The Taiwan Banker

Governments around the world have made every effort to solve the problem of housing. The US and European countries have introduced policies such as loans, mortgage guarantees, and shared ownership. Taiwan also believes that housing is a basic human right. Therefore, in 2016, President Tsai Ing-wen announced a goal of 200,000 social housing units in 8 years. Taiwan Banker magazine invited Hua Ching-chun, Deputy Minister of the Interior, to discuss the current social housing progress, goals and implementation model. 200,000 units in 8 years Deputy Minister Hua says that given current domestic housing and housing market problems – including high housing prices, empty units, and lack of a rental market – housing sales prices and rents are becoming an increasingly heavy burden for young people. This has resulted in an imbalance of supply and demand in the domestic long-term housing market, and a continuous rise in prices. In order to solve these problems, the government has not only adjusted the tax system and laws, but also provided a large number of social housing units in a short period of time. In order to take care of the housing needs of the disadvantaged and young people, realize housing justice, and improve the housing market, it has promoted a housing security policy and plans to build 200,000 social housing units for rent only, not for sale in 8 years, taking the government as the primary homebuilder, supplemented by the private sector. The 200,000 units include 120,000 directly built and 80,000 leased and managed. The National Housing and Urban Regeneration Center (HURC) is responsible for direct construction of 69,000 of these, and started chartered escrow in 2020. Currently, 42,770 units have been matched nationwide, of which 22,729 have been matched by HURC, accounting for 53% of the total number of households nationwide, effectively making up for the lack of local government execution capacity. In addition, in January 2022, the “Using Existing Hotels and Public/Private Buildings to Transform Social Housing” project was launched, with an estimated target of 20,000 units. In addition to helping the hotel industry to make it through the epidemic, this also provided jobs and rental options for families in metropolitan areas. The first case, “Zhaoji Haojia (Dunbei Branch)” in Songshan District, Taipei City, was launched on July 6, and it is available as of August 1. HURC aims to increase the social housing rate through a variety of innovative channels. HURC raises its own funds, without increasing the financial burden of the government Deputy Minister Hua explained that in order to provide more safe, inclusive, affordable and sustainable housing for people in need, under the planning of the Construction and Planning Agency and HURC, the Ministry of the Interior has adopted diverse financial financing mechanisms, as well as flexible, innovative, and entrepreneurial management. It plans overall construction of social housing from the perspective of whole life-cycle operations in order to achieve its ideal of sustainable operations. The key is reasonable long-term financial planning to ensure a sound financial structure without increasing the financial burden on the government. In particular, 69,203 sustainable community housing units spread across 19 counties and cities also create profitable long-term assets for the country worth more than NT$ 400 billion. HURC is responsible for those directly built units. The capital for the construction is mainly raised by HURC itself, so the agency does not increase the financial burden on the government. After the construction is completed, HURC will be directly responsible for long-term operations. The total construction cost is NT$ 411.9 billion, including NT$ 400.5 billion for construction and NT$ 11.4 billion for land purchase. 70% is spent on residential units, 10% on shops and social welfare spaces in ancillary facilities, and 20% on parking facilities. The long-term financial cycle includes 5 years of construction and 55 years of subsequent operation. The construction stage accounts for 39% of the cash outflows, including engineering, land purchase and loan interest. The operating stage accounts for 61%, mainly long-term maintenance, property management, loan interest and land rent, and demolition. Rent accounts for 75% of the cash inflows. Management fees are 12%, and central government subsidies account for 7%. In addition, HURC has invested about 6% of its own financial resources such as investment income related to urban renewal to cover repayment of syndicated loans and any operational shortfalls. The construction funds are fully raised through bank lending, mainly from syndicated loans and the Ministry of the Interior's social housing financing platform. All funds are currently in place to ensure that all subsequent contractors can be paid according to the construction schedule. After all the construction is completed, the syndicated loans enter the amortization stage, which is mainly supported by the rental income. Only interest is paid during the construction period, reducing repayment pressure Hua further explained the characteristics of the HURC social housing financing plan, which plans cash flow for the entire life cycle. The repayment is mainly based on rent (net operating income) over the 55 years of operation, along with the existing 20-year non-self-paid and business promotion subsidies from the government. During the construction period, only interest is paid. The existing government land rent and financing interest subsidies almost completely offset the interest paid during the construction period, reducing the pressure on capital allocation when there is no rental income. The main funding gaps are expected to occur between 2028 and 2033 (when all construction is completed, but the rental income and non-self-paid subsidies are insufficient to cover repayment) and 2045-2077 (when the non-self-paid subsidy ends). HURC raises its own money for renovation and repair. The most important task in the construction stage is to obtain sufficient construction funds. In the operation stage, the principal and interest repayment requirements are mainly met by management and control of operation (particularly occupancy rate and operating cost) and revitalization KPIs (particularly scheduling and income). Therefore, after the end of the central operating subsidy, in addition to ensuring operating efficiency and cost control, it will also be necessary for HURC to actively improve its efficiency and other asset utilization, and to evaluate other innovative financing solutions to strengthen the security of its financial structure. NT$ 411.9 billion borrowed from eight banks to avoid short-term funding gaps HURC has borrowed NT$ 411.9 billion in syndicated loans from the Bank of Taiwan and other publicly controlled banks to accelerate construction of social housing, its subsequent sustainable operation, and stable repayment. Hua explained the HURC’s three lines of risk defense and risk management strategies. 1st Line of Defense: To ensure the feasibility of the plan, the first-line defense control is rate risk, aiming for low rates and giving priority to low-interest financing, strengthening HURC’s own credit rating through the commitment of the government, ensuring that lenders don’t require bad debt provisions, and reducing bank operating costs to obtain lower lending rates. At the same time, in line with the progress of the projects, flexible priority is given to the use of low-rate channels, including the existing social housing financing platform of the Ministry of the Interior, reducing the impact of interest rate fluctuations. Although interest rates may increase in the short term due to monetary policy, based on historical data, long-term rates should remain relatively stable unless there are special circumstances such as large domestic capital outflows. In addition, due to lending rate subsidies during the construction stage, the financial impact during that stage is completely controllable, and there is no risk of capital stoppage. In addition to establishing multiple financing channels to ensure the adequacy of construction funds, HURC also gives play to the deferred cash flow effect of financial management through the design of cash income and expenditure settlement arrangements. 2nd Line of Defense: In order to ensure occupancy and rental income, and thereby stable repayment ability, first, the units are properly operated to ensure living quality, and meanwhile to maintain their attractiveness in the rental market to a certain extent. Good property management is inseparable from environmental management. Furthermore, construction and operating costs must be effectively controlled; project cost control is strengthened during planning and construction through Project Management Information Systems (PMIS). At the same time, in the early-stage property management planning, HURC selects innovative construction technologies and materials to improve the efficiency of subsequent operation management and reduce operating costs. During the operation stage, it continues investing in smart community management, and implements preventive repair and update plans, as well as periodic maintenance, to improve operational efficiency and maintain service standards. Finally, regarding injection of capital into renovation and destruction of old units, in case of unexpected funding gaps, causing a failure to meet operational targets, HURC supplements its own capital. 3rd Line of Defense: To ensure creditor’s rights, the Ministry of the Interior supervises HURC. HUD’S overall financial situation, financing planning and execution efficiency, as well debt performance, are subject to regular inspections by the Ministry to ensure that its overall financial operation is sound. In accordance with the regulation establishing HURC, the Ministry bears ultimate responsibility, and bank claims are also guaranteed. Sustainable operation facilitated by long-term financing Deputy Minister Hua also explained that the first consideration for financing of social housing is outside financing ability, not support from the government budget. The NT$ 411.9 billion for construction is allocated over a 7-year period, for an annual average of NT$ 58.8 billion. This puts a lot of pressure on the construction company to raise funds. However, using long-term financing, the central subsidy totals NT$ 80 billion: about NT$ 10 billion per year for 5 years of construction (land rent + financing interest, an average of NT$ 2 billion per year), plus NT$ 70 billion for 20 years of operation (non-self-paid and business promotion subsidies, averaging NT$ 3.5 billion per year). HURC is also responsible for operation and repayment. It optimizes the operation management to control costs ensure service provision. The service level is maintained to maintain the occupancy rate, thereby supporting the income side. Syndicated lending is used to reduce the overall risk burden. HURC’s 69,000 housing units are located in more than 200 places, and need to be completed in a short period of time, so the short-term demand for capital is large. Considering the characteristics of the capital requirements for social housing construction, and the fact that the current social housing financing platform relies on matchmaking and only offers short-term credit, it is unable to effectively manage risks and estimate financial conditions. Syndicated lending achieves several benefits. It ensures sufficient supply of funds for construction, prevents capital stoppage, and reduces administrative costs. At the same time, the loan conditions can be customized. The current rate is about 0.5% lower than the market level, reducing the overall financing burden. In addition, the customized credit period is 20+10+10+10 years, matching the complete operation cycle. Therefore, the overall package helps stabilize repayment and control risks, preventing some locations with worse debt servicing ability from being unable to obtain favorable credit conditions, which would affect construction progress. Hua also recounted that it has been four years since the establishment of HURC. Just as President Tsai mentioned at the unveiling ceremony, the agency represents a powerful force for housing justice. Houses built by HURC are now appearing across Taiwan. Recently, from north to south, Tainan City Kainan Residence, Kaohsiung Fengxiang Residence, and Renwu Community Residence have launched ground-breaking ceremonies. All public offices also plan to go to the social housing at the Linkou Competitor’s Village, and now they have become important models. HURC will gradually realize the central government's vision of giving people affordable and comfortable housing.