Strengthening Latvia’s Housing Affordability Fund

4. Funding and financing affordable housing through a revolving fund scheme in Latvia

Abstract

This chapter provides a comparative assessment of the funding and financing arrangements of the revolving fund schemes for affordable housing in Latvia and four peer countries. It outlines the main features of the approach in each country and proposes a series of recommendations and good practice cases for consideration by the Latvian authorities to ensure that the investment environment, funding sources and financing instruments contribute to scale up the Fund and ensure the sustainability of its activities over time.

The Housing Affordability Fund has the objective to support the expansion of the affordable housing stock in Latvia’s regions. For this, the Fund will need to mobilise a substantial amount of capital and allocate it efficiently to viable investment projects. The impact, efficiency and sustainability of the Fund operation depends on a variety of factors, including the:

• Framework conditions of investment projects (e.g. social and technical infrastructure);

• Availability of capital from external financing sources and the (internal) revolving fund mechanism;

• Attractiveness of participating in projects financed by the Fund for private stakeholders, in particular real estate developers and commercial creditors;

• Mitigation of financial risks and the fiscal burden associated with the Fund.

Considering those factors, this chapter outlines three dimensions of the Fund’s funding and financing mechanism to assess the setup and derive Policy Actions for Latvia by drawing on the good practices of four peer countries with longstanding revolving funding mechanisms:

• the investment environment, meaning the conditions that facilitate investment in affordable housing, such as access to infrastructure and housing tenure considerations;

• the model of intervention of the funding mechanisms in different countries (funding sources, revolving elements, impact on state budget);

• and financing instruments used in the scope of the fund (financing incentives, safety mechanisms, and related state aid considerations).

For each of these dimensions, the chapter first provides a comparative snapshot, highlighting where Latvia stands in comparison with peer countries, and then builds on the international practices to point at policy recommendations of relevance for Latvia.

4.1. Investment environment

4.1.1. Where does Latvia stand in comparison to peer countries?

Table 4.1 provides a comparative snapshot of the investment environment in different funding schemes for affordable and social housing according to the following dimensions:

• While infrastructure represents a key enabler of housing development, the revolving fund schemes in other peer countries) generally do not cover financing for major infrastructure development; they sometimes finance or co-finance smaller-scale infrastructure, including inter alia, parks, amenities for sports and leisure, playgrounds/rooms, common rooms or fitness rooms (e.g. Austria and Slovenia). In the Latvian Regulation, infrastructure investments must be directly attributable to individual construction projects to receive funding (e.g. for necessary utility connections and communication infrastructure). In contrast, Denmark presents an integrated funding approach that comprises investments in technical and social infrastructure in the broader environment of affordable housing. Moreover, the Danish Fund is indirectly involved in the design of social infrastructure by supporting the development of the social master plans.

• While the Latvian Fund will target the development of the residential rental market in Latvia, the status quo of the residential rental market varies widely across Latvia and the four peer countries. In Austria, Denmark and the Netherlands, the residential rental market accounts for over 40% of housing tenure, compared to around 12% and 10%, respectively, in Latvia and Slovenia. At the same time, all countries have policies or institutional features in place to strengthen the rental market. In Austria, Denmark and the Netherlands, housing associations serve this objective (for instance, in the Netherlands they hold around 70% of all rental dwellings). Latvia and Slovenia have also launched policies in the recent past to promote the expansion of the rental market. In 2021, the Latvian authorities introduced a new law on residential tenancy, aiming to balance protections between landlords and tenants, simplify the long litigation process in cases of landlord-tenant disputes, and promote investment in the rental market. It will be essential for the authorities to monitor the impact of the regulation on the rental market (e.g. size of the private rental market, price levels, eviction rates, etc.) over time.

Table 4.1. Comparative snapshot: Investment environment for affordable housing

	Latvia	Austria	Denmark	The Netherlands	Slovenia
Access to infrastructure	Costs for infrastructure investments must be directly attributable to individual construction projects to receive funding (e.g. for necessary utility connections and communication infrastructure). The Fund can finance infrastructure improvements such as gardens, playgrounds and parking related to the dwellings financed by the Fund.	LPHA provide infrastructure that is directly related to the building (playgrounds/rooms, common rooms). Special agreements between LPHA and municipalities can also provide for financing of infrastructure not directly related to the building.	The National Building Fund financially supports the development of technical and social infrastructure around affordable housing units. Parts of the Local Disposition Fund (to which 1/3 of rent payments go) are used for investments in infrastructure improvements, modernisation of surroundings, and social measures in the neighbourhood.	–	The HFRS can finance infrastructure improvements such as gardens, playgrounds and parking related to the dwellings build by the Fund itself. It can also co-finance some socially linked parts of the projects under the programmes of HFRS in project of investors.
Housing tenure considerations	Rental housing accounts for 12% of the Latvian housing stock (OECD, 2022[1]). Latvia has approved a new law on residential tenancy that aims to foster the development of the rental market through several novelties, inter alia balancing protection between landlords and tenants, simplifying litigation, promoting investment in the rental market, and stimulating labour mobility.	Rental housing accounts for 44% of the Austrian housing stock (OECD, 2022[1]). Tenancy agreements for contracts in the private rented sector and the municipal rental sector are regulated in the national rental law; for units managed by low-profit housing associations, additional legislation is set out in the Limited-profit Housing Act. There are several institutions to support tenants in cases of dispute with their landlords.	Rental housing accounts for 49% of the Danish housing stock (OECD, 2022[1]). Denmark applies the rental balance principle: rents are set in a cost-based approach so that rental income and housing associations’ expenditure within the social housing system must balance out.	Rental housing accounts for 41% of the Dutch housing stock (OECD, 2022[1]). In 2018, nearly 70% of rental dwellings in the Netherlands were owned by housing associations, of which more than 90% were considered social housing units. Tenants of social housing units are entitled to rental benefits (OECD, 2021[2]).	Rental housing accounts for 11% of the Slovenian housing stock (OECD, 2022[1]). Slovenia is exploring ways to strengthen the private rental market. The amendments to the Housing Act of Slovenia that came into force in June 2021 include adjustments of the level of non-profit rents and an expansion of the public rental service to activate existing, unoccupied dwellings to rent them out as affordable and social housing.

4.1.2. Recommendation for Latvia based on peer practices

Policy Action 8: Assess the infrastructure pre‑conditions for the development of the approved projects, in co‑operation with municipalities

Sufficient technical and social infrastructure is a precondition for the viability and sustainability of affordable housing projects. However, the survey of Latvian stakeholders conducted by the OECD indicated concerns about essential infrastructure preconditions for construction projects, including, inter alia, insufficient water, electricity, and sewage connections as potential barriers to affordable housing development in the regions. Therefore, the planning process of construction projects financed by the Fund should comprise in-depth assessments of infrastructure preconditions, in close co‑ordination with municipalities, as the Fund will not finance this type of infrastructure investments. Moreover, to ensure the viability of affordable housing projects, they should be co‑ordinated with ongoing or planned economic developments (e.g. planned industrial sites or economic expansion in some regions where additional dwellings may be needed for employees and their families).

Table 4.2. Policy Action 8: Assess the infrastructure pre‑conditions for development of the approved projects, in co‑operation with municipalities

Objective	Ensuring technical and social connectivity of the new rental units to offer a high living standard for residents (e.g. water, electricity, sewage, transport connection) Ensuring the sustainable demand and viability of new affordable housing projects
Actions and timeframe
By 2026	Conduct assessments of infrastructure preconditions for potential project locations in co‑operation with affected municipalities Identify planned economic development projects in regions, such as new industrial parks, which could generate sustainable demand for affordable housing
Beyond 2026	Develop an in-depth understanding of the infrastructure preconditions for all construction locations Review completed construction projects regarding the functionality of the infrastructure during and post-construction to be aware of ongoing infrastructure investment needs
Institutions/stakeholders involved	Ministry of Economics Ministry of Environmental Protection and Regional Development (VARAM) Municipal authorities
Key implementation steps	Develop a framework to benchmark infrastructure conditions and compare the viability of potential locations

4.2. Model of intervention

4.2.1. Where does Latvia stand in comparison to peer countries?

Table 4.3 provides a comparative snapshot of the model of intervention of different funding schemes for affordable and social housing:

• All countries aim to diversify the external funding sources for their investment activities in affordable housing. This comprises public loans from the state, municipalities and/or development institutions, commercial debt, issued through long-term loans or bonds, and equity contributions. Among all instruments, long-term housing loans, represent the most common funding source which is used in all peer countries. In the Netherlands, also apply credit enhancement through public guarantees or a dedicated guarantee fund to lower the financing costs and lengthen the loan terms. The aim for diversification is also reflected in the Latvian funding mechanism where co-financing may originate from developer equity (at least 5%), Altum development loans, and commercial loans (up to 50%).

• The funding scheme in all peer countries includes a revolving dimension that contributes funding to investment activity; for example, this amounts to, on average, 3‑7% of project financing in Austria and 12.5% in Slovenia. However, different approaches to the revolving dimension exist. The most common approach – which will be applied in Latvia – is the allocation of a share of rent contributions towards the fund. In the case of Denmark and Slovenia, a portion of the rents are re‑directed to the housing fund, together with returns on loans, in the case of Slovenia. In Austria and the Netherlands, a share of the rents is re‑invested via equity contributions from housing associations. Additional revolving features also exist, including the use of principal loan repayments for new construction or revenues generated from portfolio management activity of housing associations (such as apartment sales).

• All countries seek to limit the impact of affordable housing funding on public finances, yet their approaches differ. Latvia is initially making use of funds from the Recovery and Resilience Plan (RRP) and will limit the issuance of loans to the national development institution Altum; there will be no provision of state loans and guarantees so as to ensure that the Fund remains fiscally neutral. Denmark and Slovenia established their housing funds as independent institutions that operate outside the state budget. In Austria and the Netherlands, housing associations, which lie at the core of the funding regime, are independent institutions with limited, clearly defined contributions from the public budget. In Austria, while not formally ring-fenced, loans repaid to regional governments are re‑invested in housing. Table 4.3 clarifies the impacts on state budgets across the five countries.

Table 4.3. Comparative snapshot: Model of intervention

	Latvia	Austria	Denmark	The Netherlands	Slovenia
Funding sources	Primary source of initial capital: Latvian Recovery and Resilience Plan (RRP) (EUR 42.9 million), in addition to a potential State loan contracted by Altum (up to EUR 10 million) Expected project funding sources: Own investment from developer (minimum 5% of total project costs) Loan from Altum (up to 95% if a commercial bank does not co-finance the project) Commercial bank loan (if the bank co-finances the project together with Altum, the co-financing could be ~50%) (Conditional) Grant as capital rebate for the partial repayment of Altum loan: up to 25% of total eligible project costs for the partial repayment of the Altum loan for projects put into operation after 31 August 2026; or 30% for projects put into operation by 31 August 2026. Rental income (conditional upon repayment of the Altum loan)	Various historic public funding regimes have been key for the establishment of the social housing sector. Typical project funding sources: Equity of housing association (100% of land cost and about 14% on average of construction costs). The equity increases mainly from two sources: i) the surpluses of the older stock with “basic rent” (LPHA continue to charge around EUR 1.8/m2 after repayment of loans) and ii) the 3.5% interest on LPHA equity invested Tenants’ contribution (3‑7% on average): a down-payment is required of tenants (which cannot exceed 12.5% of the total construction costs and a share of land costs). When the tenant moves out, the initial sum, depreciated by 1% each year, is returned. (Conditional) Public loan regulated by the federal provinces (36% on average). Commercial bank loan (39% on average)	Funding sources of the National Building Fund: Initial capital came from contributions from a gradual rent increase in the social housing sector (as per a political agreement in 1966). Currently, funding is based on a share of tenants’ rents (2.8% annually of the total acquisition cost of the property), in addition to housing associations’ contributions to mortgage loans (~3% of the property development cost). Typical project funding sources: Commercial loans (86‑90% of the investment cost). Municipal loans (8‑12% of the investment cost) An up-front payment by tenants (2% of the investment cost) when they take up residence	Various historic public funding regimes have been key for the establishment of the social housing sector. Typical project funding sources: Bank loans and housing associations’ own equity. Most loans are issued from the two public sector banks (BNG and NWB), which have a market share of around 85% Complementary debt funding comes from commercial banks, pension funds amongst others The Social House‑building Guarantee Fund (WSW) provides lenders of housing associations with guarantees to finance new housing construction, maintenance, and the acquisition of dwellings, nursing and retirement homes Additional funding sources for the activities of housing associations come from the lease and sale of properties.	Funding sources of the HFRS: The state budget Grants from domestic and foreign legal and natural persons Revenues generated by the Fund’s own operations / revenues from disposing of the assets of the fund or the state in the management of the Fund Long-term domestic and foreign loans, or guarantees a For 2017‑20 period, the Fund used EUR 200 million from its own resources, as follows: Short-term financial investment (67.5%; EUR 135 million) Rental income (12.5%; EUR 25 million) Apartment sales income (18%; EUR 36 million) Other income (2%; EUR 4 million)
Revolving elements	During loan repayment period: Repayment of the principal by the beneficiaries of the financing mechanism (e.g. the real estate developers) Tenants in the affordable rental units must make monthly payments into a savings fund (EUR 0.25/m2) to finance building improvements After repayment of the loan issued by Altum: Contributions from the monthly rental income of the affordable rental housing equal to 50% of the rent	Quasi revolving elements: Surpluses generated by the LPHA must be reinvested into affordable housing. Those surpluses can originate from the base rent (Grundmiete) after loan repayment or the interest from LPHA equity (limited to 3.5%) Public loan financing scheme: public housing finance loans must be repaid to regional authorities to be re‑invested in future housing projects	During the loan repayment period: Tenants’ rental contribution, which initially amount to 2.8% of the total acquisition cost of the property annually The rental contribution gradually increases through indexation (payments are adjusted annually for the first 20 years after loan take‑up, and then by a slightly lower rate until the 45th year) After repayment of mortgage and state loan: Tenants pay rents at the same nominal level, with 2/3 of rent payments allocated to the National Building Fund, which functions as a form of tenants’ savings fund	Quasi revolving elements: Housing associations contribute to the financing of affordable housing investments with own equity. This equity is partially built with revenues from the lease and sale of social housing dwellings If non-profit housing associations generate surpluses from their activity, they must be reinvested in social housing	A share of the rental income (contributing 12.5% to the project financing for the 2017‑20 Fund goals) Revenues from apartment sales (contributing 18% to the project financing for the 2017‑20 Fund goals)
Impact on state budget	The impact on the state budget is limited to the amount of national co-funding. There are no direct investments and guarantees from the state and municipalities	As LPHA are independent institutions and their impact on the state budget is limited. The only items that appear in public budgets are the public loans (which always have to be repaid by LPHA) or grants (which are not the main source of funding). A recent study by the Austrian Institute of Economic Research (WIFO) showed that affordable rents provided by LPHA reduce the need to spend public money on housing allowances (Klien, 2021[3]).	The Fund is an independent institution that has no direct impact on the state budget.	Housing associations have been financially independent since the 1990s, and no longer receive government subsidies. Lending to housing associations is guaranteed by the WSW fund, and WSW’s obligations are ultimately guaranteed by the State. Due to the multi-layered setup of the guarantee system, guarantees are not part of the EU Government debt ratio.	HFRS is independent and has no permanent financing source from the State budget. It receives project financing and capital injections. The last increase of HFRS’s dedicated capital amounted to EUR 1.5 million in 2022 dedicated to HFRS’s subsidiary, Spekter, to build sheltered apartments for the elderly.

Note: a) Since June 2021, HFRS can acquire debt up to 50% of the dedicated assets and capital (10% under the Public Funds Law and 40% under the Housing Act).

4.2.2. Recommendation for Latvia based on peer practices

Policy Action 9: Pursue options to build additional equity for the Fund

Building equity for the Fund should begin early on to facilitate the rapid scaling of the housing stock. The higher the equity ratio of the fund, the higher the share of rent payments that can be reserved for new construction projects, reducing the burden of debt servicing. Additional equity for project financing facilitates the partial reinvestment of rental income into the Fund already during the loan repayment period of private and Altum loans. While the principal and interest repayments of Altum loans are reinvested into the Fund in line with the established practice in Austria (Box 4.1), this is not necessarily the case for the repayment of principal and interest of commercial loans. As commercial credit will likely play an important role for the co-financing of projects to scale up the affordable housing stock, its repayment terms could significantly affect the available cashflow from rental income for reinvestments into the fund during the loan repayment period.

Several sources may contribute to building equity for the Fund as loans are being repaid, including the use of retained earnings and grant reinvestments of municipal housing companies, direct equity investments by institutional investors, and the use of a share of rental income generated through enhanced credit conditions of commercial loans (as the rent would stay the same even if the cost of borrowing could become lower, a share of the rent could be reserved for building the Fund’s equity). Equity contributions from both institutional investors and municipal capital companies can be encouraged through targeted measures. Box 4.2 provides an additional example from the United States on how the auctioning of tax credits to private developers can help attract additional equity investments for affordable housing invest projects from third-party private investors.

Moreover, municipal housing companies often differ in terms of capacity and resources for real estate investments so that building additional capacity for the planning and execution of affordable housing projects can be important. Box 4.3 presents a capacity building approach for Community Housing Providers (CHP) in Australia.

Box 4.1. Austria’s revolving fund for affordable housing is already at work during the loan repayment period

In Austria, one of the two features of the revolving funding mechanism is already at work during the loan repayment period, ensuring capital availability for construction without several decades of lead time. As part of the public loan-financing scheme, public housing finance loans must be repaid to regional authorities to be invested in future housing projects. This ensures a continuous funding cycle despite the involvement of debt financing.

The second revolving feature, the reinvestment of limited surpluses generated by the LPHA into affordable housing projects functions complementarily but is most effective after loan repayment. The reason is that the surpluses of LPHA, partly generated through “basic rent” revenues (Grundmiete) are collected from older houses in the portfolio for which the loans have matured so that loan repayments no longer consume rental income.

Source: Presentations by Austrian experts at the Working Meetings organised by the OECD

Box 4.2. Incentivising equity investments from private investors for affordable housing construction: the Low-Income Housing Tax Credit in the United States

The Low-Income Housing Tax Credit (LIHTC) programme was created in 1986 to increase the availability of capital for the construction of affordable rental housing for low- and moderate‑income tenants in the United States. The programme has supported the construction or renovation of over 2 million affordable rental units since then, with about 110 000 units added each year (Tax Policy Center, 2020[4]).

The federal government issues tax credits to state and local governments, which then allocate them to private developers of affordable rental housing projects through a competitive process. The developers typically sell the credits to private investors to raise capital, often in the form of equity contributions. The additional funding generated from the sale of the tax credits reduces the borrowing needs for the development projects. Investors can claim the LIHTC over a 10‑year period once the housing project is ready for tenants.

A maximum price applies to dwellings built with support from this scheme. Tenant incomes upon entry must be below a percentage of area median income elected by the property developer. States may include energy efficiency or disaster resiliency requirements in their competitive allocation plans. Projects may be awarded higher rates of tax credit for location in high-cost areas or very low-income or high-poverty neighbourhoods. States must set aside at least 10% of annual allocations for non-profit property developers (Department of Housing and Urban Development (United States), n.d.[5]).

Source: (Department of Housing and Urban Development (United States), n.d.[5]), Low-Income Housing Tax Credit (LIHTC), https://www.huduser.gov/portal/datasets/lihtc.html; (OECD, 2022[1]), OECD Affordable Housing Database, indicator PH5.1, http://www.oecd.org/social/affordable-housing-database.htm.

Box 4.3. Building affordable housing investment capacity for community housing providers in Australia

In Australia, community housing providers (CHPs) have access to Capacity Building Program Grants (National Housing Finance and Investment Corporation (Australia), n.d.[6]). The programme enables CHP to receive customised assistance from a professional advisory service provider to improve their housing investment capacities. The eligible advice for capacity building is targeted at supporting the CHPs with their applications for funding from either the National Housing Infrastructure Facility (NHIF) or the Affordable Housing Bond Aggregator (AHBA) of the National Housing Finance and Investment Corporation (NHFIC) (the AHBA is described in more detail in Box 4.6).

Public support for capacity building is provided in form of grants, which amount to a maximum of AUD 20 000. The grants are available to officially registered CHPs who must either express their interest in AHBA or NHIF funding before they can receive a grant referral from the NHFIC. The professional advisory service provider (consultant) who supports the capacity building can be chosen by the CHP from a list of approved providers.

Consultancy services available through the Capacity Building Program cover four key areas:

• Finance (e.g. financial modelling, fundraising and financial risk analysis)

• Business planning (e.g. the preparation of business cases and partnership development)

• Property development (e.g. sustainable and accessible property design and urban planning)

• Risk management (understanding, managing, monitoring and mitigating different risk categories, e.g. financial risks)

Table 4.4. Policy Action 9: Pursue options to build additional equity for the Fund

Objective	Strengthen the equity base of the Fund and increase the available share of rent payments for reinvestment during the loan repayment period (the first 30 years of the Fund).
Actions and timeframe
By 2026	Use the capacity of municipal housing companies or newly established housing associations for the construction of affordable housing under the Fund. Retained rental income and construction grants from the Housing Affordability Fund can be reinvested into the Fund as equity contributions as loans are being repaid. An example of equity reinvestments is provided by the Austrian Limited Profit Housing Associations, which reinvest their profits for new projects.
Beyond 2026	Promote the collaborative participation of equity investors in the Fund. Potential actors to co-finance projects could comprise pension funds, corporate investors, and insurance firms. In this context, incentives for equity investors should be assessed, for example, tax incentives (e.g. tax exemption on dividend income) or financial incentives (e.g. grants). Use the share of rental income generated through the application of credit enhancement tools (recommended as part of Policy Action 8), to reinvest it into the Fund as the loans are being repaid.
Institutions/stakeholders involved	Ministry of Economics Altum Municipal housing companies
Key implementation steps	Increased capacity of municipal housing companies to carry out affordable housing developments Reinvestment of a share of rental income generated through credit enhancement into the Housing Affordability Fund already during the loan repayment period Agreements with equity investors to invest in the Fund A range of indicators can serve to monitor the implementation: Number of involved municipal housing companies participating in the Fund Amount of Fund equity and equity share of capital structure Share of total rental contributions in new project financing Funding received from equity investors

4.3. Financing instruments

4.3.1. Where does Latvia stand in comparison to peer countries?

Table 4.5 provides a comparative snapshot of the financing instruments of the different funding schemes:

• Long-term loans are the key instrument to finance affordable housing investments in Latvia and the peer countries. The loan terms vary in terms of durations, rates, and repayment structures. The durations range between 20 and 50 years. The rates are commonly low but vary depending on the origin of public and private lenders. When public loans are provided, the rates are particularly low, in Austria for instance at 1% per year. Public loans usually become subordinate when commercial capital is employed for financing.

• Different countries use a variety of tools to provide incentives for affordable housing investments. Peer countries like Austria, Denmark, and the Netherlands tend to rely on ex-ante instruments such as loan guarantees that improve financing conditions. Latvia’s capital rebate can be considered a special incentive structure that rewards developers ex-post. The direct use of subsidies has been decreasing as the funding schemes have become more self-sustained and the affordable housing stock has increased. Some incentives are directly linked to the specific institutional set-up around the funding mechanisms. Austria and Denmark grant corporate (and VAT) tax exemption for housing associations that engage in the construction of affordable housing. Only Slovenia does not set dedicated incentives for projects.

• EU State Aid rules have affected the funding mechanisms for affordable housing in peer countries to different degrees. While the long-standing funding mechanisms in Austria and Denmark have not been challenged by the EU regulation, State Aid decisions by the European Commission have contributed to the reorganisation of the affordable housing funding system in the Netherlands. The much younger Fund in Slovenia has chosen a cautious approach in light of EU State Aid rules by largely refraining from public support to its fund. Latvia aims to account for the past decisions of the European Commission by targeting the model of intervention of the Fund and limiting public financial support to the scope of “Services of General Economic Interest” (SGEI).

Table 4.5. Comparative snapshot: Financing instruments

	Latvia	Austria	Denmark	The Netherlands	Slovenia
Financing terms	Loans issued by Altum have a maturity of 30 years (deferred repayment is permitted under certain conditions). Altum loans within the framework of the revolving fund may be combined with a loan from a commercial bank and/or other international financial institutions. In this case, the loan issued by Altum is subordinate and requires lower collateral.	Public loan terms are set in the regional housing subsidy laws. At the end of 2021, the yields were on average at about 1%. They can also vary over repayment period (generally 35 years). Public loans are usually subordinate to capital market loans.	Support from the National Building Fund is obtained through applications submitted by housing organisations. The development of a fiscal master plan, agreed with municipalities, is the precondition to access support from the Fund. The predominant commercial loans are issued as 30‑year nominal adjustable‑rate mortgage loans. To support the loan repayment, state subsidies are available that reduce the costs for both, housing providers (mortgage repayments) and tenants (rents). The complementary loans of municipalities (used to pay a portion of the investment cost upfront) are interest- and instalment-free up to 50 years after completion of the dwelling construction.	The predominant public loans from one of the public sector banks (BNG and NWB) have mostly fixed interest rates. Many are issued as bullet loans, which do not require intermediate repayments but are to be repaid all at once at the end of the loan term. BNG initiates both guaranteed and unguaranteed loans; the effect of the guarantee results in around 0.75% lower yields. Loan terms can vary between 2 and 50 years, whereas the average maturity is 19 years. An adequate municipal back-stop agreement(s) is required for the loan to be secured under the guarantee scheme (WSW). The loans must be used for housing associations’ SGEI-activities.	The Fund mostly provides loans at favourable conditions to municipalities and their local funds, in addition to non-profit organisations. Loans are provided to specific groups of borrowers according to each programme or public call, with the conditions set according to the housing legislation, the public funds and finance legislation, the Act of establishment of HFRS and its processes and activities. Main conditions are: approval of building permit; financial viability of applicant; demonstration of real housing needs in the local community; adherence to standards relating to integrity, money laundering, anti-corruption and public procurement; high building and energy efficiency standards must be met (B1 at least); absence of gender discrimination or other differentiation; project must meet price restrictions.
Financial incentives for providers	Conditional grants in the form of capital rebate on the Altum loan, of up to 25% (for affordable housing projects put into operation after 31 August 2026) or 30% (for projects put into operation by 31 August 2026). The rebate amount is calculated by Altum, in accordance with EU rules on overcompensation. The condition for the rebate is that the real estate developer upholds with the Fund’s Regulation and the loan agreement with Altum. The capital rebate is granted once the affordable rental housing has been put into operation, appropriate housing quality standards are met, and at least 90% of dwellings have been leased (100% in the case of buildings with no more than 9 apartments).	Providers of social housing have access to public loans with low interest rates that help to reduce their financing expenses. LPHA are also exempted from corporate tax	Providers of social rental housing financially benefit from state guarantees on the bonds that back their mortgage loans. They also receive tax advantages (including corporation tax and VAT), which help to reduce the costs of provision (there are some exceptions, as in some cases VAT must be paid on construction fees and payroll tax on services performed and certain ancillary activities are also subject to tax)	In exchange for performing their duties, housing associations may have their loans guaranteed by the Social Housebuilding Guarantee Fund (WSW), and may purchase council-owned land at reduced prices for the purpose of building social housing. Contrary to provisions in the past, housing associations are no longer granted exemption from corporation tax	No particular financial incentives are mandated or available for providers.
State aid considerations	Latvia addresses EU State Aid rules in the Fund’s regulation. The total amount of compensation to real estate developers is limited to EUR 15 million within an administrative territory on a yearly average. Latvia’s regulation distinguishes between executing agents’ SGEI and non-SGEI activity when it comes to projects’ eligibility for public financing. It defines a target group for affordable housing through income ceilings. Only if the constructed dwellings meet the requirements of affordable housing, developers are eligible for public grants in the scope of the Fund.	Although social housing is available to a large share of the Austrian population, the country’s long-standing limited-profit set-up of the sector has not conflicted with EU State Aid regulation in the past. Due to the cost-based system, any public support is passed on 1:1 to tenants and LPHA do not benefit from it.	Although social housing is available to a large share of the Danish population, the country’s long-standing non-profit setup of the sector has not conflicted with EU State Aid regulation in the past.	State aid for affordable housing comprises reduced interest rates through loan guarantees, restructuring and project aid, and reduced land prices. Rent subsidies are also available for lower income households to guarantee affordability. The Housing Act (2015) resulted in greater clarity and control over the use of state aid for housing associations’ (non-)commercial activities. The use of state aid is restricted to activities which are labelled as “Services of General Economic Interest” (SGEI). The EC also required reducing the income ceiling for social housing to remain SGEIs and eligible for state aid.	Because the HFRS’ funding and support activities do not grant recipients an advantage over competitors that they would not have under normal market conditions, they are not considered state aid. Grants, contributions or capital investments are in accordance with market conditions. The HFRS can offer loans with a favourable interest rate to legal entities for the acquisition of non-profit rental housing and nursing homes, assisted living facilities and day care centres for the elderly. However, given the nature of the funded investment, these loans are not considered to provide an economic advantage to the recipient that it would not have in normal business. Other support provided for the construction of non-profit housing would also have the purpose of ensuring the public interest, without granting an undue advantage or affecting trade and competition between the member states of the European Union.

4.3.2. Recommendations for Latvia based on peer practices

Policy Action 10: Line up financing instruments to support the scaling and financial sustainability of the Fund beyond 2026

A diversified range of financing instruments will be fundamental to scale the Housing Affordability Fund beyond the funding horizon of the RRP, which ends in 2026. To mobilise capital from public and private sources, the portfolio of selected instruments should comprise, inter alia, development loans (potentially with grant/rebate elements), housing bonds or bond backed loans and direct equity investments (e.g. from institutional investors such as pension funds). To facilitate the co-financing at the project level through commercial loans, the financial risk profile and the lending conditions could be improved through credit enhancement tools, including government guarantees.

Latvia’s peer countries that have established, sometimes long-standing, financing mechanisms present a rich selection of financing instruments to facilitate the mobilisation of capital for affordable housing investment. To improve the lending conditions of the most common financing instrument for investments in new housing units, long-term loans, the Netherlands apply a public loan guarantees scheme that operates in absence of contingent liabilities for the Dutch public sector (Box 4.4). Several countries, including Austria, Denmark, and the Netherlands issue housing bonds or bond backed loans to access capital from (inter-)national capital markets for the financing of affordable housing (Box 4.5). Lastly, a background box (Box 4.6) on the Affordable Housing Bond Aggregator (AHBA) in Australia sheds light on the implementation process of a financial intermediary that facilitates the issuance of bonds for affordable housing project financing.

Box 4.4. Improving financing conditions through a multi-layer loan guarantee scheme in the Netherlands

In the Netherlands, the provision of guarantees under the sectoral guarantee fund Waarborgfonds Sociale Woningbouw (WSW) enables developers of social housing to benefit from interest rates below market level for financing their social (non-commercial) housing activities.

The public sector bank BNG initiates loans with and without guarantees. Taking a loan that is guaranteed under the WSW ensures an interest rate that is about 0.75% lower than the unguaranteed loan. The average loan term amounts to 19 years but can be extendable to up to 50 years due to the guarantee. Marginal and average financing conditions in the Netherlands have continuously improved whereby the guarantees contributed to lower interest rates alongside the favourable market environment (Figure 4.1).

The special feature of the Dutch loan guarantee system are its three layers. As a first layer, the WSW guarantees loans for social housing investments with its risk capital, serving as a mutual insurance company for housing associations’ social housing projects. The second layer is provided by the capital commitment of the housing associations. It ensures far-reaching solidarity among them and is applied if the WSW falls short of its minimum capital requirement. As the third layer, the WSW has a backstop agreement with municipalities and the central government. In case that the capital provided by the housing associations is still insufficient, the government acts as a guarantor of last resort by providing unlimited interest-free loans to the WSW.

The setup of the guarantee system has an important positive implication for the public finances. Due to the very low probability of a required state intervention, the guarantees are not considered as contingent liabilities. Therefore, the government debt-to-GDP ratio is lower than in alternative scenarios with direct provision of guarantees by the government.

Figure 4.1. Evolution of lending conditions for affordable housing investments in the Netherlands

Source: Presentations by Dutch experts at the Working Meeting with Latvian stakeholders organised by the OECD in 2022.

Box 4.5. Housing bonds to attract more private capital for affordable housing investments: Austria, the Netherlands and Denmark

Special purpose housing bonds are a valuable financing instrument that can be customised to national capital and financial market conditions. In Austria, Housing Construction Convertible Bonds (HCCBs) are issued by special purpose banks committed to financing affordable housing investments. HCCBs provide tax advantages for private investors, self-employed individuals, and SMEs, with interest income from HCCBs being exempt from capital income tax up to a level of 4%. Although not government guaranteed, HCCBs are backed by the trusteeship of holding banks (Bank Austria, n.d.[7]), as well as public loans and grants (Lawson, 2012[8]), and have helped raise over EUR 18 billion between 1994 and 2012 (Oberhuber and Denk, 2014[9]).

Similarly, in the Netherlands, BNG Bank has developed a BNG Bank Social Bond for Dutch Housing Associations that is issued as a sustainability bond on the international capital markets. The proceeds from the bond are used to finance the improvement of social housing in disadvantaged neighbourhoods and granted to the most sustainable housing associations. Between 2016 and 2021, BNG Bank has raised around EUR 5 billion for affordable housing development via several Environmental, Social, and Governance (ESG) bond emissions (BNG Bank, 2021[10]).

In Denmark, commercial mortgage loans represent the most important financing instrument for social housing developers, with the interest rates depending on market terms. However, since 2018, the Danish state has successfully lowered the cost of loans through the issuance of state‑guaranteed mortgage bonds that back the loans, highlighting the role of the state in setting the framework and providing guarantees for otherwise independent actors.

Source: Presentations by Austrian, Danish, and Dutch experts at the Working Meetings with Latvian stakeholders organised by the OECD in 2021 and 2022.

Box 4.6. Implementing bond-backed housing loans through an Affordable Housing Bond Aggregator (AHBA) in Australia

The implementation of the Affordable Housing Bond Aggregator (AHBA)

The Australian Affordable Housing Bond Aggregator (AHBA) is a financial intermediary that facilitates the financing of affordable housing through the issuance of housing bonds. It was implemented in 2018 in the context of the establishment of the National Housing Finance and Investment Corporation (NHFIC), following the Reducing Pressure on Housing Affordability plan released in the Australian Federal Budget in 2017. The AHBA is a direct subsidiary of the NHFIC (Fotheringham, Gorter and Badenhorst, 2021[11]).

The establishment of the AHBA was preceded by research on country-tailored financing instruments that could help to mobilise additional capital from private investors for affordable housing investment. Lawson (2012[8]) and Lawson et al., (2014[12]) drew on the expertise of international and Australian financial experts and extensive consultations with institutional investors, regulators, public finance specialists, housing providers, and policy officials and came up with the idea of a financial intermediary with capital market expertise that could issue housing supply bonds in line with Australian framework conditions. Lawson et al., (2014[12]) also outlined the potential of government guarantees to foster investor confidence in the instruments.

Application of bond backed loans through the AHBA

The AHBA serves as the financial intermediary that provides long-term concessional loans to Australian community housing providers (CHPs) while pooling and allocating them with available capital issued through housing bonds. The responsibilities of the AHBA include the loan origination, the execution of transactions, and the assessment of investment and credit risks. Ultimately, the bonds that fund the long-term loans to CHPs are issued by the NHFIC as social bonds in the wholesale capital market. CHPs can use the loans provided from the AHBA for a variety of affordable housing activities including the construction and acquisition of new housing units, the maintenance of the existing housing stock and the refinancing of outstanding debt (National Housing Finance and Investment Corporation (Australia), n.d.[13]). Bond investors are provided with a financial guarantee (Commonwealth Government guarantee) to strengthen their confidence in the instruments and help reduce the cost of borrowing for housing providers. The approved volume of AHBA loans to CHPs has amounted to over AUD 2.5 billion by 2021, enabling financial support for over 4 600 new and 8 300 existing dwellings while saving interest expenditure payable by CHPs by an estimated AUD 420 million (Australian Government, 2021[14]).

Relevance for Latvia

Latvia’s Housing Affordability Fund has the potential to prospectively take the function of a bond aggregator. To ensure the capital availability for project financing after the RRP period, Altum loans to real estate developers or municipal housing companies for individual construction projects could be pooled and backed by bonds issued in international capital markets. While the fund could serve as the financial intermediary, Altum could potentially the bonds in a centralised manner.

As in Australia, it could be a good starting point to research the conditions and requirements for a customised bond issuance scheme in Latvia to finance affordable housing. Such research could draw on the expertise of (inter-)national finance experts and incorporate the view of relevant stakeholders.

Sources: (Community Housing Industry Association (Australia), 2023[15]), NHFIC Capacity Building Program, https://www.communityhousing.com.au/nhfic-capacity-building-programme/.

Table 4.6. Policy Action 10: Line up financing instruments to support the scaling and financial sustainability of the Fund beyond 2026

Objective	Increase the availability of funding beyond 2026. Secure financing at favourable conditions for the Fund beyond 2026. Ensure financing for projects in regions where there is potential demand (e.g. new economic development activities and/or investments are expected) but credit access to finance projects is limited.
Actions and timeframe
By 2026	Determine and quantify the short- and medium-term housing needs including estimates on number and types of required units, as well as implied investment needs to define multi‑annual funding targets for the Fund. Improve project access to bank co-financing by using credit enhancement tools such as government guarantees.
Beyond 2026	Assess the previous incentive structures to developers, investors, creditors, and municipalities and let the assessment of the status quo inform the choice and design of financing instruments going forward. Consider to broaden the use of financing instruments for the Fund. The portfolio of applied instruments could comprise Altum loans (potentially with grant elements), development loans from international/European development banks, newly issued housing bonds, and direct equity investments. Those instruments could help to increase the availability of capital by leveraging the potential of (international) capital markets and investors. Establish a process for planning the potential for additional public resources from the government budget to contribute to the Fund.
Institutions/stakeholders involved	Responsible for planning investment needs: Ministry of Economics The State Asset Possessor Municipalities Responsible for defining the scope of financing instruments: Ministry of Economics National developing finance institution Altum Potential lenders and creditors: National developing finance institution Altum International development banks (e.g. EIB and CEB) Commercial banks Institutional and retail investors (e.g. pension funds and savers) Potential intermediaries: Investment banks, to facilitate loan or bond issuance and (international) capital market access
Key implementation steps	Identify and quantify the overall housing investment needs Define gross financing targets for the Fund beyond 2026 Outline a set of possible financing sources, instruments, and incentives, and define a strategy to implement them under the umbrella of the Fund A range of indicators can serve to monitor the implementation: Volume of accessible financing (beyond 2026) Cost of capital of provided financing

Policy Action 11: Develop a risk assessment tool/framework and allocate additional funding to cover potential losses

The Housing Affordability Fund assigns an important role in both project execution and financing to private actors, in particular real estate developers and commercial banks. Accordingly, the Fund’s setup should provide for contingency plans that mitigate financial risks. Those risks comprise project interruption or suspension before completion due to:

• The financial default of a contracted developer;

• Funding gaps due to insufficient credit availability; and/or

• Increasing costs of input factors driving up a project’s gross financing needs.

For financial and fiscal risk mitigation, Denmark’s National Building Fund (NBF) provides a focal point for good practices that serve to protect Denmark’s large‑scale investment into affordable housing. To minimise the risk of financing shortfalls, the NBF provides for the scheme of fifth, a collaborative arrangement between stakeholders involved in the funding process, to bridge financing shortfalls (Box 4.7). Foresighted fiscal planning at the national level and the consideration of municipal fiscal constraints are implemented through regular budget planning with parliamentary resolution and fiscal master plans (Box 4.8).

Box 4.7. Preventing funding shortfalls: Denmark’s “scheme of fifths”

Since revolving housing funds have very long-time horizons, it is also necessary to plan for bad times in which the level of funds available for investment is limited. The Danish National Building Fund has an established solution that addresses such funding bottlenecks through the collaboration of all stakeholders.

If a public housing organisation faces funding difficulties (generated by, for instance, structurally low demand), the gap is resolved through a partnership of the five major stakeholders (the concerned housing organisation, the National Building Fund, the municipality, other housing associations, and the mortgage bank). The mortgage bank issues a loan and the five previously mentioned actors share the financial burden.

The scheme highlights the importance of solidarity among housing actors and the value of designing policies that plan for worst-case scenarios before they occur to make the social housing sector shock resistant. Throughout the history of the National Building Fund, loss rates have consistently been very low. However, the approach could counter emerging funding difficulties in an environment of increased macroeconomic uncertainty in which funding gaps are more likely.

Source: Presentations by Danish experts at the Working Meeting with Latvian stakeholders organised by the OECD in 2022.

Box 4.8. Considering fiscal constraints for Denmark’s National Building Fund

Affordable housing investments through the Danish National Building Fund are subject to comprehensive, systematic, and long-term planning. The Danish planning system illustrates how planning for affordable housing investments and related financing needs can adhere to fiscal constraints on national and local levels.

To ensure financial predictability, the NBF’s funding level and areas of investment are set every four years by the Danish Parliament in political agreements (National Building Fund, 2022[16]).

Fiscal constraints are also incorporated in the local planning process through so-called fiscal master plans. These plans are agreed with municipalities and represent a precondition for housing associations to access support from the Fund. Fiscal master plans shall contain information relating to residential challenges, key statistics for the housing associations, a budget estimate of a minimum 25% local co-financing and a municipal recommendation.

Source: Presentations by Danish experts at the Working Meeting with Latvian stakeholders organised by the OECD.

Table 4.7. Policy Action 11: Develop a risk assessment and allocate additional funding to cover potential losses

Objective	Ensure a high completion rate and commissioning of eligible affordable housing construction projects
Actions and timeframe
By 2026	Conduct assessments of financial risk factors inherent in the current funding mechanism and anticipate “worst case” scenarios concerning financial difficulties of contracted developers
Beyond 2026	Draw on the capacity of multilateral development banks (MDBs), such as the European Investment Bank, to finance and undertake studies on the feasibility and economic viability of projects, and to reassure private co-financing in the Fund Develop a concept for the Housing Affordability Fund to compensate potential losses and mitigate funding gaps: Envisage public resources for risk coverage to ensure better financing conditions and cheaper pricing of end products (dwellings) due to improved return-risk profiles of construction projects. Going forward, collaborative arrangements between the stakeholders involved in the funding set-up, including the government and Altum, commercial creditors, and real estate developers or housing associations, could be established.
Institutions/stakeholders involved	Ministry of Economics Altum Commercial creditors Real estate developers (or other executing agents)
Key implementation steps	Assignment of responsibility in the Ministry of Economics and Altum for the financial risk management of the Fund Actions and procedures for adverse financial scenarios included in the Fund’s regulation Provision of public resources for risk coverage and definition of eligible cases and contingencies Risk sharing/mitigation agreements with stakeholders involved in the financing process to ensure continuity of funding and project execution until commissioning Indicators to monitor: Commissioning of constructed dwellings under the Fund Cost of capital for newly assigned construction projects under the Fund Solvency and liquidity of real estate developers or other executing agents

References

[14] Australian Government (2021), Review of the National Housing Finance and Investment Corporation Act 2018 Report, https://treasury.gov.au/publication/p2021-217760.

[7] Bank Austria (n.d.), WohnbauAnleihen - Höhere Erträge durch Steuervorteile, https://www.bankaustria.at/wohnbaubank/wohnbauanleihen.jsp.

[10] BNG Bank (2021), ESG Bonds, https://www.bngbank.com/Funding/ESG-Bonds.

[15] Community Housing Industry Association (Australia) (2023), NHFIC Capacity Building Program, https://www.communityhousing.com.au/nhfic-capacity-building-program/ (accessed on 23 May 2023).

[5] Department of Housing and Urban Development (United States) (n.d.), Low-income Housing Tax Credit (LIHTC), https://www.huduser.gov/portal/datasets/lihtc.html.

[11] Fotheringham, M., T. Gorter and A. Badenhorst (2021), “Charting the policy development process of social housing bonds in Australia through an impact narrative approach”, Journal of Public Administration, Vol. 80/3, pp. 590-601, https://doi.org/10.1111/1467-8500.12485.

[3] Klien, M. (2021), Ökonomische Wirkungen des gemeinnützigen Wohnbaus., WIFO, https://www.wifo.ac.at/jart/prj3/wifo/resources/person_dokument/person_dokument.jart?publikationsid=66962&mime_type=application/pdf.

[8] Lawson, J. (2012), Housing supply bonds: A suitable instrument to channel investment towards affordable housing in Australia?, https://www.ahuri.edu.au/research/final-reports/188.

[12] Lawson, J. et al. (2014), Enhancing affordable rental housing investment via an intermediary and guarantee, https://www.ahuri.edu.au/research/final-reports/220.

[16] National Building Fund (2022), Social development plans at work, https://lbf.dk/om-lbf/english/.

[13] National Housing Finance and Investment Corporation (Australia) (n.d.), Affordable Housing Bond Aggregator (AHBA) loans, https://www.nhfic.gov.au/affordable-housing-bond-aggregator-ahba-loans.

[6] National Housing Finance and Investment Corporation (Australia) (n.d.), Capacity Building Program Grants, https://www.nhfic.gov.au/capacity-building-program-grants.

[9] Oberhuber, A. and D. Denk (2014), Zahlen, Daten, Fakten zu Wohnungspolitik, Endbericht 2014.

[1] OECD (2022), Affordable Housing Database - OECD, http://www.oecd.org/social/affordable-housing-database.htm.

[2] OECD (2021), OECD Economic Surveys: Netherlands 2021, OECD Publishing, Paris, https://doi.org/10.1787/dd476bd3-en.

[4] Tax Policy Center (2020), What is the Low-Income Housing Tax Credit and how does it work?, https://www.taxpolicycenter.org/briefing-book/what-low-income-housing-tax-credit-and-how-does-it-work.