Joint venture partnerships between developers and government could be a means to help create low-cost housing in the Cayman Islands.
The concept, used in the UK to regenerate run-down urban areas, involves creating new neighbourhoods with a mix of subsidised properties and middle-class homes. Profits from houses sold on the open market – typically around 60% of the development – help fund affordable homes within the same community.
Sam Story, head of corporate finance at KPMG, believes it could be the perfect model for Cayman. Story, who was formerly head of finance for UK building firm Wates Residential, helped structure partnerships with local authorities in London.
He said the model relied on a developer who was willing to accept slightly lower profits in order to help solve a social problem.
“The biggest challenge is to get developers to buy in,” he said. “There has to be a moral element to it, because the profit margin is usually lower than it is for developments targeting the higher end of the market.”
He said the beauty of the model is that the developer and government agree on the margin up front and split it evenly, with both providing equal funding to the scheme.
The developer usually takes a fee for managing the design and planning – and overseeing construction and financing – while government receives much-needed affordable housing for its residents, often at a subsidised rate.
The concept in the UK typically involves government putting in the land and the developer matching the value with a comparable cash investment. A joint venture partnership, with three board members from each entity, is then tasked with steering the project to completion.
Typically, these are ‘mixed tenure’ developments with 40% affordable housing split among three categories:
- Affordable rent – Government retains ownership and rents the units at a cut rate, calculated based on the average income of the target group.
- Social rent – These units are rented at a ‘peppercorn’ amount to people who qualify via social services.
- Shared ownership – Government retains 60% of these properties and first-time buyers get a mortgage to own 40% of their home.
Story said the shared-ownership concept allows young people, who may not qualify for a large enough mortgage or be able to afford a significant down payment for a home, to get on the property ladder. These owners are often given flexible terms by the government to try to buy the full property over time, or to sell their stake and move elsewhere.
With few homes in Cayman on the market below $300,000, he believes this method would lower the bar for entry to home ownership.
Affordable rent would be aimed at lower income workers while the social rent units would be specifically reserved for people who are reliant on government services like the Needs Assessment Unit. The rest of the homes in the development would be sold on the open market.
Good design is essential
Story said a well-planned, well-designed development can create a mixed community of families and individuals from different backgrounds.
“The right design is crucial because you are bringing together a diverse group of people,” he said. “You have lower income families who can live in nicely designed and beautifully maintained communities. Specially in the Cayman Islands, the safety aspect of providing hurricane-grade homes to those families who might otherwise not be able to afford it, would also be a significant benefit.”
The open-market properties would have to be competitive in terms of price, he said.
“You are talking about decent, affordable accommodation at a lower price than what is available elsewhere on the market.”
Even with those elements he believes it is possible for a joint venture to make a reasonable return.
“The purpose is not to maximise profit, but to maximise the number of affordable homes, having essentially fixed the profit margin upfront. You have to have a really efficient design to bring down construction costs – there are no wide corridors, large empty spaces and grand entrances, for example.”
Further cost savings could be achieved through economies of scale in the supply chain for basic fixtures and fittings – and appliances – as well as through tax breaks for partner developers, he said.
In Greater London, joint venture partnerships had been used to regenerate run-down areas.
Typically, a handful of dilapidated tower blocks were bulldozed and the residents rehoused into the newly developed community. Story believes the Cayman Islands government could look for vacant buildings or dilapidated areas – for example, the site of the old government building – as possible locations.
“It is proving to be very successful in London and I really believe it could work here as well,” he said.
For developers, he added, it was a chance to be part of the solution and build a working relationship with the authorities. “When house prices are going crazy, it is difficult to not want to take advantage of that. Government and developers working alongside each other on specific residential developments could be a very effective way of delivering the affordable housing requirements of the Cayman Islands.”