftly to operating cost
coverage (incl. repairs);
 Support tenants with excess burdens by rent allowances;

Second phase: quid-pro-quo further rent adjustments against
landlord investments:
 East Germany: assisted by soft modernization loans by public
agency KfW and housing allowances.

Third phase: reference rate system or indexation.
Rent Decontrol Process Visualization
Source: Dübel
Rental Tenure and Termination Options
TYPICAL TENURE FORMS IN EMERGING MARKETS
 ‘Liberalized’ (e.g. Colombia).
 1 year with symmetric termination options (landlord, tenant). Problem:
creates short-termism (long-term demanders move to ownership) and price
volatility
Analogy: adjustable-rate mortgage.
 Permanent tenancy (e.g. most transition countries);
 Severely contrains landlord termination options, e.g. use by own children,
redevelopment; breach of covenants & contract;
 Rent adjustment rules – periodic and upon new investments – likely to
cause mismatch with landlords;
Analogy: callable fixed-rate mortgage.
ALTERNATIVE
 3, 5 years default tenure is a reasonable middle ground (e.g. Russia):
 Period long enough to provide certain tenure security (short of ownership);
 Short enough to deal with market risk and options purely contractually.
Analogy: roll-over short-term fixed rate mortgage.
Soft Rent Control Options:
Reference Rate System
Reference rates derived by rent surveys
 Based on rental market surveys, CPI indexation only for updating
 Covers rental contracts closed in the last 4 years
 Generates average rents and confidence bands over an apartment
quality-size-location matrix.
Legal impact: rent surveys are the basis for usury legislation, replaces
hard rent controls
 Rent level 20% above the upper band limit is considered usurious.
 Landlord may contest in court if he is able to prove that at least 3
typical units are priced at his ask rent level.
Market impact: reasonable rent definition changes with market
conditions, with some lag (4 yrs); usury claims can be objectively
benchmarked.
Costs: surveys are done every 4 years; alternative is expert rent survey.
Rent Survey Methodology
– Locational Quality Map
Example of city of Berlin
3 classes:
- Red areas – high quality
- Orange areas – mid quality
- Yellow areas – low quality
Maps are provided online
Rent Survey - Typical Rent Matrix by
Size/Amenities
Example of city of Hamburg
Mean and range of net rents
(net of heating and
operating costs), are
provided by
- age class of building
- size of apartment
- amenities in the apartment
(bath, central heating)
Individual assessments are
provided online
Rent Adjustment after Investment
– Options
Decision-making
 Law should provide tenants with rejection option for non-essential
investments:
 E.g. pure beautification of building
 Smaller investment, major repair decision of landlord alone (e.g., elevator
repair);
 Major investments e.g. analogous to condominum laws, voting?
Rent adjustment formulae:
 Max statutory interest rate, or market interest rate, TIMES investment
(minus subsidies);
 Amortization, e.g. 10 year schedule, of investment (smaller investments =
sunk).
 Increases beyond a certain threshold are usually capped by law (as
interest caps); exceptions can be made for major repairs.
Confict Settlement and Contract Enforcement
TYPICAL SITUATION IN EMERGING
MARKETS:
 Disputes courts only;
 Eviction not practiced;
 Rental investment deterred.
BEST PRACTICES:
 Mediation as a low-cost
mechanism can settle smaller
disputes, e.g. repairs, and declog
court system;
 Local gov housing offices (ideally
those that do rent surveys) can
offer independent opinions over
usurious rent levels;
 Substitute housing to cater for
evicted tenants (private or public
rental).
Duration in days..
until completion of of trial
service of process
of enforcement
TOTAL
Egypt
7
180
45
232
Jordan
Tunisia
Morocco
7
3
15
100
28
365
30
2
365
137
33
745
Source: Lex Mundi project (2000)
Case:
 Morocco introduced mandatory precourt mediation in commercial affairs.
 Colombia extra-judicial eviction
orders possible.
2. Rental Housing Taxation
Tax system should be:
 Tenure neutral and otherwise non-distortive;
 Neutral among rental investor classes;
 Budgeted and transparent;
 Supportive to investment rather than confiscatory.
Relevant tax classes:
 Income tax;
 Capital gains tax;
 Property tax;
 Value-added tax.
Income Tax Treatment
SITUATION IN EMERGING MARKETS:
 Gross rental taxation system;
 No deduction for investment costs, or costs exceeding certain % of gross
rents;
 High levels of tax-informalities.
BEST PRACTICES:
 Make investment model of taxation available for individual landlords, I.e.
 Deduction of main expenses from income tax
 maintenance;
 interest paid;
 economic depreciation.
 Netting of losses from rental with other income, e.g. labour or business.
 Carrying forward of losses from rental to future incomes;
 Simple administration (may imply flat cost deductibles in certain cases).
Rental Investor Tax Situation: Case Egypt
50% of gross rent revenue is taxed at max 20% PIT = 10%;
10% of 15% of ‘assessed rental income’ = 1.5%; total = 11.5%;
Rental investment taxed although initially loss-making;
Structure works against leverage and reduces return on equity.
Source: Dübel/Finpolconsult
Investment Good Model for Rental
– Basic Mechanics
Investment good model allows to deduct capital & maint costs;
Actual losses can be deducted from other sources of income;
Structure works in favor of leverage and higher return on equity.
Source: Dübel/Finpolconsult
Other Taxes
SITUATION IN EMERGING MARKETS
 High tax rates (property, capital gains tax, sales tax)
 Tax base loopholes (primary residence, units intended for children);
 Sometimes inconsistencies (value-added tax on rental income), definition
problems (commercial vs. residential).
BEST PRACTICE
 Broaden tax base (including, in principle, primary residence);
 Lower tax rates
 For property transfer taxes: keep rates low to reduce loads of housing
investments vs. other investments
 For property taxes: burden on cash flow as gross rent taxation; tax
deferral model?
 For capital gains tax: floors of tax-free gains addressing inflation (cold
progression);
 For value-added tax: treat mortgage interest rates and rents similar.
Internal return of a new rental investment under
different tax policy scenarios, Case Egypt
Purchase in t=0, sale in t=21. 20 years rental payment stream.
Long-term IRR rests on heavy assumptions (fixed rental growth,
fixed interest rates), to be repeated with shorter terms, scenarios.
3. Sustainable & Diversified Investor
& Collection Base
Who is the optimal rental investor?
 Equity investor with long-term savings (collection) horizon
 E.g. savings for retirement: can be small individual, or large
pension fund;
 Investor with institutional social or non-profit agenda, e.g. funded
by endowments;
 NOT developers (short-term funding)
 Rents are usually fixed or slowly adjusting. A leveraged investor
needs to manage rent / interest rate mismatch and rent collection.
Who is the optimal rental collector? Two models:
 At arm’s length collection (e.g. individual renting out single apt)
 Professional collection (like mortgage lender, can serve large
apartment stock), usually combined with maintenance.
Types of Rental Investors
TYPICAL SITUATION IN EMERGING MARKETS:
 Subsistence and small private landlord rental housing;
 Employer housing.
 Some (limited) public rental housing efforts (often failed).
MISSING INVESTOR AND COLLECTION AGENTS:
 Small businesses (10-50 units);
 Supported by financing and risk management model (developing e.g. in
Poland and Lithuania, UK buy-to-let market, Germany);
 Institutional investors in housing (pension funds, insurance co’s);
 Non-profit housing associations, foundations and cooperatives:
 Defined as risk-taking investors, not beneficiaries;
 Supported by financing and risk management model (e.g. Poland);
 Property management companies (e.g. Poland).
 Also: PPP models between developers and public housing companies;
Rental Investors and Their Support Needs
Smaller landlords primarily mobilize existing stock or build
progressively; different needs from larger buy-and-hold investors.
Public/Non-profit Rental Financing
& Risk Management Models
Problems to solve:
 Matched, long-term financing source for housing companies or associations
which have difficulty to access the banking or capital markets.
 Transfer of market risk to capital markets, retained & manageable credit risk.
Models
 Single-tier: Council housing (identity of owner and financier); inefficient &
risky.
 Two-tier:
 Public soft loans or public co-financing with fully matched conditions
(e.g. 10 year fixed-rate soft loan vs. 10 year fixed rent conditions);
 Secondary market agency acting as conduit of MBS, or arranger,
packager or guarantor of bond issues (e.g. Finland, United Kingdom);
 Private secondary market with public agency acting as advisor, e.g. on
asset-liability management; also private advisors/arrangers (e.g.
Germany)
Sine-qua-non: create local housing companies, associations or other bankable
owners of the housing stock (incorporation).
Two-Tier Model of Non-profit Rental Housing
Finance – United Kingdom
First tier: Housing Associations.
Second tier: The Housing Finance Company; initially direct (co-)financier,
now administrator for securitization deals, bond and commercial paper
arranger.
PPP for Rental Construction
– Proposal for Poland
Developers builds into public-private SPV, which issues debt to commercial
lenders and pays the developer.
Local government services debt and purchases properties held by SPV in
installments. Central government counter guarantee.
 Problem: PPP (laws) usually foresee limiting government risk, yet in practice
often shift risk to government.
4.
Rental Subsidies
Direct assistance to support rental tenants may take three
main forms:
Allocation of (new) public rental unit;
Rental allowances/vouchers in the private stock:
 to protect against rental shocks following decontrol;
 as permanent housing cost support for the poor,
elderly.
Purchase of occupancy rights from the private rental stock
(i.e. gov subsidizes rent temporarily)
Indirect assistance to landlords via soft funding, tax support.
Choice of Subsidy Approach in Rental
– Vast Fiscal Cost Differences: Latvia 2005
Lat
per annum
New 60 SQM Unit @ LAT 350/sqm = LAT 21,000
Santimes
per month
per sqm
Capital plus operating costs new unit (Riga)
1080
180
Loan repricing to 5%
990
165
900
150
810
135
Potential
Subsidy
Range
Loan repricing to 3%
720
120
630
105
540
90
450
75
360
60
270
45
180
30
90
15
Free market rents for existing units (Riga)
Private sector rent ceilings (Latvia)
Public rent new construction (Riga)
Public maintenance fees (Latvia)
2005
2006
2007
2008
2009
2010
Source: World Bank mission report by Dübel
2011
2012
New public rental unit
costs exceeding public
rents by factor 4-5;
Rental allowances far
more affordable option,
including in non-rent
controlled stock.
Choice of Rental Subsidy Approach
– Avoiding Poverty Traps
Do not house poor
people in new units!
Do not limit the housing
cost to income ratio at
low levels
Do cap absolute housing
costs in a rental
allowance system.
 combine income and
housing cost ceilings.
Income after
taxes/transfers
Poverty trap
Excessive
housing
allowance
allocation of
new unit
Incentive-compatible
Pre-tax income
Rental Allowances
TYPICAL SITUATION IN EMERGING MARKETS:
 There is a social allowance system in some rudimentary form (welfare);
 System collects targeting information that could be used for housing.
BEST PRACTICES:
 Targeting via unified system, local government level control;
 Applicable rents to be capped to avoid poverty traps and excessive fiscal
costs.
CASES:
 Latvia, Poland introduced rental allowance systems;
 East Germany used rental allowances to absorb payment shocks as rents
were massively decontrolled.
East Germany – Housing Allowances do NOT
Mean that Rental Burden will not Change
40
35
30
25
East 1994
20
East 1998
West 1998
15
10
5
0
1st quintile
2nd quintile
3rd quintile
4th quintile
5th quintile
East Germany – Housing Allowance Expenditures
during Shock Decontrol Phase
3500
35
Housing allowance
expenditures, l.h.s.
3000
Share of recipient households,
r.h.s.
2500
25
2000
20
1500
15
1000
10
500
5
0
0
%
Billion DM
30
1991
1992
1993
1994
1995
1996
East Germany – Targeting: Share of Households
with Housing Allowances by Quintile
45
40
35
30
25
East 1994
East 1998
20
West 1998
15
10
5
0
1st quintile
2nd quintile
3rd quintile
4th quintile
5th quintile
Occupancy Rights for Social Tenants
TYPICAL SITUATION IN EMERGING MARKETS:
 Housing programs limited to new housing provision.
 Alternative: creation of housing solutions for the poor.
BEST PRACTICES:
 Existing housing stock provides much cheaper rental solutions
than new housing;
 Needs combination with eviction protection (e.g. to mobilize units
built for later use by children);
 Occupancy rights will be limited in time (3, 5, 10 years); landlord
can choose among a choice of tenants offered by local
government;
 Local government will top-up affordable rent level; collection by
landlord.
Should Rental Investors Receive Tax Subsidies?
US Low-Income Housing Tax Credit
System:
 Swap 10 year-tax credit against
30 year commitment to house
x% low-income tenants.
 Make tax credits tradeable in
order to expand investor base.
Problems:
 New & high standard housing
unaffordable for the poor 
additional subsidies
 Tax subsidies not under direct
control of subsidy provider
(state).