Sunday, February 28, 2010

Unitising Residential Property

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

Written by Chris Cook - September 03, 2009 9:38 AM
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Only in Scottish law is there to be found a pragmatic, “not proven” middle way between the absolutes of guilty and not guilty. Perhaps such open-minded pragmatism is the reason why the Holyrood parliament's Economy, Energy and Tourism Committee listened intently earlier this year to the unconventional financing options which the Nordic Enterprise Trust (NET) has developed in Scotland with support from Norwegian state agency Innovation Norway.

It was clear from informal discussions with members of the Edinburgh parliament that the effect of the credit crunch on Scottish housing is a far greater political hot potato than renewable energy, the subject on which we were giving evidence. The housing crisis is currently manifesting itself in several ways, including a rise in repossessions and homelessness; a shortage of development credit, particularly in the private sector but extending to the public sector; and the effect of the cessation of development on affordable housing.

We believe that there is a simple but radical partnership-based new solution – co-ownership – which we are prototyping in Scotland but could be applied throughout the UK and even internationally.

Public And Private

We all take many things for granted, and one of these things is that when say public sector we mean “owned by government” and when we say private sector we mean “owned by a limited company”. But, as the city of Glasgow has realised, there is an emerging alternative to the limited company. Enter the UK limited liability partnership (LLP), which was quietly introduced in April 2001. The LLP is the simplest and most flexible legal entity ever created; the agreement between members is totally open, to the extent that it need not even be in writing. It combines the best qualities of a limited company with the co-operative values of a partnership.

Glasgow has at least four municipal LLP organisations, which engage with private sector partners to provide services such as car parking, market premises, and buildings for the use of the local community. But these municipal LLPs leave financiers and ratepayers alike on the outside, which means that they are just as constrained by the credit crunch as any other organisation. The “land partnerships” which NET proposes are not organisations but frameworks for investment in municipal assets of all kinds, in particular for investment in sustainable and affordable housing.

Introducing Public Equity

A land partnership does not own anything, employ anyone, contract with anyone or even do anything. It is a simply a framework agreement between the various stakeholders. Land ownership remains with, or is transferred to, a public custodian, probably a local municipality.

We are not asking land owners to give their land away but to invest the value of the land/location, i.e. the right to occupy it exclusively. Whether or not it is municipalities or councils who invest the land, planning permission also has a value and municipalities and councils would invest the value of that consent. Once materials, labour and services – or money to pay for these – have been deployed, then valuable new housing is the result.

Once building has been completed, occupiers pay an affordable rental for the use of the investment made in the land/location. This “capital rental” will then be indexed to a suitable measure of inflation. It is also possible to imagine a separate payment purely for the use of the location.


This is the alchemy. The pool of rentals which we have created is simply divided into proportional units and investors are invited to buy these units of public equity. So units are shares...but not shares as we know them.

Investors who have seen their returns vanishing as interest rates spiral towards zero would be ready buyers of an investment such as this. Units offer a reasonable, index-linked return based on property, but with low risk since affordable rentals are by definition more likely to be paid. Units are a perfect investment for risk-averse investors such as pension funds (although not UK pension investors – for tax reasons), sovereign wealth funds, and even Islamic investors (given that no debt or interest is involved).

To all intents and purposes the proposed “rental pools” are identical to real estate investment trusts (REITs), but with the key attribute that they are redeemable against property occupation. Unlike conventional units, which typically trade at a discount (occasionally at a premium) to the market price of the underlying asset, if the market value of the units were to drop below the market value of the rental stream then property occupiers would buy and redeem them.

For occupiers there is an end to any stigma of tenancy as they literally become co-owners and have a responsibility to maintain the property in good order. If they are able to pay more than the affordable rental, they automatically buy units. Even if occupiers have no spare cash, those who either assist in the initial development of the property or subsequently maintain their property in good order will effectively receive “sweat equity” units. This is because they will be able to keep the maintenance/ depreciation allowance applied to the building (since land/location does not depreciate, although its value may change).

A borrower under a mortgage contract may be foreclosed – no matter how much equity he may have – if, for some reason such as unemployment or a credit crunch, refinancing is impossible.

In co-ownership, on the other hand, an occupier may only be evicted if he fails to pay the rental and has no more units of equity to use instead of cash.

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