Sunday, February 28, 2010

Sustainable Development

The conventional transaction-based property development model is well described as “the four Bs: Buy, Borrow, Build, and B****r Off”.

Under the existing model, developers have no interest in energy efficiency or good quality since these cost money and reduce transaction profit. In a land partnership development, the individuals or enterprises (such as housing associations) who manage development have an interest in high standards of quality and energy efficiency because this lowers the cost of occupation over time and makes the units they will receive more valuable.

The approach for contractors is firstly to invite them to invest their costs, which may be possible for businesses such as architects and engineers but not so straightforward where there are costs of materials and labour to consider. However, whether or not contractors are willing or able to invest their costs, they will be expected to receive an agreed profit margin in the form of units, and this will align their interests with those of other investors. In this way, we minimise the amount of development risk capital needed from public or private investors.

Once the developed property is complete and occupied, the manager member – again, possibly a housing association – also has an interest in doing a good job because that will increase the value of their proportional partnership equity share in the rental.

Unlocking Public Equity

Development of new housing takes time and development credit is in short supply. So we propose that some of the investment tied up in existing housing stock should be recycled and used to develop new housing. We propose to simply replace existing government, municipal and housing association borrowing with units of a new class of Scottish equity, which dramatically cuts financing costs.

Defusing The Debt Bomb

New medicines are often tested on the most desperately ill patients and we believe that our proposal could first be tested as a solution for those increasing number of Scots who are currently suffering the trauma of losing their homes to debt. So distressed properties would be transferred to a custodian, an affordable and index-linked rental would be set, and units in the resulting “pool” of affordable rentals would be sold to long-term investors, with the scheme managed by local housing associations.

For the banks, the exchange of distressed debt for units would give rise to an asset with far more resale value than any conventional security or restructured loan, which retains a debt obligation. Moreover, the fact that the rentals composing the income are affordable will mean they are more likely to be paid, and this relative certainty should justify a higher price and lower rate of return.

In this way, distressed Scottish borrowers may shake off the shackles of mortgage debt and the Scottish government's limited funding to alleviate their plight may be deployed as a revolving transitional investment in the pool while new investment is introduced by skilled Scottish financial services providers.

A New Wave Of Housing Investment

Using the co-ownership approach, international and domestic investors may refinance existing UK public and housing association debt. The massive resulting pool of development credit could then be deployed in networked sustainable development of affordable housing throughout the UK in such a way that the interests of all stakeholders are aligned.

It's not rocket science and (tongue-in-cheek) the NET even has a name for Scottish use of what is essentially a new form of partnership-based national equity: the Scottish Futures Trust.

This is an expanded version of an article published in the summer 2009 edition of Scotregen, the journal of SURF, Scotland’s independent regeneration network. Chris Cook is Principal of the Nordic Enterprise Trust. He is a well-known commentator and expert on the petroleum markets and peer-to-peer finance. He was formerly Director of Compliance and Market Supervision at the International Petroleum Exchange.

1 comment: