Newsletter Q3 2017 UK

Newsletter Q3 2017

relation to section 5(1) of the Housing Regulation Act and the maintenance history of the property in relation to provisions under sections 18 and 18b of the Housing Regulation Act, etc. In a correct statement of the property’s current income and operating expenses, the valuation should also take into account any optimisation potential currently factored in by the market for traditional rental properties. In a joint effort, the Danish Ministry of Industry, Business and Financial Affairs, the Danish association of private cooperative housing, ABF, and Finance Denmark have listed 13 recommendations to safeguard responsible operations in the cooperative housing sector. The 13 recommendations pertain mainly to formation, financing and the transition from unit owners to tenants, whereas the valuation is only touched upon very lightly, because of concurrent efforts presently undertaken by the Danish Association of Chartered Estate Agents and the Danish Property Federation. These two organisations are in the process of updating the guidelines and norms for real estate appraisals, including ways of ensuring that the appraisers have the required qualifications. However, updated guidelines and norms alone are not enough to reduce the uncertainty associated with valuations made by real estate appraisers as the valuation basis remains an antiquated and complex body of laws. Serving as a current example of the consequences of the challenges posed by the maximum price system, several old and well-run cooperative housing societies are being liquidated, guaranteeing the unit owners a profit that substantially exceeds the value of the property had it been valued on the basis of continued operation of the cooperative housing society. As a result, it does not seem fair that tenants, who are often long-term residents at very low rent levels, pursuant to the mandatory pre-emption rights of tenants as set out in the Danish Rent Act may take over a rental property by forming a cooperative Speculative dissolving of housing cooperatives

The underlying philosophy of cooperative housing was to establish a type of housing that would offer reasonably priced dwellings free of any speculative element. housing society, subsequently realising substantial tax-free profits when dissolving the very same society and selling the property as an untenanted rental property and therefore with a significant immediate upside potential for a buyer. The underlying philosophy of cooperative housing was to establish a type of housing that would offer reasonably priced dwellings free of any speculative element. By dissolving a cooperative housing society and selling the property, however, the unit owners precisely do speculate in achieving tax-free capital gains. Valuation basis remains antiquated Like the maximum price system, cost-related rent was introduced in a statute passed as a temporary measure by the Danish Parliament, Folketinget, in 1937. The statute entails that the income basis of a rental property is artificially low as the rent is often much lower than the real value of the asset as warranted by the right of disposal of the unit. As a result, the correct valuation by a real estate appraiser of a cooperative housing property will often be substantially lower than the actual market value of all units combined. The Danish Parliament hardly intended for members of housing cooperatives to realise tax-free capital gains by dissolving cooperative housing societies. However, this option fundamentally continues to co-exist with the effective unhealthy maximum price system.

19