Home / UCLA Housing Voice Podcast / Episode 73: French For-Profit Social Housing Developers with Julie Pollard

Episode 73: French For-Profit Social Housing Developers with Julie Pollard

Pollard, "The political conditions of the rise of real-estate developers in French housing policies"

More

Episode Summary: Before the 2000s, French real estate developers were prohibited from building social housing. Today, they build more than half of it. Julie Pollard shares how two seemingly unrelated policies came together to make this rapid shift possible.

  • “French housing policies have long been scrutinized through the lens of the social housing sector. Features of the French model of social housing provision, as well as the sector’s evolutions over the past decades, have been thoroughly investigated …  Private real estate developers have long been understudied … Though there has been a renewal of interest in these actors since the 2010s, this research has focused largely on real estate developers in the commercial or tertiary sector (Coulondre, 2016, 2017; Guironnet, 2016; Nappi-Choulet, 2006). Particular attention has thus been paid to their role, linked to that of real estate investors, in the processes of financialization of urban development (Guironnet et al., 2016; Wijburg, 2019; Wijburg and Aalbers, 2017). But the role of private real estate developers as key actors in the French housing sector has largely remained in the shadows.”
  • “Private real estate development accounts for nearly 70% of housing construction authorizations in the Paris region between 2013 and 2021 (Trouillard, 2022). Their scope of intervention has also been widening: private real estate developers have worked in an increasingly upstream manner, toward urban planning, and downstream, toward rental management. In addition, the main developers have broadened their geographic areas of intervention: while historically established in the main French metropolises – and mostly the Paris region – they began to set up in smaller cities and more peripheral locations. Another key evolution is their role in social housing construction. Excluded from this activity until the 2000s, they have since then adopted a progressively larger role in this sector. Private developers built 3% of the social housing in France in 2007 and 53% in 20183. These evolutions are striking with regards to the main French developers, on which this article focuses.”
  • “In this article, I argue that the expansion of developers over the last 20 years in housing policies in France stems in large part from the public policies that have been put in place. I therefore show how the rise of French real estate developers has been largely politically driven. But I also suggest that the outcomes of such evolution are only partially controlled by political actors. Developers are becoming central actors in implementation, and the possibilities for political regulation are increasingly dependent on local political resources.”
  • “Activities of real estate developers in France are framed by a large number of instruments, rules, and standards issued by national public actors … Within this complex landscape of policy instruments (for more details see Pollard, 2018), two main instruments have fostered the expansion of developers over the past two decades. First, the boom in tax expenditures for buy-to-let investment played a crucial role. These fiscal schemes directly benefit households who purchase a property in a new construction and commit to renting it for a fixed period of time, but they also provide important support to the real estate industry. The second instrument to foster developers’ expansion has been the opening of social housing construction to real estate developers. This opening has been made possible by the redefinition of a pre-existing regulatory instrument: a type of sales contract that gradually transfers ownership of the building during its construction (vente en l’état futur d’achèvement, VEFA) to social landlords … Each instrument is examined through the following dimensions: the political motivations that led to its introduction; the perception of the instrument by developers and its impact on their activities; and finally its broader outcomes.”
  • “This text draws on research carried out on real estate developers in France, and more specifically in the Paris region, for about 15 years. This research is based on in-depth qualitative research and combines fieldwork at the national and local levels. About 50 semi-directive interviews are the central material of this work. Executives of the largest French real estate development companies were asked about their conception of various housing policy issues, their public and private networks, and their links with their own professional association (Fédération des promoteurs immobiliers (FPI)). In order to analyze developers’ place in the overall housing sector and policies, other public and private actors in the sector were also interviewed: political and administrative actors at central state level and in two municipalities in the inner suburbs, and social landlords. As for the local level analysis, data was collected in two large municipalities in the inner suburbs of Paris. These cities had been selected during the 2000s as the most dynamic territories in terms of housing construction. The professional housing sector press was also valuable material for this research. Several empirical fieldwork phases were carried out: in-depth individual work (Pollard, 2018) and research partnerships (Gimat and Pollard, 2016; Bonneval and Pollard, 2017).”
  • “To grasp the key – and increasing – role of real estate developers in the production of housing and, beyond that, in the making of the city, one can draw on a number of analytical contributions. In the 1970s and 1980s, seminal research on the coalitions guiding urban development revealed the particular position of real estate actors – i.e. real estate developers, land owners, and land and property companies. These actors, seeking to maximize growth and profit through the development and exploitation of land, were seen at the core of urban politics, particularly in the United States. Such research drew mainly on two analytical frameworks: “urban growth coalitions” from a neo-Marxist perspective (Logan and Molotch, 1987; Molotch, 1976), and “urban regimes” from a neopluralist perspective (Elkin, 1985; Stoker and Mossberger, 1994; Stone, 1989, 1993). Thinking in terms of urban regimes helped researchers understand the influence exerted by real estate actors on governing decisions within coalitions of public-private actors built over the long term. Such analyses concentrated on the power of developers based on their financial resources, the prominence of their interests on the local political agenda, and their strong integration into the local ruling elite.”
  • “Starting in the 2000s, this earlier research was followed by further investigation into the rationale for the central position of real estate developers in urban development. This research has been developed in several directions. First, the various resources of real estate developers have been considered, including financial resources, local networks and expertise. Their centrality would be linked to their means of influence on public actors. Their presence in local economic and political life would thus have worked in favor of their own interests, turning them into decisive actors in the local political agenda.”
  • “Second, their rise is also analyzed as part of a broader neoliberalization trend. From such a perspective, the rise of developers is examined in relation to global dynamics that restructure the capitalist economies of Western democracies. The flow of capital into real estate is attributed to broader macroeconomic trends, such as the end of large industrial investments or the growth of Asian economies (Pinson, 2020). This would go along with the transformation of the real estate sector, which has seen the concentration of real estate development companies and mergers between the banking and real estate development sectors … Finally, some literature describes different types of public initiatives that have put real estate actors at the forefront. For one, public-private partnerships – that is, formal arrangements between local authorities and business actors (Davies, 2003; Pierre, 1998; Raco, 2014; Savas, 2000) – have been developed. In addition, privatization policies, including the transfer of public services to private actors (Bernt et al., 2017; Savas, 2000), have been on the rise. Recent research shows that facing increased funding pressure, local-level governments have sought new ways to attract investors and other private urban development actors…”
  • “In the French case, such explanations have proved unsatisfactory. Public-private partnerships as well as privatization are indeed not central issues as far as housing is concerned. Moreover, financialization is (still) low in the French housing sector – unlike for office and commercial real estate (Guironnet et al., 2016; Wijburg and Aalbers, 2017). In France indeed, real estate investments are massively dominated by private households, encouraged by substantial tax breaks (See next section : How national tax expenditures have fostered the rise of developers). The dynamics of financialization only began, very gradually, in the second half of the 2010s. The intervention of the French government, which set up investment funds for intermediate housing, helped from then on to attract institutional investors to the housing market. This trend is still only emerging and has not (or at least not yet) led to substantial restructuring of the real estate sector (Guironnet et al., To be published).”
  • “Economic and fiscal instruments impacting the activities of real estate developers have existed in French housing policies since the 1930s, but did not gain momentum until the late 1990s. From then on, one of these tax expenditures has been particularly favorable to real estate developers: tax exemptions for buy-to-let investments. These schemes, frequently named after the Minister in charge of housing at the time of their introduction, benefit households that buy a property in a new building and commit to renting it for a fixed period of time (usually about 9 years). Some schemes have provided tax benefits for taxpayers over a much longer period, for example up to 24 years in the case of the Périssol scheme6, which was launched in 1996. They are intended to encourage individuals to prefer real estate investment to other types of investment. But they also provide crucial support – albeit indirect – to companies in the real estate sector. Among the main stated political objectives of these measures are promoting the supply of new housing, providing a certain stock of rental housing outside the social housing sector, and supporting economic activity in the construction sector.”
  • “Tax expenditures are a means of producing public policies in a context of “petrification of public spending” (Siné, 2006). They are indeed easier to set up than budget expenditures. They are not accounted for, but only estimated, and are not subject to quotas, which again distinguishes them from budget expenditures. Moreover, their costs are diffuse and spread over time7. Another advantage of tax expenditures for policy-making lies in their temporality: investors and private economic actors in the building sector react quickly to their creation or reorientation. In a sector of mainly long-term, tax breaks are a means of acting in the short term.”
  • “The collective mobilization of developers to defend these instruments provides an initial indication of how developers have appropriated them. The professional association of French real estate developers (Fédération des promoteurs immobiliers), as well as the major developers, have indeed become fierce advocates of these schemes over the last decades … Within the companies themselves, the major developers strategize to get the most out of these mechanisms. They may change their marketing practices and redefine territorial strategies and internal processes in order to maximize the sale of units benefiting from these schemes.”
  • “The expansion of the activities of real estate developers over the last two decades has been based on these mechanisms put in place by successive national governments. To understand the extent to which the rise of developers has been politically regulated, one has to consider in greater detail the implementation of these mechanisms. An analysis of the outcomes indeed reveals a contrast between national measures and local regulations.”
  • “For example, rental housing was overproduced in some parts of France due to these schemes. Even though these schemes were supposed to promote construction in financially strained areas, new rental housing was concentrated in areas far from markets with the highest demand. In his research, Patrice Vergriete showed that western and southwestern France were overrepresented as zones where real estate developers widely developed their construction activities thanks to these tax breaks. He also showed the expansion of the developers’ activities to medium-sized towns and rural areas. Such a shift went so far as to create imbalances in certain local rental markets and to saturate the rental market in certain cities, in particular for small dwellings (Vergriete, 2013).”
  • “Critics point also to the gap between maximum fixed rental prices and the diversity of local markets. Private individual investors tend to demand rents based on financial calculations that make their investment profitable, but that are too high in comparison to local prices. Investors thus risk failing to find a tenant at the risk of losing their tax advantage (Herlin-Giret and Spire, 2019). This is accentuated by the fact that developers and their marketing networks often sell investors buy-to-let housing units far from where they live. The real estate investment is therefore sold as if it were a financial investment like any other, minimizing the critical importance of location.”
  • “Difficulties of controlling the activities deployed by real estate developers relying on these public measures have been stressed with increasing intensity. A January 2018 note from the French Court of Auditors14 makes very critical observations. The document confirms that these measures remain sparsely used in areas where the need for rental housing is particularly acute because of lower expected rental profitability, which in turn is due to high acquisition costs. The report also points to the high cost of these tax exemption schemes for the community, their limited economic impact in terms of increasing the number of accessible rental units, uncertainties about the windfall effect generated, and recurrent evaluation difficulties. The document even suggests that private economic actors such as real estate developers may be addicted to these schemes.”
  • “Until the 2000s, French housing policies were largely structured around a differentiation between professional stakeholders on the supply side. On the one hand, social landlords (HLM organizations) produced and managed social housing; on the other hand, real estate developers produced and built housing at market conditions. This segmentation, which had its origins in the differentiation of public intervention after the Second World War (Effosse, 2003), de facto legally excluded real estate developers from the construction of social housing.”
  • “A shift began to occur in the early 2000s (Gimat and Pollard, 2016). Local elected officials had to face growing regulatory and financial difficulties, which included an increase in construction costs, scarcity of available land, and more complex financing procedures, in building social housing on their territory. Specific regulations on social housing related to public procurement exacerbated these difficulties. At the same time, national injunctions, some of them coercive, reinforced local elected officials’ obligation to build social housing. For instance, the Law of December 2000 on Solidarity and Urban Renewal (Loi Solidarité et Renouvellement urbain) provides that social housing must represent at least 20% or 25% (depending on the case) of the housing stock for municipalities with more than 50,000 inhabitants. In this context, local governments have explored new ways to produce social housing. Among them, the involvement of real estate developers has gained ground.”
  • “In practice, the new use of an older tool was adapted to social housing construction and made this evolution possible. This device, called Vente en l’état futur d’achèvement (VEFA, meaning sale under construction) had been used since the 1960s by real estate developers to sell their new homes to private individuals. It consists in a specific contract that gradually transfers ownership of the building during its construction. This type of contract has been adapted to transactions between developers and social landlords to allow developers to sell part of a project to social landlords even before construction begins – one speaks then about VEFA-HLM. Housing units built by developers are then managed by social landlords. The adaptation of this tool has been gradual. Successive decrees and circulars have regulated it since 2000, at which point loans to finance the production of social housing could be obtained for VEFA operations. The 2006 National Commitment to Housing Law (Loi Engagement National pour le Logement) allows for the imposition of a new easement (referred to as social mix easement) consisting of legally imposing a quota of social rental housing in the Urban Development Plan for a given area. In this way, local governments can enforce a quota of social housing to be included in future construction programs by developers.”
  • “As a result, the 2000s and especially the 2010s saw a gradual and sharp increase in the importance of developers in the construction of social housing. They were virtually absent from this activity in the first half of the 2000s. In 2018, they built more than 50% of social housing in France – more than 60% in the areas with the highest housing demand.”
  • “When asking developers about this policy change, responses are quite mixed and evolving over time. As the conditions for the production of social housing were first imposed and framed by local political actors, developers and especially their professional representatives were initially reluctant and quite suspicious. Building social housing imposes on real estate developers a significant set of adaptations and compromises. In the early 2000s, this was a new mission in a sector whose rules and needs developers were only remotely familiar with. Social landlords and real estate developers were indeed not used to working together and had long relied on different processes, actors, and norms in their construction programs. These new mixed projects (i.e. including social housing sold to social landlords and housing intended for private individuals) necessitated collaborative work processes among an increasing number of stakeholders. It also required developers to integrate specific norms imposed by social landlords, representing additional costs. The latter are indeed particularly concerned with the architectural and technical design of their properties, because they must ensure long-term rental management, and because their financing is conditional on compliance with certain standards (thermal standards and room sizes, for example).”
  • “For developers, because sales prices of social housing are lower than market prices, the arrival of social housing threatened the profitability of their activity. In the 2000s, developers interviewed also mentioned that the integration of social housing would result in a loss of value for housing sold at market price in the same operations. However, discourses have largely evolved with the generalization of these practices in the 2010s. In the 2010s, these socially diverse operations, although still the subject of bitter negotiations, were better anticipated by the actors involved thanks to greater knowledge of each other’s expectations and the joint work practices that had been established (Hincker Jourdheuil, 2019). The development of VEFA-HLM has contributed to the evolution of some practices, especially in terms of financial balances, in order for real estate developers to maintain their profitability levels but has not led to a complete reevaluation of their operating methods. To limit the impact of the shortfall, linked to the lower price of housing acquired by social landlords, and to continue to generate a margin, control of land charges has become one of the main issues in the feasibility of mixed operations.”
  • “In terms of their practices, most developers have fully embraced the production of social housing. Today, about a quarter of the housing units produced by developers are sold to social landlords. Ultimately it has become a new source of profit. Indeed, the production of social housing constitutes a counter-cyclical activity, which ensures that real estate developers remain profitable even during periods of less dynamic real estate markets. Because it relies in part on public financing, it is less sensitive than other products to the broader economic context. Moreover, producing social housing is a secure business for developers. Indeed, when a social landlord commits to a project, it generally purchases a significant share, rarely less than 20% of the housing units. For the developer, this commitment reduces the number of buyers involved and the number of units to be commercialized, the results of which include savings on marketing costs, faster release of bank loans, and a reduction in risk. In addition, social housing is also a gateway for developers to a new market, that of low-income households. This leads them to diversify the housing production segments in which they are present. Finally, social diversity has also become, since the 2000s, a public communication argument for the main French real estate developers.”
  • “Effects of this new practice are paradoxical in several ways. Criticism, sometimes fierce, has been expressed with regard to this tool, in particular on the part of professional representatives of social housing organizations. First, despite being politically driven, these arrangements raise legal problems on several levels. They have been denounced as circumventing the public procurement code and the procedures for competitive bidding … Second, negotiations between elected officials, social landlords and real estate developers prior to the granting of a building permit, although in principle prohibited by law, are becoming widespread with the development of VEFA-HLM. Third, further questions are raised about the outcomes of this development and about the capacity of political authorities to control its consequences in the medium term. When social landlords choose this method of production, or are forced to use it, they relinquish direct control over the construction of their housing – control which has traditionally been integral to their mission. In addition, they must give up some of their freedom to choose construction site locations.”
  • “The impact of these instruments extends to the entire real estate development industry. All professional developers sell housing to individuals who benefit from tax breaks; and all professional developers build social housing. The few exceptions are the handful of players who have become specialized in social housing construction or tax-exempt housing sales, or who have been created ad hoc in order to concentrate exclusively on the same. The top developers are therefore all beneficiaries of public policies in the housing sector. Understanding their rise means paying attention to the changing policy landscape in which they operate.”

Shane Phillips 0:05
Hello, this is the UCLA Housing Voice podcast, and I'm your host, Shane Phillips. This week, we're joined by Julie Pollard, who is sharing her research on the rise of private for-profit real estate developers in France -- particularly in the production of social housing, or what we might refer to as affordable, below-market, or low income housing here in the US.

France is an interesting place to study housing for a bunch of reasons. In many ways, its approach is very different from ours in North America. For example, prior to the 2000s, social housing was built by entirely different organizations from the companies that built market-priced homes. Real estate developers were literally prohibited from building social housing. That changed in the 2000s, and although private developers still only built about 3% of social housing as recently as 2007, today they build more than half. But even now, developers can't operate social housing, or any housing really -- they have to sell it all once it's built, mostly to individual investors, but increasingly to social housing providers as well. We also share important characteristics with France. Those individual investors I mentioned end up buying the housing built by developers, in part because the government gives them tax breaks for doing so, not so different from how we do it here. French cities are also dealing with affordability challenges like the rest of the Western world, and they're experiencing these challenges without the same pressures of financialization and privatization that are often blamed for the affordability crisis here. I think Paavo has said this before, but for all our differences, it's easy to imagine how some elements of the French system could be imported here -- even more than some other countries that are usually held up as models -- and I think this conversation with Julie helps get at why. This was a conversation about an area of housing policy completely unknown to me, but that in many ways also felt very familiar. I learned a bunch and I bet you will too.

The Housing Voice podcast is a production of the UCLA Lewis Center for Regional Policy Studies, with production support from Claudia Bustamante, Jason Sutedja, and Gavin Carlson. Don't forget to subscribe to the show, be sure to give us a five star rating and a review if you'd like us, and you can reach me at shanephillips@ucla.edu. Now let's get to our conversation with Julie Pollard.

Paavo Monkkonen 2:44
Julie Pollard is a lecturer and researcher at the Institute of Political and International Studies at the University of Lausanne in Switzerland, and she's joining us today to discuss her article on changes in the real estate development industry in France over the last 20 years, where policies have substantially changed how private rental and social housing is built. Julie, thanks for joining us, and welcome to the Housing Voice podcast.

Julie Pollard 3:07
Hello, thank you for inviting me to this podcast.

Paavo Monkkonen 3:09
And I'm joined by the regular host of this podcast, Shane Phillips. How's it going, Shane?

Shane Phillips 3:14
I'm doing great. Hey, Paavo. Hey, Julie. Nice to meet you.

Paavo Monkkonen 3:17
So let's start as we always do with our guests giving us a tour. So Julie, what's a place that you've lived that you'd like to tell our listeners about?

Julie Pollard 3:25
Yes, I would like to take first a short trip to Switzerland because I'm now based at the University of Lausanne. So I suggest we take a short trip to Lausanne first, before moving to Paris and to France. So maybe first some basic facts about the city. Lausanne is about 150,000 inhabitants. So that may sound like it's a small city, but it's the fourth largest city in Switzerland. What makes it special, it's that it is very sloped. Lausanne is really hilly city with a panoramic view of Lake Geneva and the Alps. From the lake shore to the highest points of the city. The difference in altitude is more than 500 meters. Interesting fact for housing specialist 88% of the population rent their apartments. So um, homeownership rate is very, very low in Switzerland in general, but in Swiss cities in particular. If you were to come to Lausanne, I would like to take you on a tour of the campus of the University I work at because it's quite nice campus located by the lake and it has several emblematic architectural buildings. One of them is Vortex which is a student residence, which has the shape of a large circular ring and a single three kilometer ramp provides access to all the students apartments. After that, I would like to take you to the northern part of the city to a new eco neighborhood in the north of Lausanne, called Plaines-du-Loup. And it's now nearing completion, after many years of discussion, opposition and planning, it will accommodate more than 8000 residents. Its development has been the occasion for some interesting reflection on the characteristics of the new housing to be built. And in particular, there is a significant proportion of housing with kept rents, more or less 40%. And several projects have been developed by cooperatives so form of collective property, which is quite important here in Switzerland. And I think that would sum up our data in Lausanne.

Paavo Monkkonen 5:55
My legs are already tired. Are there a lot of funiculars and Lausanne, like in some other cities? Or do you have escalators, urban escalators or something?

Julie Pollard 6:04
Only a metal? But it's okay. It's okay.

Shane Phillips 6:09
We're gonna have to do an episode at some point on why Germany and Switzerland have such a lower homeownership rate than other European and Western countries, because I think that's a super interesting topic. I know it didn't just happen by chance, there's there's policies that are kind of pushing in that direction, right.

Paavo Monkkonen 6:26
It's because of bond financing, apparently, according to an article I read today.

Julie Pollard 6:30
Yeah, it's very interesting, but maybe it's another subject.

Paavo Monkkonen 6:34
That 80% was including cooperatives as rental housing, or do they count as homeownership? Because I know when like Zurich, there's tons of I mean, I think it's like 20% 3%.

Julie Pollard 6:44
Yeah, at the moment cooperatives in Lausanne, the rate is quite low. So that's not very significant.

Paavo Monkkonen 6:51
Bigger in the Swiss German parts of the country?

Julie Pollard 6:55
Yeah, that's a big difference. But they have the project to make it higher. But for now, it is quite low.

Shane Phillips 7:01
So I was in Paris for the first time last year, just about a year ago. And they had the... what was the name of it, like, Clichy-Batignolles eco-district.

Paavo Monkkonen 7:13
You went there because Alex Fisch told you to go there I bet.

Shane Phillips 7:18
I thought he may have someone I think someone did tell me. And it was just about the best thing I saw in Paris. It was it was from like housing development perspective. Anyway, it was incredible. But like, what is an eco district? What is an eco neighborhood? It's not a term we really have here in the US. Oh, okay.

Julie Pollard 7:36
It's just a way to emphasize the fact that while building a new neighborhood, we are taking into account environmental preoccupations. It is a way to put the emphasis on environmental concerns, I would say. But yeah, there is discrepancy between discourses and realities. And what is really implemented and this eco neighborhood are not always very efficient.

Shane Phillips 8:06
It seems like they're usually like redeveloped from the like Whole neighborhoods redeveloped, at the same time, from, you know, formerly industrial a lot of times. And, again, that seems like something that we don't do a lot of in the US, everything's just so much more piecemeal.

Paavo Monkkonen 8:21
And I think I mean, with the cliche, but in your one, for example, it's it's more than just the buildings are LEED platinum, or whatever they have, like connective heating, thermal heating that goes to all the buildings in the neighborhood. And they have like a trash collection system that's centralized in a way. So it's like a neighborhood level policy,

Shane Phillips 8:39
in addition to just buildings and a beautiful park right in the middle of all of it. We can't

Paavo Monkkonen 8:43
even build multi family housing. So we're pretty far behind. But yeah, so speaking of Paris, and coming to France, the article we're discussing this week is entitled, The political conditions of the rise of real estate developers in French housing policies, and it was published in Environment and Planning. And it documents the change in housing production in France, since roughly the year 2000. And the increasing importance of private real estate developers here. It's an interesting article for many reasons, as France is known for both having increased social housing production over the last two decades, at a time when many European countries are not doing that. And for French policies, pushing social housing construction to all urban municipalities in the country, which we discussed in Episode 20, with Martin Maui. So one aspect of the two trends over the last 20 years is a change in who builds housing, and the incentive structures that kind of guide their behavior. So as Julie writes, France is known for the strong role of local and national government in both housing policy and urban planning. But today, private developers build roughly half of the country's new social housing, which is up from only 3% in the year 2007. So a big big change there. The article describes the broad changes that have occurred in the real estate development sector and the policy reasons for them, focusing especially on two instruments that she shows had a substantial impact on real estate development activity, which are tax breaks for individuals who invest in rental housing, and a system of pre sales that allows social housing associations to purchase units directly from private developers rather than building them themselves. So the article is based on bottom up research interviews with 50 executives and the larger development companies, national and local government officials and employees of the social housing organizations themselves as what as well as some primary data analysis for the Paris region. Julie frames the article around three main questions. First, how do institutional and policy settings what we might call regulatory pathways shaped the activities and position of private real estate developers? Second, what are some of the impacts of the changes in the housing production landscape in France? And third, why did these changes occur? So first, Julie, let's get some background, especially for the US audience who might assume private for profit companies build housing everywhere, even half of the subsidized housing, like in the United States. So can you just describe the housing production landscape in France before the changes that you talked about in your article? So from the 1970s, to the 2000? Yes,

Julie Pollard 11:13
I think that to understand this housing production landscape, you have to grasp what was and still partially is social housing in France, because after the Second World War, and especially in the 50s, and the 60s, social housing has become a really central political issue in phones, housing was an important domain of political intervention. And historically, the goal was to house practically all French people in social housing. I'm exaggerating a bit, but just a bit. middle classes were the targets of these programs. We called it a Universalist social housing model. And to implement this the state as regulated and encourage the activities of a specific group of actors specialized in the production of social housing. So social housing organizations that say all social housing associations, and why is this regulation of social housing organization and of their activities, so important, because these nonprofit actors were the only one entitled to build, manage and rent social housing in France. That is to say that private real estate developers were historically excluded from this activity there were not allowed to build neither to manage social housing. So in France, we traditionally had a kind of equivalence between social housing and social housing organization, that is to say that the definition of social housing generally adopted for example, in official statistics, is based on the actors that produced it. So social housing is the rental stock owned by social landlords. So to sum up until the 2000s, French housing policies were structured around this differentiation between professional players on the supply side, on the one hand, social housing, landlords produce and manage social housing. And on the other hand, will estate developers produced and build housing at market conditions. So this was a quite stable housing production system. However, there were some significant changes during this period, let's say from the 70s to the 2000s. And as far as social housing is concerned, the state during this period was determined to reduce the costs of this policy and refocus it on the progress household. Yeah.

Paavo Monkkonen 13:55
So I mean, I think it's like a lot of European countries where it switched from like the dream of having a Universalist style system where social housing was for everybody changed dramatically in the 80s. And also, I mean, I was shocked to see the decentralization of planning and kind of the boom in single family home construction in France really took off in the 80s, as well as that's true, right.

Julie Pollard 14:16
That is another point very important. The share of individual family houses is very high in French housing projection. And it has been quite stable since the end of the 70s. And it's about 50% of the housing units, and sometimes even more, for instance, at the end of the 70s it which is almost 60% of housing units, so quite a lot

Paavo Monkkonen 14:48
of Americans that just come to Paris, they don't realize how much of French cities are Yeah, I went I had to drive to somewhere the other day here and rent a car for the first time in Lyon, and I went outside of kind of the areas where I usually Good. I'm like, Oh my God, there's a giant like Home Depot style thing. There's all these single family homes. I'm like, oh, no, I'm talking. I'm back in California.

Shane Phillips 15:07
What did the actual you know, production numbers look like back in the 70s 80s 90s, maybe even 2000s, between social housing providers are builders and the private real estate sector providers, but also just in aggregate, I guess I'm curious how it was divided between them. But also, if there was just enough housing being built overall, or if, you know, perhaps there was maybe in the 60s and 70s. And it kind of declined over time, as it did in many countries, what did the overall picture look like for the amount of housing being produced?

Julie Pollard 15:40
That's a good question to know if it was sufficient or not. But we can say that between 300,500 1000 housing units were built annually between the end of the 70s. And now basically, and to present the evolution of the share of real estate developers. So we have first, this importance of the share of individual family houses. So around half of housing units, this is quite stable. And then, to present the evolution of the share of real estate developers, I think it's quite important to have in mind that in the 70s, real estate developers accounted for 25%, of new construction more or less, and there is a gradual increase to around 35%, in the 2000s. And in the 2000 10s, we are between 40, and 45%. So that's quite a lot. And this increase is due, among other things, to the construction of social housing, by developers. And as Pavel said, Today, more than 60% of social housing is built by developers.

Paavo Monkkonen 16:58
And then social housing units are about 100,000 a year social housing

Julie Pollard 17:03
are between 20 and 25% of the new housing starts.

Paavo Monkkonen 17:09
So that brings us up to about the year 2000. But housing production at that time was very different from today. So can you help us understand what housing production looks like? Now in terms of how much development is done by the private sector and the kinds of real estate developers that exist?

Julie Pollard 17:24
I think maybe I could just clarify what is a real estate developers in France, because it is not exactly the same thing as in the US. But I don't know if it's because in the US, developers can sell the projects they build, or they can retain ownership and manage it for rental purposes. So if I am right in the US, the roles of investors and developers can overlap, which is basically not the case in France, developers typically sell all the homes, they build, either to individuals in most of the case or to institutional investors. This means that the developer traditionally does not integrate the management of the housing it builds. So I think maybe it's in an important precision for an American audience. And I think it will also important about the question of tax breaks, will will speak about in in few in few minutes. So regarding the characteristic and types of developers that exist in France, I think that a few salient features that we can present is that first there is a trend towards concentration of players. That is to say that we have a few large real estate development companies, but we have also still a very large number of small, locally based companies, whose lifespan sometimes does not exceed a single project. So we are very dual a dual sector and maybe to say some words about the nature of the other characteristics of the largest firms. They are quite diverse because we have some subsidiaries of banking groups, such as BNP Paribas real estate, or Saudi palm, but we have also subsidiaries of construction companies, for instance, wiggy, mobile here, FRG mobile here WLC imobiliario. But we also have some independent companies such as NEC city, which is among the top real estate developers here in France. And many of these players, they date back to the to the 50s, or to the 60s. And

Paavo Monkkonen 19:44
I'd be remiss to not mention that KB Homes has a French division but then I guess they sold off the Kaufman road France is like its own company now, but I guess it's one of the big developers here still.

Julie Pollard 19:56
Yeah, also. Yeah, you're right, right. A little

Shane Phillips 19:59
Hello. or California connection there. Before we move on, actually, I'm curious, Julie, you said that private developers prior to the 2000s, let's say, couldn't build social housing, they just were not allowed to. I guess I'm wondering why they would want to or what the appeal would be for them, because presumably, they're, they're rented at lower prices. So developers wouldn't want to just like build them at full cost without subsidies and then rent below market. So was there a reason they would have been interested in building social housing? Maybe just because there was a big market there, and they could have access subsidies? What was the situation there?

Julie Pollard 20:35
Yeah, I think, in fact, social housing organizations were very powerful organizations. So they prevent any ambition of the real estate developers to enter this market. So I think that's the first point protecting their turf. Yeah, yeah, there were released more powerful that real estate developers in particular, if you look at the professional organization, it is very clear, the professional organization was a much more powerful, the one representing the social housing organizations than the one of the real estate developers. So that's the first answer. And why would developers have been interested in building social housing? Yeah, maybe to benefit from certain subsidies? And to benefit from a counter cyclical activity? I guess. Because, yeah, when the market tendencies are not so good, it's could be interesting to build social housing, instead of building nothing. And

Paavo Monkkonen 21:37
you get a guaranteed client base, almost, you get a 40 year below market interest rate loan from the cost of the bow and, you know, a bunch of subsidies in the form of land, maybe are some local grants to build projects. And I mean, these these are big organizations that they could be very profitable if they were allowed to make a profit. Yeah,

Julie Pollard 21:57
yeah, exactly. But I think we will go further into that question, when we will speak about this later. I

Shane Phillips 22:06
do think there's an interesting connection here and sort of a tangent, but something that I thought was pretty compelling about your article, which is, you mentioned how financialization and privatization in the housing sector are common explanations offered for why developers have gained influence in the past few decades. And more generally, why we have a housing crisis with seemingly too few homes and just constantly worsening affordability. And I should say, this is what you'll hear in the US and in Canada, and in Germany, in the UK, and Spain and Japan, and presumably, to some extent in France, as well, you really hear it everywhere. But in the article, you know, that there just has not been much financialization and privatization in France's housing market. To the extent it has happened. It's been, you know, only in the last 510 years or so. So it's still kind of ramping up. Yet. It's facing affordability challenges that are similar to all of these other places. So I'm curious if you could just say more about that, not to say that financialization and privatization are not playing a role. But it does seem that if these things were the central player, the primary contributor to this global housing crisis, then we would expect them to be strongly present everywhere, including in France.

Julie Pollard 23:17
Yes, yes. I think that the issue of financialization in finance is very, very interesting, because there is financialization of real estate in finance. And it has been documented but not in the housing sector, in fact, so we have witnessed it, the IRA will have large institutional investors and investment firms. So dynamics of financialization, largely concerned office buildings and shopping centers, but also logistic platforms and business parks in France. So in the case of the residential sector, the presence of institutional investors or investment funds, remains very, very low and very, very marginal, just like you said, despite this political will to attract institutional investors over over the past decade. So there are prisons still remain very limited to certain specific properties such as student residence or residences for the elderly. And it's an important point. I think that in France, it is primarily private individuals who are direct owners of the housing. In other words, they own one or two units that they rent out and not institutional investors. And about the affordability crisis, because yes, there is an affordability crisis in France, too, even though there is little or no, almost no financialization of housing. And this affordability crisis is particularly acute in metropolitan areas where housing demand is very high. But I think that this affordability crisis is not a question of housing prediction. And the gap between household income levels and price levels is very important is widening in France, but it is not specific to new housing. It's a more global issue. For the housing stock, I would say, Yeah, I

Paavo Monkkonen 25:24
should have better numbers on this. But I feel like it's there's an affordability problem in France, but it's much less than California, for sure. And I don't know about other cities in Europe that have been doing worse on on housing production, social housing production. I mean, it does seem like France is doing much better than most cities, in most places in Europe on building social housing, yet, it's still facing similar challenges, but probably less. Yeah.

Julie Pollard 25:46
And it varies greatly, depending on the locations, in fact, so it is particularly acute in Paris metropolitan area, and it's quite different from the rest of even the other metropolitan areas in France. Right.

Paavo Monkkonen 26:02
All right. So let's get to the article and the two areas of policy change that you talk about. So first, you talk about legislative and regulatory instruments that have changed in France, especially the SRU law that we've talked about before on the podcast, and then economic and fiscal instruments around tax breaks and VAT on new housing. But a lot of the focus, most of the focus is on two new instruments, and one is tax breaks for buy to rent investments. So let's talk about that. First. Can you just tell us how they work? Why? Easy question, how they work, why they were introduced? And why are they are so important for developers?

Julie Pollard 26:38
Yeah. Okay, so maybe I just begin. Yeah, you can further questions that so these are tax breaks for buy to let investment. These are tax deductions. For households that invest in new property, it looks like this, households that buy a property in a new building and commit to renting it for a fixed period of time. Usually, it's around nine years, but sometimes it can be much more 50 years or so will benefit from a substantial tax deduction. And these schemes have been around since the 80s, in France, but they have become increasingly popular since the late 90s. So French residents own individual units in a condo type building, and rent them out directly or through real estate agents or through specific actors managing the property. But they basically have to act as landlords themselves. So about the beneficiaries of this by to lead tax schemes. There are direct beneficiaries. So the households were accumulating wealth through property, while for instance, investing for retirement. And there are also indirect beneficiaries. And here we are speaking about the developers, in particular, because it has been shown and I showcase it in the in the article that our for these tax exemptions are a significant boost to a new construction. And it represents a very significant part of the sales made by real estate developers. And I think it's important to note that this specific scheme is that this specific tax exemption tool is part of a wider context of tax exemptions in in France, because we have for now, almost 500 different tax breaks in France, that that's quite a lot. And I have

Paavo Monkkonen 28:50
a feeling we get up here. Famous, famously complicated tax code in America, what

Julie Pollard 28:58
is quite impressive is that the loss of revenue for the state is today, around 92 billion euros. And what is impressive is that this amount almost doubled in 20 years. So it was around 50,000,000,020 years earlier. So I think that's quite impressive. And around 20, billions of this would be in the housing sector. So yeah, tax exemptions are quite a big thing. Important matter in the housing sector. The US

Shane Phillips 29:34
is obviously much larger, many more people and has higher incomes as well. But prior to the 2017 tax law, which did lots of bad things, but one good thing it did was cut the mortgage interest tax deduction in 2016. I think the amount of tax breaks on that program alone was somewhere between 60 and $80 billion per year.

Paavo Monkkonen 29:59
Well And we're five times the

Shane Phillips 30:01
population. So yeah, yeah, yeah. Yeah. But it was just one. Yeah. And there were two or three other, just housing, homeownership related tax breaks that were in the ballpark. Anyway, please continue

Paavo Monkkonen 30:13
playing around with the this tax break seems like a very popular tool for housing ministers or, or presidents. Yeah, I guess, was it the 96? Is the p&l one, was that like a big jump in this tax break? Or how did the evolution happen in terms of how much was being offered through this buy to rent program, maybe

Julie Pollard 30:33
I could just begin by explaining why they're so important to developers. And to present the fact that, on average, between 50 and 65% of the homes built by developers each year, are purchased by individuals who benefit from this type of tax incentive. So that's really massive. And this percentage varies, depending on the attractiveness of the scheme in question, because the schemes are varying from one Housing Minister to another. And these changes are quite related to political affiliation, in fact, so governments use this tool differently, depending on the political orientation of their governments. Broadly speaking, we can say that there has been two approaches for the right wing governments, the main aim was to develop an abundant supply of housing. And that's it. For left wing government, it was more to promote an intermediate supply of controlled rent housing. So that's not exactly the same way to conceive this tax exemption, I think it's important to try for some nuance to explain this. Yeah,

Paavo Monkkonen 31:53
I mean, it's a very interesting approach. And similar to I don't want to say that France got an idea from Germany, but similar to postwar Germany, right, they had a program where you could get tax breaks and subsidized loans to individuals to build rental housing. And in that case, you had to keep the rents at a below market rate for some number of years. Right. And so I guess some of the programs in France have followed that model more closely. Yeah,

Julie Pollard 32:17
exactly, exactly. But this one have been less, less interesting or less favorable for developers. And so the sales have been lower.

Shane Phillips 32:28
It does seem like there's a political benefit to this approach to because you know, one way you could promote the production of housing generally, or have this sort of intermediate housing in particular, is just directly subsidizing developers, right, giving them tax breaks, giving them grants, whatever, you know, approach you want to take. But by doing this kind of indirect path through sort of regular residents are maybe they're a little higher income and wealthier than the average resident, but they're citizens, they're not developers, you're able to kind of sell this politically as as as a tax break for people. Something I was thinking about, as I was reading about this is it, it sounds in some ways similar to our home mortgage system in the US, which is very subsidized, very regulated, how we have this 30 year fixed rate 20% Down payment mortgage product that would not exist, if not for various government guarantees. And so it's sort of a different way of getting there. But I think there's no real question that the availability of that mortgage product is sort of the reason that many developers are able to build housing profitably, or they build for that product specifically. So is it fair to kind of see these programs as as similar but through different channels, but still targeted at the consumer directly, but indirectly trying to promote housing production?

Julie Pollard 33:53
Yes, I think it's important to reflect about the outcomes of these schemes to be sure about who are the beneficiaries. Because if you look at the outcomes, you can document a lot of problems with this tax breaks, but problems for the home homeowners, for the renters, not for the developers. And this is also explained by the fact that in finance, a developer will build sell and disappear, basically. So if the flat is not rented, it's not his problem. And so among the outcomes of these schemes, we can mention quite a big problem of misallocation of housing because the housing has been largely built in the area where it was not so necessary to build even though the aim was to build in the most dense areas, metropolitan areas, but there were not a place where it was possible to maximize the tax benefits. So there has been quite massive overproduction of housing in some medium sized cities, for instance, where it was not so necessary to build. So I think that's a way to show that. Yes, the true beneficiaries are the real estate developers, and not so much the homeowners. Of course, some homeowners have benefited from it. That's, that's for sure. But some of them have also been in trouble with not managing to rent their apartment because of overproduction. The problem also was that these schemes have been sold as if housing was a non territorial eyes investment. And developers and marketing networks often have sold investor buy to lead housing units far from where they lived, and tried to pry them higher than local demand, and so on. So and we also observed that in some cities, small cities, even they saturated the market with small units, that did not correspond to the local demand for for housing. That's

Paavo Monkkonen 36:16
really interesting how you a program that turns many people into landlords, and they might not be very knowledgeable about how to be a profitable landlord. But I'm thinking so is it more that the structure of the tax breaks was leading where housing was being built, or developers weren't kind of building where rents were the highest in that case,

Julie Pollard 36:36
this problem of MIS allocation was quite clearly identified by political elites. And they tried to change the zoning to benefit from these tax schemes. But it was still quite widely conceived and not very precise in territorial terms. And so it was quite impossible to really be in line with the dense areas and where the demand was high.

Shane Phillips 37:09
I know, we don't want to spend all our time on these questions. But I think the similarities to the US market and just North American markets generally are really interesting. I'm wondering if you know anything about the profile of the people buying and receiving these tax breaks, you know, presumably, these are not low, or even necessarily moderate income households, right to be able to buy a condo unit or to who is buying these units, but also, are they buying just like literally one at a time and then just managing that unit through their Hoa, or whatever it is, or people buying maybe a few at a time in a building? If they've got the resources? What does that look like?

Julie Pollard 37:50
Yeah, I think people have had very different strategies, in fact, about these schemes. And of course, people have made very, very wise investments through the head, that's for sure. But for other people, it was more difficult, but I have no systematic material research material. And that's, it's quite difficult to to pretend that I am about to propose the typology of the homeowners who are buying this, this kind of apartments. So I prefer not to try to Yeah, to develop about that.

Paavo Monkkonen 38:24
I'm now I really want to know, because I've been I've, you know, since I learned about the German system, I was a proponent of kind of democratizing the access to something like a low income housing tax credit in the US, because that's how we fund so much subsidized housing, but it just goes to corporations that can buy these tax credits. And so creating something like this seems like it could work. I mean, I think there might be is a big, it's a kind of market where it's challenging because, you know, a normal, wealthy enough household to access this tax break, they're just gonna buy one or two in their life. Right. And so you're not, it's not like a market where you can get a lot of information. And it's a it's a kind of market, we don't know a lot about it. So you can imagine that, that there's just some information problems there. But I mean, I think it does have a lot of good aspects. And I think especially like something I've said to California legislators before is, you know, we give these downpayment assistance for first time homebuyers, but we don't make a requirement that the homes be new. So it's just feeding into like the the secondary market for housing. And I like what I like about this is that it is stimulating housing production, and you should be tinkering with where it goes. Yeah. And just aligning incentives so that developers aren't scamming the middle income and the innocent Mom and Pop future landlords, by building them, you know, selling them an apartment in a place where there's already tons of new apartments, right?

Julie Pollard 39:45
Yeah. I have a colleague. She gave me her lunch. And she did a very interesting research on the people disappointed by these schemes, and she works on a specific association of these people trying to, to get some reimbursement of their, of their flood are trying to file appeals against developers and so on. So it's quite interesting. And it's another perspective on these schemes at a more very, very, micro and local level. Great.

Paavo Monkkonen 40:18
So let's talk about the second big regulatory change. One is that I think is a very exciting potential for us as well as, which is the shift to allowing social housing construction by real estate developers through the vault, on the tap through to the chef Mo, the vefa program. So essentially, this is a pre sale system, which already existed, but was opened up to allow social housing associations to buy units directly from private developers. So maybe first talk about how it works, and then how it started. Yes.

Julie Pollard 40:49
So the functioning of this pre sale system is quite simple. It was a system that existed prior to it's used by by developers with social housing organizations, because developers used it since the 60s to sell their new homes to private individuals. And so basically, it involves a contract that transfers the rights to the property to the buyer, as the building is constructed. So that's it. And the system has gradually been adapted to social housing for several reasons. Because first, purchasing social housing ads become more complicated for several reasons, including an increase in the construction costs, and increased capacity of lands very, are quite complex financing and regulatory procedures and so on. And on the one hand, you had these difficulties to build social housing. And on the other hand, there was a pressure to build social housing at local level, and especially since the low s, which is quite famous in in France, at the beginning of the 2000. And it is one of the factors that have led to the fact that real estate developers have been hacked to, or pushed to produce also social housing. So

Paavo Monkkonen 42:16
it was a case of like, there's a lot of municipalities where social housing associations had never built anything. And now those places have to add some social housing units. And the private developer says, Oh, I'm building there, I'll sell you a few of mine. And did they were they do it kind of in secret? Or it was just they have a better relationship in these places?

Julie Pollard 42:32
No, I think to understand the way it went, it is important to get the kind of relation between local government and developers influence and especially in the more dense and attractive areas for developers, because power relations are quite in favor of local governments in France, which is maybe quite surprising for US audience, but local governments F quite a lot of resources to impose something, a lot of things to developers building on their territory. And I think this is a way to get why the these local governments have been able to at the beginning to force real estate developers to build social housing, because they were exploring new ways to produce social housing. And I think that involvement of real estate developers has been one of them. What is interesting in that issue is that there have been impulses to that at local level, but also at national level, another impulse as the spin the crisis or effects of the crisis of the 2008. And a program was set up at this moment to support actors in the real estate industry. And it's basically consisted of social landlords buying back 30,000 housing units built by real estate developers who were in financial difficulty. So during the crisis, developers could then sell part of their unsold homes to social housing organizations.

Paavo Monkkonen 44:14
Yeah, I mean, that my understanding is, that's when it really took off. And it was a way to solve two problems. At the same time, you know, to the extent that all these real estate developers, losing a bunch of money is a problem that can be solved by buying those units relatively less expensively, and using them for social housing.

Julie Pollard 44:31
Yeah, but prior to that, there were really also local experimentations to push the real estate developers to produce social housing. So

Shane Phillips 44:43
actually, just a few months ago, I wrote about the home key program in California and how we've sort of been doing something like this. And it actually took place during the COVID 19 pandemic. So maybe there was some market pressures pushing in this direction as well. Well, but basically, the State gave cities some money, mostly for converting motels and hotels into supportive housing for formerly unhoused people. But in Los Angeles, specifically, some of those funds were used to just buy new market rate buildings and just convert them entirely to affordable units. So, you know, let's just call it social housing. But in that case, I guess the big difference was that it was the entire building, whereas a lot of these social housing associations are just buying a share of the units, a quarter of them, let's say, but I think the appeal was was similar in many ways, you know, I found that the cost per unit was about 20%, lower for these acquisitions compared to the nonprofit and for profit, affordable housing builders and what they're doing. And then actually per square foot, it was more like 20 to 30% cheaper. And so there was a real cost savings through that approach. But like I said, the difference is, at least thus far, we've only done that like for entire buildings. Never as far as I know, for partial that we do do things like Master leasing, where we're not buying the building, but we're kind of leasing a lot of it or all of it through our public agencies, and then reserving those units for formerly unhoused people for very low income people, that kind of thing. I

Paavo Monkkonen 46:11
guess one difference there is on the costs. Were you know, in California, there's a lot of cost savings by buying units from market rate developers. But in the case of France, it's it's less different in terms of costs. Do I understand that correctly? It's really, yeah,

Julie Pollard 46:26
in fact, because the social housing organizations also have quite different requirements in the housing they build. And that can be quite costly for real estate developers. So that's also an issue that also can explain why developers during a time were quite skeptical about building social housing, because they had all these constraints linked to the building social housing.

Paavo Monkkonen 46:53
So are those like building standards that are different? Yeah, exactly. Exactly. Interesting, which,

Julie Pollard 46:59
which are quite high for the social housing buildings in France. Very

Paavo Monkkonen 47:04
interesting. So let's talk a little bit about the role of the EU law and how kind of this French inclusionary housing programs have emerged and the role of vefa. In that, I'd love for you to break it down. Right. So as I understand it, there's a lot of municipalities in France that are requiring for larger projects, some social housing production as a condition for the permitting. But then in this case, the developer sells those units rather than managing them themselves.

Julie Pollard 47:32
Yeah. Anyway, the real estate developers will sell the housing units, social housing units, to social housing organizations, because what has not changed since many decades is the fact that the social housing organizations are the ones that are managing and renting the social housing units. So that's the first point that developers will never manage the social housing units by themselves. And what is interesting with the low SLR is yes, the fact that it imposes to municipalities in large metropolitan areas basically depends on the population of the municipality to have a share of 25% of social housing in the new construction in the new programs. And so this was quite an important factor to push for the inclusion of social housing units in the new program by a real estate developers.

Paavo Monkkonen 48:32
And one follow ups are there there are buildings where there's just a few units in the building that will be social housing, or is it usually a separate building? It depends,

Julie Pollard 48:40
sometimes. It poses also very interesting issue in terms of social mix. Because sometimes, it's only one building, especially in very dense urban areas, the developer has the opportunity to build only one building. And so in such cases, the social housing units and housing units at market price will be basically in the same building. It

Shane Phillips 49:08
seems like a just a management challenge to to have a bunch of individual owners of units and a social housing landlord, who owns some of the other units and how that all comes together. I did want to connect the vefa. And the tax breaks here, because it seems that you were saying earlier that generally developers are just building these projects and selling the unit. So they're selling anyway, but previously, they were just selling one or two at a time. And there are additional costs that you've talked about with building for these social housing associations or organizations. But there's also savings and some simplifying that's going on because instead of having to sell again, one or two at a time to a bunch of different owners, you're able to just sell in bulk, a big chunk of the building to a single buyer. Are and also that agreement is established before you even start construction, I think and so there's a real connection between these things where that tax break system that's been around for decades has actually transformed into or facilitated this vefa. Program.

Julie Pollard 50:17
Yes, exactly. I think it's also an important point that the fact that, yeah, it's interesting, it's profitable for developers to sell in block the housing units, because the fact that it will sell the housing units to a social housing organization will reduce the number of buyers involved, and the number of housing units to be commercialized. And so the result will include the fact that the real estate developers will have the opportunity to have some savings on marketing costs, for instance. And this also mean a reduction in risk. And what is also very interesting is that it also implies faster release of bank loans to the sale system, because social housing organizations, strong guarantee that part of the building is already the financing is already secured.

Shane Phillips 51:20
Right. And you have to get I don't know how it works here in the US. And I know the rules are somewhat different in Canada, but generally, you have to secure some percentage of the buildings as like pre sold before you can get a construction loan. Right. And so it's the same inference. Yes, exactly. Exactly. Just gets you there quicker if you get that Social Housing Agreement. Yeah,

Julie Pollard 51:37
yeah, exactly.

Paavo Monkkonen 51:38
Well, it sounds great. But let's talk about some of the problems with this new vefa HLM arrangement, but you call paradoxical in part, so maybe you can tell us the main critiques, some of which are even from the social housing associations themselves. Yeah,

Julie Pollard 51:53
maybe to sum up the the advantages for real estate developers, we could just say that, in the end, it's really an opening of a new market for them, because it is really an extension of the developers activities that was promoted by public actors to that first point to to emphasize writing. But I think also that despite being politically driven, these arrangements between real estate developers and social housing organizations raise some problems, and especially some legal problems, because first, it circumvents the public procurement codes, because normally while building social housing, the social housing organizations eff to select construction companies or architects through special procedure, competitive procedure. And when it is real estate developers constructing the building, it does not need to have these specific rules. Real estate developers are not required to comply with the trolls and neck social landlords. So that's a first point. And I also think that social housing organizations through such free sales system, they have really kind of given up control of projects include including many dimensions, site location, for instance, also partly the quality of the operations and their durability. And so I think that's also a problem which can emerge with this pre sale system, because we spoke earlier about the fact that it was about 60% of the house social housing production. But when you are looking at the more dense areas, for instance, the Paris metropolitan areas, the numbers, this rate are much higher. In fact, it's more like around maybe 80%. So the stakes are quite important. And there is an open interrogation about the fact that social housing organizations are partly losing their competency in producing housing. And they are more dependent on the developers strategies. And so this is an open question. The fact that social housing landlords are reliant on developers, if it's a problem on it.

Paavo Monkkonen 54:33
I mean, I think it just touches on such a fascinating set of assumptions about I mean, I think, if you were talking to some typical us person, they would say like, Well, yeah, of course, it's a better idea to have the private real estate developers do it. Like they're going to be building a much better product than those those social housing association. So you know, it really depends on on what you assume about who's doing a better job and whether they should have that direct production role. Yeah,

Julie Pollard 54:58
in home So we have a strong history of social housing construction. And it has been shown that many architectural innovations have been made in social housing construction, and still have, because in general, social housing organizations are they have higher budgets to be able to, then the real estate developers also because they are keeping the and managing the

Paavo Monkkonen 55:27
incentive to do a good job. Exactly. So

Julie Pollard 55:29
yeah, and

Paavo Monkkonen 55:30
plus, I mean, the especially like, the bigger ones have much have huge economies of scale, because they're pretty large organizations. But it's interesting, though, because it seems pretty popular among the social housing associations. And I was talking to a friend in Paris the other day, who was saying, like, yeah, of course, they love it, because now they don't have to do a lot of the job. Like they have all the staff that just don't have to do their job anymore. And they're just hanging out or something. So I wonder if you've talked to people within the, the, you know, the, the architects that used to work on social housing are not doing it anymore? Are they just shifting to other things? Yeah,

Julie Pollard 56:05
it's quite interesting to see our social housing organizations people's, they just changed the discourse about architects. Yeah, it's quite difficult for them to, I don't know if it's quite difficult. Now, I won't say that. But for architects, it implies a change in the way of working, because you don't work in the same way with a developer and with the social housing organizations, because with social housing organizations, what is very important is the initial competition. And when you win it, it's a big part of the job. With the real estate developers, it's more more procedural and sometimes more complicated, also, because you will have to redesign the project quite often to make some some savings.

Shane Phillips 56:52
Yeah, when you have the subsidies available, I'm sure I would imagine the architects are the most unhappy about this of all parties, just because, you know, like the social housing providers, they're getting a good deal. They're getting maybe social housing and more places, maybe some of them aren't happy with this, but others are kind of happy to just focus on management and not worry about building. But the architects, it's like you had this subsidized program that was very competition and design oriented. And those funds are helping allow you to do these really creative things, and just like great design, and now you're in a very much more market oriented just like how do we cut costs, you know, value engineer, etc. And every architect hates that, you know, it is what it is, but like I understand why they would be unhappy?

Julie Pollard 57:39
Yeah, I think you summed it up to Yeah, quite nicely. I think that that's it.

Paavo Monkkonen 57:46
So let's talk a little bit back to the big picture, we've discussed some of the specific factors contributing to the emergence of these two instruments and how they've changed the role of real estate developers in the French housing production landscape. And you explore the different possible explanations for the change in your paper from a review of the academic literature. And I like it that you're able to distinguish the French context from the international literature. And so can you talk about the different hypotheses that might explain why the sector has changed so much in France? Yes,

Julie Pollard 58:17
I tried to examine different hypotheses. And of course, the first hypothesis was the financialization one. And we already talked about this, stressing that it was not a convincing explanation for the French case. I think that another explanation was about interest group politics, that is to say, Are these developments taking place because real estate developers, as a collective actor, have been very influential in shaping national housing? No. Yeah. And looking quite in details. And the characteristics and functioning of the failure has shown the promoter imobiliario, which is a professional organization of real estate developers, the answer is clearly no, because this federation, and it is now changing. But in the 90s, and in the 2000s. This video has shown this professional organization was rather weak in the sector, in terms of resources, and above all, in terms of its ability to ever Yeah, relations with the public authorities. And this is particularly striking when you compare it with the quite powerful professional association representing the social housing organization. So that's explanation which is just not so convincing, I think. So what I suggest is to explain these evolutions, looking at the evolution of policymaking in finance, and I think these evolutions, they have more to Do with evolution of the conditions of policymaking and political processes, that is to say, with the resources and constraints of political actors to govern both at local and national levels. And my analysis is that politicians involve private real estate developers to try fulfill their ambitions given limited budgets. And so I think the two tools mentioned above have add an eye impact at a quite reduced cost for the public budget, and at least in the short term, and that's an important precision to insist on. And these ambitions were to reach quantitative objectives of housing production, to maintain or increase social housing, production and if possible at lower costs. So I think that the rise of developers is rather side effects, partially uncontrolled, as far as implementation is concerned, of the policies that were put in place to try to act with limited resources with limited public spendings.

Paavo Monkkonen 1:01:11
Don't tell them they're a side effect.

Julie Pollard 1:01:15
Maybe I could just add that these common points between these two tools were the fact that they were quite discrete political tools, the VEFA and the tax breaks. And I think it's quite interesting to understand that they weren't quite at the beginning quite as the margins of the policymaking processes. That is to say they were never, that there was no great public debate around these two tools. And they have progressively rise in scale and importance. And they have been very important. But it was quite, quite invisible at the at the beginning. And today, of course, there are quite at the center of political debate about social housing. But yeah, for for many years, they just weren't quite invisible.

Paavo Monkkonen 1:02:10
Yeah, it's fascinating how that can happen osmetimes with policies. You create a program, and it doesn't really take off until, uh... then next thing, you know, 60% of housing is being built by private real estate developers.

Julie Pollard 1:02:22
Yeah, I think that that was not the plan. That was not the political project. It was not really anticipated. And so is it with tax exemptions? It's quite interesting to, to see also, because I think maybe it's an important point that we did not mention the fact that Cody quarter, which is the Court of Auditors, I will translate it like that as become very critical about these schemes, these public schemes. So it's also interesting to see our public authority and then very heavily criticized the schemes.

Paavo Monkkonen 1:02:59
The tax the tax exemption schemes. Yeah, yeah. Well, it's yeah, it's a very tricky political maneuver, because it doesn't seem like you're spending money. But you're spending money.

Julie Pollard 1:03:10
And in particular, the emphasize the windfall effect generated by this by the schemes and the fact that we are not sure about the economic impact in terms of increasing the number of accessible rental units. And, yeah, it's quite interesting. Also, I wanted to mention that because they have an official report, that stayed the fact that real estate developers are addicted to the schemes. So that's quite a strong formula to do to point out the negative outcomes. And so this Court of Auditors like Cody coons points to the ICO most of this tax exemption schemes for the community and calls for phasing out of these measures since the end of the 2000. Tense.

Paavo Monkkonen 1:04:05
So So yeah, looking ahead, I know that macrons people are trying to change some of the rules around social housing, including this controversial move to expand the requirement of this Oh, to also include this intermediate kind of social housing for middle income households to kind of make it easier for municipalities to hit their hit their targets. Are there other changes that you think are coming in France that will reshape the role of real estate developers in the in the I mean, French politics is very dynamic at the moment. It's hard to predict what's gonna happen

Julie Pollard 1:04:40
on other subjects. Yeah, I think that real estate developers have been going through a difficult time in recent years. Because we witnessed a drop in the number of housing starts, layoffs, decline in sales, longer lead times for home sales and Soho And, of course, various factors are at play inflation, rising construction costs, I interest rates also increased difficulties in obtaining building permits and so on.

Paavo Monkkonen 1:05:11
And the zero land take.

Julie Pollard 1:05:15
Yeah, exactly. So it's quite a complicated time. And we have to also explain that these tax breaks we spoke about, these tax incentives for rental investments, which have been so strongly criticized by the court, they are now scheduled to expire at the end of this year. So that's quite a big change to come for real estate developers, even if we are still waiting for what is really happening. But the political will is now ready for institutional investors to take over. And this has been pushed for almost 10 years now. But maybe we are at a new turning point. And I think this is also the purpose of the revision of the Article 55 of the law. So you just mentioned the fact to include intermediated housing managed by institutional investors in the way to meet the targets. So I think it's quite a big period of important uncertainties for right now for for developers for several reasons.

Paavo Monkkonen 1:06:26
Great. Well, thank you so much, Julie, for joining us on the Housing Voice podcast. It was a fascinating conversation.

Julie Pollard 1:06:34
Au revoir, thank you very much.

Shane Phillips 1:06:41
You can read more about Julie's work on our website, lewis.ucla.edu. Show notes and a transcript of the interview are there too. The UCLA Lewis Center is on social media, I'm on Twitter at @shanedphillips, and Paavo is at @elpaavo. Thanks for listening, we'll see you next time.

About the Guest Speaker(s)

Julie Pollard

Julie Pollard is a lecturer and researcher at the Institute of Political and International Studies at the University of Lausanne in Switzerland.
Learn More

Suggested Episodes