The key pillars of development, financing ownership and governance of affordable housing explained
By Erol Riza
Cyprus, like many other EU countries, faces a socio-economic problem of a shortage of affordable housing for a combination of reasons.
The issue was recently addressed by housing ministers in the EU with the Liege Declaration in March 2024. The main outcome was a common call for a European New Deal for Affordable and Social Housing, based on principle 19 of the European Pillar of Social Rights.
The New Deal should encompass:
- An annual EU summit; bringing together EU institutions and all involved stakeholders from the member states to streamline a multi-level approach to the ongoing housing crisis in the EU.
- The establishment of an EU Platform which would aim to share best practices and build partnerships. It would give the opportunity to share experiences from diverse stakeholders in increasing affordable social housing, exchange data and knowledge.
The European Investment Bank (EIB) has in its discussion paper on Housing Market Developments in the Euro Area: Focus on Housing Affordability, published in September 2022 attributed the rise in the prices, and diminishing affordability, of housing to the post Global Financial Crisis focus by governments in the Euro Area to solving the sovereign debt and financial crisis at the expense of planning for a long term policy on demographic needs. Its key finding was that land use regulation was the most important determinant of housing supply mostly with an adverse effect on housing affordability.
A number of proposals have been put forward to the government by Etek, the Cyprus Science and Technical Chamber, as well the Productivity and Competition Committee which are useful, but there is no comprehensive answer on the development of substantial new housing to increase supply and improve affordability. The interior minister has proposed a package of very interesting measures (most notably Build to Rent, tax relief on rents and increased building co-efficient of 45 per cent) to boost the supply by attracting the private sector to invest. The jury is out over the success of the measures as new affordable housing cannot be left to the private sector solely.
This article aims to address the key pillars of development, financing ownership and governance of affordable housing which it is hoped will further increase the awareness of the problem, bring about new initiatives and hopefully solve the problem.
Development of affordable housing
It is generally accepted that the cost of housing is a function of land prices, the cost of materials and the cost of financing. It is no secret that owners of land/land banks within housing zones do not wish to construct and rent affordable housing since they aim to maximise their profit. The choice of land for development has been hitherto based on government-owned land.
Thus, where government, local authority or semi-government-owned land exists in desirable locations this must be released to enable sizeable affordable housing; if not then the government should compulsory purchase the land. Affordable housing needs to be contrasted with social housing since the latter is for very low-income households whilst affordable housing is closer to market rents/prices; for the purposes of this article the focus is on rental of affordable housing.
Other suitable land in terms of cost and location is agricultural land that is not used for sustainable farming. This is regulated by the policy statement on the Controlled Development of Rural Areas. At present there are three types of development that can be approved by town planning: these are for medical, educational and sports infrastructure. It does not include affordable housing, and this can easily be amended to include affordable housing in selected areas.
Affordable housing is required where there is a cluster of development, and the cost of renting is excessive.
Financing of affordable housing
The availability of long term and low-cost financing is critical for successful development of affordable housing. The current source of financing by the private sector is limited to banks and the cost is unattractive for long-term funding for a major project of say 100-200 houses. There are few alternatives to bank finance in Cyprus so the government agency, the Cyprus Land Development Corporation (CLDC), could borrow long term from European institutions with a government guarantee. The CDLC could then lend the funds to the private sector developers.
An alternative model in the EU is that of Private Public Partnership (PPP) for affordable housing as proposed by the World Bank. PPP requires a legal framework to be in place and given the time to get legislation approved it may not be the most attractive in Cyprus. A typical PPP would entail the government providing the land and paying availability payments to the developers when the project is completed. A hybrid PPP could be the answer, and this can be done in Cyprus with a credit enhancement known as a “deficiency guarantee” provided by the government. In other words, where the project cash flows are insufficient to meet the debt repayment the government would step in to make the payment; the amount of sustainable debt would be determined by the projected future rent revenues.
It is vital that public sector involvement in sourcing the funding is arranged since the lowest cost of funds would only be achieved with such support. There is no necessity for financing affordable housing with on-budget revenues when there is ample funding available from European institutions which now have affordable housing as a sector of major interest as per the Liege Declaration. Invest EU and the EIB are surely the key sources and are financing affordable housing in other EU member states.
Ownership of affordable housing
In my opinion, and based on successful European models, the public sector is the regulator and sets the standards for both ownership and governance; thus, the CLDC will not own or manage the affordable housing stock. The ownership could take the form of a community/cooperative model. Arecent paper by Dan Hill and Mariana Mazzucato, both professors and experts in the Built Environment, highlights that modern housing ownership could be based on successful cooperative models. One such model is the Barcelona La Borda and Sostre Civic. They state the following:
“Having diversified across numerous environments over the last century, co-operative housing provides a particularly robust, well-tested and well-researched alternative to traditional private property ownership patterns. Most emphasis is placed on the idea of the cooperative as a collective owner of the properties, avoiding individualistic financialisation of dwellings, but the shared co-ownership models underpinning such structures also tend to facilitate more sustainable housing than typical private market housing.”
In the most successful model, with over 100 years of successful housing developments, Vienna has the Limited Profit Housing Associations (LPHA). This is not currently feasible in Cyprus, but an approximation of the ownership can be achieved with Social Enterprises (SE) with a focus on affordable housing. SE is essentially a single purpose company and 70 per cent of its net earnings has to be reinvested in the sector whilst 30 per cent is allowed to be distributed to the owners. The owners of the social enterprise could include the private sector and municipalities.
Governance of affordable housing ownership
Good governance shapes the effective functioning of housing systems. Without it, the availability of other factors such as land, capital and expertise might be squandered. This also includes a clear understanding of stakeholder roles, for example national and local government, the judicial system, housing providers and individual households. In Cyprus the government, via the interior ministry, and the CLDC predominate; both actors were mostly focused on the development of social housing rather than affordable housing except for the recent published Build to Rent proposals of the ministry.
The book Affordable Housing: Governance and Finance edited by Van Bottel, V Gruis, J Nieuwenhuijzen and B Pluijmers clearly states that one of the most prominent conclusions emanating from the contributions to the research is the strong role of the state in shaping favourable conditions to attract private sector/institutional funding for the affordable housing sector. There is a need to develop larger housing communities with a focus on affordability. These larger developments of 100-200 housing units will have to be designed by the government in terms of built environment, the standards and the size of houses to be set by the government and implemented by a regulator such as the CLDC.
The government can promote the SE model of ownership as it approximates the LPHA in Austria. Its key features include rent linked to incomes, assuring the long-term tenure of tenants, flats can be passed down generations and profits reinvested in affordable housing. SE are regulated by the Commissioner of Co Operatives and Social Enterprises and the Law reflects the EU guidelines. SE could include in the management boards members of the community as well as public sector officials and should publish annually their financial accounts so that there is accountability and transparency in their performance.
Good regulation of the SE sector can be mutually reinforced by internal regulation and external legislation such as:
- Internal control by a specialist auditor reporting to the board of the social enterprise;
- External control by a specialist auditing firm approved by the CLDC and the board of the SE;
- External government oversight by interior ministry where there has been state support or land allocated for affordable housing.
Erol Riza is former managing director of DEPFA Investment Bank and former vice- chairman of the Interim Board of Bank of Cyprus 2013
