Following Rothschild’s example

Cheap speculative building on cheap land can only result in poor quality apartments; real solution should partially involve private sector.

By YOEL SHERIDAN
August 14, 2011 22:56
3 minute read.
Protesters on Rotschild

Protesters on Rotschild311. (photo credit: Nir Elias/Reuters)

In 1887, Baron Nathan Mayer Rothschild, who can hardly be called a socialist, initiated an economically viable project that was able to provide affordable housing for working-class families in the East End of London and to answer the demands of the large influx of Jewish refugees from Eastern Europe. Although far from today’s standards, the housing provided was of higher quality than was common at the time. Each apartment had a bath and inside toilet. He set out to replace the substandard housing with tenements designed to house large numbers of the urban poor in relative comfort at affordable rents.

He did this by founding The Four Percent Industrial Dwelling Company, which was designed to generate a four percent return on the shareholders’ investments.

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The Israeli social scene is quite different from the conditions in London in the late 19th century. The comparative standard of living, education and expectations of those seeking decent quality, affordable accommodation are much higher, and their demands for social justice are not restricted to housing.

Nevertheless, the provision of decent, affordable housing for rent is an essential element that will influence rents countywide.

Because of the high price of land in Israel today, the government has made a disastrous proposal whereby a speculator who can submit the cheapest tender to build rental apartments on allocated land can buy that land at half price.

Cheap speculative building on cheap land can only result in poor quality apartments and slum areas.

Cheap is cheap wherever one goes, and it should be avoided like the devil.

While housing is a national issue, it is in local areas that it manifests itself, so if the government, along with the municipalities and universities, were to follow Baron Rothschild’s initiative, they too could economically build affordable housing for students and the middle and working classes without compromising ideological values.

The real solution for Israel should partially involve the private sector.

Suitable state or municipal land should be allocated for rental purposes only. Designated land should not be sold to construction companies, but should remain the property of the state or municipality, which should fix the rents. The construction companies should tender to build the rental apartments, which will be owned by an independent state-owned company to which the designated land will be leased for a nominal fee. The company will issue 4% bonds to the public. The Bank of Israel should guarantee the payment.

To maintain decent standards, the building tender should require the construction companies to build the best-quality apartments within the price set by the government or the municipality (not the lowest quality proposed by the government). The tenders should be won by the construction companies that provide the best value for the money. By virtue of the public being the bondholders in the companies holding the properties, it will be in the companys’ best interest to ensure that they are properly managed and maintained.

Here is a simplified example of the economic considerations. Excluding land, the cost of building a 100-square meter apartment today is in the region of NIS 500,000. This money will come from bondholders, who will receive 4% on their investment. A reasonable rental charge for such an apartment is NIS 3,000 per month (NIS 36,000 per annum), which is circa 7% of the construction cost, leaving a positive margin of 3% that will cover vacancies, maintenance, management and other costs and/or rent reductions.

This is a win-win situation all around. Dormant land will be utilized, Israeli investors will get a reasonable, guaranteed return on their money (particularly those, like pensioners, who are receiving little or nothing on their savings), jobs will be created, municipal taxes will be collected, the government’s budget will not be affected, and above all, affordable housing will be provided to those in need, safe from greed and speculators.

There is no need to reinvent the wheel. Just take a leaf out of the Baron’s book and proceed forthwith.

The writer is an FCA and CPA who immigrated from England in 1973. He is the author of From Here to Obscurity, which deals with the life, times and demise of the large Yiddish-speaking community of London’s East End during the Hitler years (1933 -1945), and several accounting booklets.


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