Reasonably priced rental accommodation – fact or fiction?

Janne Vaula
There is much public debate at the moment regarding the concept of affordable rental accommodation, as well as the ARA loans related to it. It might be appropriate to first correct some misconceptions.

Contrary to what is widely believed, the state does not loan money to developers, but only gives a loan a deficiency guarantee. The loan itself is taken out from a commercial bank, such as Nordea or OP-Pohjola, or then from MuniFin. Building is an important source of revenue for the state, as 45% of investment costs are taxes and tax-like levies. Although individual ARA projects may create low guarantee obligations for the state in the future, maintaining ARA housing production is very profitable for the state – in addition to having other positive benefits for society.

At the heart of the discussion has been the new support instrument, the välimalli, of the Housing Finance and Development Centre of Finland (ARA), which is based on the legislation concerning short-term interest rate subsidies for loans to build rental housing. This is one of the present government’s flagship projects, which will quickly help in the construction of significant numbers of genuinely affordable rental dwellings in the areas where they are most needed.

The main elements of the välimalli are:

  1. The deficiency guarantee given by the state (ARA), which enables a maximum loan to value rate of 95%.
  2. Interest rate subsidy: the state pays a 75% subsidy to the developer for the part exceeding the own contribution, which is 2.5%.

Of these, the deficiency guarantee is the more significant in the prevailing interest rate conditions and enables construction with a relatively small amount of capital.

Correspondingly, the developer commits to the following conditions for each location:

  1. Limitation on disposal: the dwellings cannot be sold until ten years after they have been taken into use (Limitation on disposal period).
  2. A reasonable level of rent: ARA determines the level of rent for each location (starting rent), which in principle is 10–15% lower than the prevailing market rate for the area in question.
  3. Rents can be raised a maximum of 1.5% plus the effect of the cost of living index annually. This ensures that rents remain at a reasonable level for the time the limitation on disposal is in force.
  4. In selecting residents, income limits should be followed; this way, reasonably priced rental accommodation is made available for individuals and families that most need it.

Cities and municipalities are not going to give extensive plots of cheap land over to ARA production any time soon. If there is a wish to build affordable rental accommodation, then ARA’s new välimalli is the ideal instrument for it. ARA’s task is to control and take care that plot costs are reasonable, building costs are at arm’s length prices, dwellings are built where there is the greatest need for them and that the dwellings are functional and of good quality.

In August 2016, Premico established, together with Auratum Kiinteistöt Oy, Auratum Asuntorahasto Ky, Finland’s first fund focused on reasonably priced ARA production. The investment capacity of the fund is around EUR 300 million and its purpose is to have built around 2000 new and reasonably priced rental dwellings in Finnish growth centres by 2019. In the first quarter of 2017, the fund has over 600 rental dwellings under construction.

Investors in our fund include trade unions, universities, pension insurance companies and private foundations. Factors that are common to our investors include a long-term outlook with moderate growth expectations and in addition, one of the most important criteria is a wish to assume social responsibility.

It is clear that the problem of affordable living will not be solved once and for all with state support. The right medicine includes making town planning more efficient, speeding up the complaints process and placing limitations on the right to appeal, easing of permission-related regulations and the speeding up of permission processes, as well as developing the production processes of building companies and making them more efficient.  The ARA välimalli is only a form of first-aid, albeit a good one.

Janne Vaula Janne Vaula is the CEO of Premico Group.