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Banker pitches private-public partnership, housing bonds to ease shortage

Published:Tuesday | January 27, 2015 | 4:24 PMTameka Gordon
File Beresford Grey, executive director of corporate investment banking at FirstCaribbean Jamaica. (at right)

Corporate banker Berisford Grey says the Jamaican Government should consider issuing housing bonds, targeted at pension funds, to finance residential projects to ease the current shortage.

He also advocated for a different model for housing delivery, one that uses public-private partnerships for large projects under which a state agency like National Housing Trust would continue to spearhead the sale and mortgaging of homes to offset the private sector risk on investment.

The executive director of corporate investment banking at FirstCaribbean International Bank Jamaica said with the creation of a special-purpose financing vehicle, the housing bonds issued by the Government could be serviced with housing deposits paid to the state agency involved in the private-public partnership (PPP).

"The way the project is executed, the developer will have the land which is pledged as collateral as well as all approvals, which are also pledged as collateral," said Grey.

"Once they have all of that, then a special-purpose vehicle will issue bonds to investors. The proceeds of the bond will be put into an escrow, and the project will be constructed from there," he told Sunday Business, explaining his thinking on an idea that he floated at the JSE Capital Markets Conference more than a week ago.

As the units are sold, or as the NHT gives a mortgage to a buyer, those flows come back and pay off the bond, Grey said.

Target pension funds

He named pension funds as target subscribers for the housing bonds, saying they hold capital that is not utilised.

"The pension market is large, so you can have large projects, and if you structure the bonds correctly, then you can re-issue a similar type of bond over and over again," he said.

Government's role under the PPP, as the banker sees it, would be to handle the necessary regulatory approvals, and to put up the land on which the homes are to be built. The private developer would take the lead

on negotiating and securing financing, as well as establishing the special-purpose vehicle.

"What I'm suggesting is that by using PPP as a financing technique, the Government can achieve a solution that allows us to address our housing problem because PPP will allow us to do large scale projects, deliver housing of consistent quality, deliver the homes on time, and because of the use of the private sector to manage the implementation process, you will end up with economies of scale with lower average cost per unit," Grey said.

While noting other PPPs currently exist locally, for example the toll roads, he said extending the technique to housing could be easily adopted.

A representative of WIHCON, which is one of Jamaica's largest construction firms, says the idea for PPPs has merit, but sees a downside for the housing bond.

While for the PPPs, WIHCON's concern would be the location of the properties. The company said that the housing bonds could be risky, potentially leading to cash flow problems and debt servicing challenges for the bond issuer if persons defaulted on payments.

Grey sees the PPP model unlocking value for properties such as sugar lands and idle real estate.

Of the risks involved, the corporate banker said an 80 per cent sales ratio should guarantee returns for all interests.

His model envisages NHT committing to buy the units, further mitigating the risk for the private investor.

"In PPP, what you really want is to manage the sales risk by having off takers like the NHT, who achieve certain level of presale through pre-approved mortgages, as well as commit to buy certain volume of units directly," said Grey.

He noted that the annual demand for housing was about 13,000-15,000 homes, while supply was about 10,000.

"According to the NHT's latest Housing Demand Summary Report, in St Catherine alone, there is a demand for 31,477 housing units over the next three years," he said.

Affordable housing falls in the $5 million to $8 million price range, Grey said.