Rapid Housing Sector Assessment: Sint Maarten 1 2 3 © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. 4 ACKNOWLEDGMENTS This report was produced as part of the Low Income and Affordable Housing Technical Assistance under the umbrella of the Sint Maarten Recovery, Reconstruction, and Resilience Trust Fund. The team was led by Catherine Lynch (Senior Urban Specialist) and included Ashna Mathema (Senior Urban Specialist) and Giuliana De Mendiola (Urban Consultant), under the supervision of Ming Zang (Practice Manager) and Michelle Keane (Program Manager). The building stock analysis was led by Luis Triveno (Senior Urban Specialist) and Sarah Antos (Data Scientist). Editing and graphic design support provided by Peter Hormel and Sociopúblico. The team thanks the Government of Sint Maarten for their collaboration and contributions to the preparation of the assessment. 5 Preface In September 2017, Hurricane Irma devastated housing on the island of Sint Maarten. Between January and March of 2019, a World Bank team consisting of Catherine Lynch (Task Team Leader and Senior Urban Specialist), Ashna Mathema (Senior Urban Specialist), and Giuliana de Mendiola (Urban Development Consultant) carried out this Rapid Housing Sector Diagnostic. The Diagnostic is based on information gathered during a one-week mission to Sint Maarten, desk- top research, and analysis of drone- and street-view imagery gathered by the World Bank’s Global Program for Resilient Housing. In the field, the team met with representatives of the government departments responsible for housing, as well as private sector players (developers, builders, engineers, banks, union representatives). The team also visited several social housing developments and informal settlements. Because this is the first assessment undertaken in Sint Maarten since the hurricane, housing data remains scarce. The Diagnostic’s findings are therefore more qualitative than quantitative. They do, however, present a broad picture of the current state of the island’s housing sector, which should be viewed as the start of a dialogue on housing with the Sint Maarten government, and as a foundation for the Bank to develop a longer-term engagement in the sector. 6 Contents Preface 6 Executive Summary 8 Situation Analysis 22 1. Country context 23 2. Institutional framework 29 3. Housing market 32 4. Housing finance 46 5. Land 50 6. Building construction industry 54 7. Relevant regulations and procedures 59 8. Housing affordability 66 9. Why housing is unaffordable in Sint Maarten 73 Guidance and Recommendations 77 1. Promote the development of “affordable” housing 79 2. Improve land supply 82 3. Improve land management 83 4. Make the rental housing market more robust 85 5. Provide targeted assistance to low-income and vulnerable households 88 6. Improve technical and financial capacity of government institutions 89 7. Improve data collection 91 7 Executive Summary 8 Context In September 2017, Hurricane Irma struck Sint Maarten (SXM), and devastated a significant portion of the island nation’s building stock, including 70-80% of the housing.1 According to the Sint Maarten National Recovery and Resilience Plan, the estimated damage to the housing sector was USD 442 million.2 The tourism and commerce sectors were also debilitated. Sint Maarten has since made a tremendous recovery. However, much remains to be done in terms of repairs and reconstruction, and preparing for the next hurricane season. This rapid assessment of Sint Maarten’s housing sector was undertaken to facilitate a dialogue with the Sint Maarten government regarding housing development, reconstruction activities, and disaster preparedness under the Sint Maarten Recovery, Reconstruction and Resilience Trust Fund. The need for more – and more affordable – housing has been a long-standing issue in Sint Maarten. According to the 2012 SXM Housing Vision Report, more than 500 new houses were needed yearly to fill the low- and middle-income housing demand. It is believed this number has increased significantly after Hurricane Irma, and addressing the housing gap is critical priority for recovery. Due to the limited availability of data, this report is more qualitative than quantitative, but provides a broad overarching understanding of Sint Maarten’s housing sector. It also presents policy recommendations and guidance to make the sector more resilient to disasters and more responsive to residents’ needs, particularly for low- and middle-income households. It is important to note that some of the ideas presented as part of this guidance will need to be further developed and vetted with the government and relevant stakeholders. 1 https://www.worldbank.org/en/country/sintmaarten/overview#2 2 A proxy calculation, based on ECLAC damaged housing figures, was used to derive the housing sector’s damages and losses. 9 Main Findings Big picture issues related to housing In addition to its extremely vulnerable risk profile, Sint Maarten’s housing market faces several serious challenges: lack of affordability, severely constrained land markets, growing informality, limited housing insurance coverage, poor condition of much of the housing stock, and increasing vulnerability of certain social groups. Although these issues are common in many small island states, the extreme nature of the circumstances, and their pervasive negative impacts, sets Sint Maarten apart. Take, for example, the growing trend of young Sint Maarteners leaving the island. This brain drain is attributed to the lack of access to good quality higher education, well-paying jobs, and the high cost of living relative to incomes – including housing. The resulting gap in the labor market is being filled by foreign workers both at the upper and lower end of the market, which constrains the housing market by increasing the demand for all types of houses. Bifurcated housing market The island appears to have a ‘bifurcated’ housing market structured around two distinct demand-supply chains. One caters to the wealthy— and mostly foreign—investors buying luxury real estate. The other caters to the low- and middle-income local population, with many living in modest or substandard rental housing and informal housing.3 The former constitutes a relatively small fraction of transactions, but a significant share in terms of market value, and is also the primary target group for much of the formal construction industry. The latter constitutes modest, self-built, incrementally constructed houses and also a growing number of poor-quality structures in informal settlements that are susceptible to natural hazards. This duality in Sint Maarten’s housing market, although peculiar, is not uncommon. In fact, it is quite typical of housing markets in tourism- 3 61% of all housing units in Sint Maarten are rental units. Rental units are mostly 1-2 bedrooms (83%), 44% are 1 BR units, and 74% of all rental units are smaller than 150m2. Owner-occupied residences, on the other hand, tend to be larger: the majority (71%) of owner-occupied housing are 2-3 BR units; 64% of these units are larger than 150m2, and 23% larger than 300m2. 10 based economies on small islands. And while it is important to acknowledge the existence of broader sectoral issues that impact housing delivery and affordability, it is equally critical to acknowledge that changing them can be very difficult. Accordingly, rather than focusing on these intractable aspects of the housing sector, this report focuses on practical solutions to better serve the needs of middle- and low-income households in the short- and medium-term. Challenges in delivery of Government-provided social rental housing The Sint Maarten Housing Development Foundation (SMHDF) administers the government’s social housing program. Since its creation in 1996, SMHDF has faced operational and financial challenges which have limited the delivery of social housing despite the country’s growing needs.4 SMHDF’s current portfolio includes 769 social rental homes and apartments targeted to low-income households, seniors, and emergency homes for people affected by disasters. One of the SMHDF’s biggest constraints is the restriction on raising rents. There are income criteria5 that determine eligibility for social housing, and the rent is capped at 30% of the tenant’s gross household. Rent levels are typically set upon initial lease signing, and by law, cannot be increased until there is turnover in the unit. Further, the SMHDF does not have the ability to track the tenants’ income over time, hampering its ability to adjust rent or terminate a lease contract if the eligibility criterion pertaining to income is not being met. In some cases, rents have not been increased for 20 years, and are therefore significantly below market rates, ranging from USD 150-630 per month. Tenants, on their part, often choose to stay for extended periods of time, given the limited affordable alternatives available in the housing market. The social housing waitlist significantly increased after Hurricane Irma, growing from 1,500 to over 9,000 applicants. Delinquencies are high in several SMHDF developments, and tenants attribute this to the poor quality of housing and maintenance services provided by SMHDF. A roof-repair project is underway as part of the Sint Maarten Recovery, 4 As part of the Sint Maarten Low-Income and Affordable Housing Technical Assistance a review of SMHDF business model was conducted and finalized in October 2019. 5 This program targets households with monthly incomes up to USD 1,944, and who do not own a home. 11 Reconstruction and Resilience Trust Fund; however, many units are still in need of structural repairs. The increased number of grievances without adequate channels to address them is a major source of frustration for the tenants, many of whom have stopped paying rent. For its part, SMHDF leadership blames its inability to carry out repairs or deliver services, in terms of quality or speed, on severe constraints on staff and budget resources6, as well as the questionable financial viability of its current business model. This is a vicious cycle: the dissatisfaction of tenants impairs SMHDF’s inability to deliver adequate services and compromises its reputation as a social landlord, which in turn leads to more delinquencies. Additionally, there is poor coordination of responsibilities and accountability mechanisms for the provision of social housing between the SMHDF and VROMI (the Ministry of Public Housing, Spatial Planning, Environment and Infrastructure or Ministerie van Volkshuisvesting, Ruimtelijke Ordening, Milieu & Infrastructuur), which further impairs the effective functioning of the organization. Constrained land market In addition to the fact that Sint Maarten is an island, it also has a hilly terrain, much of which is not ideal for development. Of the limited amount of developable land available, there are large tracts of government-owned land under long-term leases that remain un- or underdeveloped,7 and also large parcels of privately-owned land with unresolved inheritance issues that cannot be developed. Other factors that may be contributing to a highly constrained land market, include: Large parcel sizes mandated by Hillside Policy promoting forest preservation that encourage lower density and more spread-out developments;8 Absence of any penalty or tax on privately held vacant land, which contributes to speculation by wealthy landowners, both individuals and corporations. 6 The SMHDF is managing its entire housing portfolio with a staff of 12 individuals and limited financial resources. 7 The Domain Affairs department reports that many undeveloped parcels of land on the island are not in compliance with the terms of their land leases. 8 The Hillside Policy applies to all hillside land above an altitude of 50 meters, where only residential development is allowed. 12 As a result, land comes at a premium in Sint Maarten and constitutes between 30-60% of the overall selling price of a property.9 High price of housing  Building construction in Sint Maarten is expensive. The high base cost of housing construction is attributed to several factors, including:  Hilly terrain and hurricane exposure, both of which require much more concrete – for example, to build retaining walls and reinforced cement concrete (RCC) roofs;  The relatively small size of most housing projects, with little to no economies of scale; Imported construction materials;  Imported skilled and unskilled labor for large projects; and High contractor profit margins attributed to high levels of risk underlying project financing, obtaining permits, and contracting, as well as the risk arising from frequent natural disasters. In addition to the base cost, the following factors further escalate the price of housing: Closing cost: closing costs include realtor fees of 6-8% of purchase price, notary costs of 0.4-2.0%, and transfer taxes of approximately 4%, totaling to between 10-14% of the full purchase cost.   Turnover tax: A flat turnover tax of 5% is levied on the delivery of goods and all services, including housing developments. This tax is applied at multiple points in the housing supply chain, resulting in a significant cumulative impact on the cost of producing housing. It is levied on the purchase of materials, on the revenues of the construction company, and on the developers’ profit upon sale of the unit. House size: The homes for sale on the market are typically larger than 100m2, which explains why the cheapest houses for sale cost upwards of USD 250,000.   9 To provide a comparison, in a well-functioning housing market, the cost of land should be in the range of 20-30% of the overall selling price. Zoning regulations should ideally be designed to reflect land prices, with higher densities on more expensive land. 13 Lack of affordability and access to finance The price point of the cheapest houses for sale in the market are USD 200,000-250,000 (2-3BR, 2-bath, 120-150 m2). There is little in the formal market for purchase or rent that is affordable to people below the 60th income percentile (monthly household income USD 3-5 million) to a relatively small number of wealthy investors constitutes a disproportionately high fraction of the total mortgage debt, and is a major contributing factor for the high GDP-to-Mortgage debt ratio. 44 Figures from Central Bank: https://www.centralbank.cw/statistics/monetary-and-financial/monetary- union/new-series-from-july-2016 47 It was reported by VROMI that a Mortgage Guarantee Fund was established in 2000 in Sint Maarten and a board was appointed. However, it appears the fund was never operational. In fact, the banks interviewed were unaware of the instrument. Typically, mortgage guarantee funds are designed to provide an incentive for banks to provide services to the low-income population by eliminating a degree of credit risk on mortgages. The National Mortgage Guarantee (Nationale Hypotheek-garantie, NHG) was created in the Netherlands in 1995. It offers protection to lenders from any residual debt owed after the forced sale of a house. The NHG is fully funded by mortgage borrowers, and receives an explicit public guarantee. This is a likely model for the Mortgage Guarantee Fund in Sint Maarten, but further analysis is required. The National Recovery and Resilience Plan recommends the establishment of such an instrument to encourage homeownership. Home improvement loans Home improvement loans are available at rates of 5-6% and terms of 3-10 years. Some banks typically have a minimum income to qualify for personal loans. For example, Orco Bank requires a minimum income of ANG 4,500 (USD 2,500) per month and has a maximum loan limit of ANG 5,000. Impact of Hurricane Irma Following Hurricane Irma, there was a spike in both mortgage defaults and demand for home improvement loans. In the case of the former, banks typically provided deferment of payments for 3-6 months with a re-amortization of the loan balance. Some banks even offered a special post-hurricane loan product – up to USD 10,000 (unsecured) at fixed 4% interested rate for 5 years. Developer/ construction finance Commercial banks offer developer finance for well-conceived development projects. Construction loans are considered high-risk by the banks and generally have the following terms: Interest rate: 5.5-6% Equity: 30-35% equity contribution in the form of cash or land value Presales: Presales to cover 100-125% of loan amount 48 Disbursement: Loan funds are disbursed based on works completed Repayment: Bank receives 100% of sale proceeds towards loan repayment until loan is repaid. 49 5. Land Land supply and the management of serviced land are key issues for housing provision. Given Sint Maarten’s small size and its topography, there is limited availability of land. Much of the nation’s land is not fit for housing development. Additionally, several institutional constraints have affected land management. These have caused a mismatch between the supply and demand for land, leading to high prices for lots and houses, as well as high rents. As a result, land comes at a premium in Sint Maarten and constitutes between 30-60% of the overall selling price of a property. Domain Lands Government land typically comes into private use through long leases. These typically have a term of 60 years but are sometimes shorter. Currently, approximately 4.3 million m2 (5% of Sint Maarten’s total land) is held under 2,400 of these long leases, averaging USD 1,120 per year per contract.45 Box 5.1 explains the different types of property ownership in Sint Maarten. The underlying intention of long leases (as opposed to freehold sale) in Sint Maarten is to regulate land use: for example, to encourage house- building by persons who cannot otherwise afford to buy land in the market, and to ensure a guaranteed annual revenue through land rents.46 Box 5.1 Property ownership in Sint Maarten Long-term land lease (erfpacht) A long-term land lease, also known as a long lease, is the right to hold and use someone else’s land for a fixed or unlimited time, usually against an (annual) payment. These arrangements are usually made for a period spanning several decades, in which the lessee is allowed to use the land as if (s)he was the owner (although some limitations are usually stated in the contract). Different to a normal lease, long lease is a proprietary 45 VROMI Ministry Plan 2015-2018. 46 https://www.doingbusinessdutchcaribbean.com/st-maarten/real-estate-construction-law-sxm/private- property-ownership-long-term-land-lease-short-term-land-lease-sxm/ 50 right, thus it can be mortgaged as security for a monetary claim. The long lease can also be transferred (sometimes subject to owner’s approval) and the same conditions as for the transfer of full ownership apply. Generally, the long lease buyer pays the former holder of the long lease a transfer sum (selling price). The lease can typically be terminated by the lessee (except if stated differently in the deed creating the long lease). The lessor can only do so if the payment, if any, is not paid for two consecutive years or with other severe breach of contractual obligations e.g. if the land is not developed as required. If a long lease is terminated, the lessor is required (unless otherwise agreed in the deed of long lease) to pay a compensation to the lessee is for example buildings are built on the land. Short-term land lease For short-term land leases, land is typically owned by the government and is leased out for a short period of time (e.g. between one and five years), to third parties for agricultural or recreational purposes. This lease type specifies restricted uses of the land and can be more easily terminated by the lessor. Building on short-term land lease land is generally not permitted so there is no need for the lessor to compensate the lessee. Private property ownership (eigendom)  A private individual or a legal entity can own property in Sint Maarten and if they do so, they are entitled to the absolute right to that property (i.e. have the right to freely enjoy and dispose of that property). Property can also be jointly owned. In such cases, common regulations may be established or already in place, which provide rules for the use and obligations of the individual owners. The owner must adhere to the property’s zoning plan and the civil code. Ownership of property in Sint Maarten must be recorded in the public register, also known as the land registry (kadaster). The land registry keeps record of property encumbrances, mortgages and liens (if any). To complete the transfer of 51 ownership of property, the civil law notary that executes the transfer deed has to register the new ownership of property in the public register. Source: Doing Business in Dutch Caribbean The Department faces several challenges in the way that domain land is being managed, thus affecting the supply of land for development: 1. The lease contracts have not been very effective, either in strategically directing the use of the land or in enforcing the clauses that were agreed upon. Instead, much of the land has been captured by opportunistic investors and speculators. 2. There are many domain land parcels on long leases that have not been developed for decades. In some cases, this is due to genuine monetary constraints, but in others the cause is speculation. The lease contracts stipulate that development must occur within 1 year of the contract date, breach of which could result in the government terminating the lease and revoking the land. The Department of Domain Affairs, however, has struggled to enforce these stipulations, in part due to its lack of staff capacity,47 and in part because of political decisions that fall outside its sphere of control. 3. These rents were set in the past and have not been updated to reflect the current land value. In many cases, even the nominal rents have not been paid for years, with no penalty effectively enforced on the lessee. The Government is collecting a fraction of what it would if the land rent could be adjusted to reflect the market value. 4. A lessee with a long lease may use the property and dispose of it as if (s)he were the owner of such real estate (e.g. sell it, or establish a right of mortgage), subject to any applicable restrictions in the terms of the lease. A lessee, whether a corporation or an individual, who has obtained a long lease with low, government-set rent, can then transfer – effectively “sell” – the lease to another buyer for the full market-value of the land. In effect, the lessee can capture the full market value through this transfer, instead of the agency. 47 The capacity of Domain Lands to update rents and enforce their collection is weak. The department has a total staff of 4 to oversee the entire state of affairs of all public lands, with very little ability to review or consolidate data. 52 5. Today, most of the government land (exact percentage share not available) has been leased out to individuals and to private companies on long term leases. It is unclear what percentage has gone to lower income individuals, or even what amount remains under government control. Private land holdings There is little data on private land holdings, but two trends seem to be affecting the market. First, some large landowners keep their land undeveloped, letting its value appreciate. Second, private succession land that has been passed down for generations is today the subject of litigation due to the absence of adequate inheritance documents. Many of these plots are either lying vacant or have been subdivided into small parcels and rented out informally (see section 3 on Informal Settlements). 53 6. Building construction industry Cost of construction The construction industry plays a key role in Sint Maarten’s overall economy and in the delivery of housing. After Hurricane Irma, while almost every economic sector experienced a negative turnaround or fast contraction, the construction sector accelerated 5% during the first quarter of 2018 compared to the first quarter of 2017.48 This was driven mainly by repair and reconstruction activity. The cost of construction is a key factor driving up housing prices in many Caribbean countries, including Sint Maarten. Table 6.1 shows the increase in construction costs in terms of basic materials, labor and plant units. An average increase of 28% in construction costs was observed from 2016 to 2018, with the biggest increase in medium quality housing. This can be partly explained by the reconstruction boom in the aftermath of Hurricane Irma that resulted in increased demand for materials and labor, and corresponding price hikes.49 Field interviews suggest that there has been no scaling back of these prices since. Table 6.1 Construction costs Cost per sq.mt 2012 2014 2016 2018 Residential construction low high low high low high low high Modest quality 1,076 1,722 861 2,476 969 1,507 1,291 1,938 Medium quality 1,507 2,476 1,184 1,830 1,184 1,938 1,614 2,475 High quality 1,938 3,122 1,938 3,230 2,045 3,444 2,582 4,196 Source: BCQS Construction Market Trend Reports 48 Estimates by the Centrale Bank van Curaçao en Sint Maarten. 49 The government does not regulate the prices of construction materials. 54 The construction cost in Sint Maarten, although on the lower side in comparison with other Caribbean island nations50, is quite high overall. Table 6.2 shows the construction cost in Sint Maarten compared to Colombia, Brazil, and the United States. Table 6.2 Construction costs (USD per sq.mt.) Cost per sq.mt Sint Maarten (2018) Colombia (2018) Brazil (2018) US (2018) Residential construction low high low high low high average Modest quality 1,291 1,938 573 828 647 1,078 1,345 Medium quality 1,614 2,475 669 955 782 1,267 1,614 High quality 2,582 4,196 1,051 1,465 1,267 2,129 2,313 Source: Latin American and Caribbean Construction, 2018 MarketTrend Report, BCQS International, 2018. In Sint Maarten most construction materials are imported as the local market is very small. There is no import duty on construction materials; still, importing supplies from the U.S., Europe or other Caribbean countries can have significant impacts on everything from basic construction schedules and labor projections, to the ability to keep a project’s cash flow positive. Big construction companies import the materials themselves to be more cost effective, but smaller contractors often must buy products locally, which is more expensive. Costs for local labor in Sint Maarten are generally lower than in other countries in the region, including the U.S. However, there is high demand for labor for reconstruction purposes, which has led to an influx of construction labor from the other Caribbean Islands. For these workers the Government has provided expedited reconstruction work permits. Skilled labor—such as HVAC technicians, electronics installers, and engineers—is limited in the local market and has high demand. Thus, especially for big projects, contractors often import labor from other islands or countries, which significantly increases the construction cost. 50 This is in part because it is the only island in the Caribbean which is a Duty Free port, where no taxes are levied on imported materials. 55 Construction equipment for large developments, such as large excavators or cranes, is scarce and often transported from island to island according to project demand. This can cause schedule uncertainty and delays, and is an underlying financial risk that needs to be factored into the project’s cost. Building hurricane proof houses, which usually involves concrete structures, is costlier. While the concrete structure is stronger than a typical wood frame, it can add up to 50% to the construction costs.51 Additionally, many houses in Sint Maarten are being built on hillsides due to the scarcity of available flat land. Building on sloping land is more complex and requires more work in terms of excavation, foundations and retaining walls, thus making it more expensive. Contractors and developers There are many small developers and contractors in Sint Maarten with good technical knowhow but low capacity. Among other things, small contractors do not have the capacity or strength of balance sheet to: attract equity investment or debt finance, acquire equipment and machines, buy materials in bulk, organize labor according to their best productive use, and support research and development. LICCOM is the only local construction company with the capacity to build housing “at scale”, which in Sint Maarten means anything larger than 50-200 housing units. LICCOM usually acts as the prime contractor and the main go-between between smaller subcontractors and the developer. LICCOM has the capacity to take on 3 big projects at a time. LICCOM is the construction company on the ORYX project and has previously worked on social housing projects. As a result, most of the large residential and commercial projects are built by foreign companies with significant expertise and capacity, while individual housing and small repairs are left to smaller contractors. Construction companies must bear high levels of financial, occupational, contractual, and natural-disaster related risk, which drives profits 51 According to interviews with real estate developers and construction companies. 56 margins up. The average margin in Sint Maarten is 12%, which is comparable to other countries in the Caribbean, but much higher than the global average of 5.9%.52 Figure 6.1 compares average profit margins in different markets around the world. Figure 6.1 Construction margins in various markets Construction profit margin (%) Seoul 3 Munich 5 Madrid 5 Bogota 5 Santiago 5 Seattle 5,5 Global average 5,9 London 6 Toronto 6 Nairobi 8,5 Doha 9 Barbados 10 Curacao 10 Jamaica 10 Caribbean average 11,7 St. Maarten 12 Bahamas 15 Trinidad & Tobago 15 Source: BCQS, 2018 and Turner and Townsend, 2017. 52 BCQS, 2018. Note: The average overhead and profit margin percentages are typical for projects ranging from $1M to $5M in construction cost. 57 Given the high profit margins and lower risk associated with high- end luxury housing right through the value chain – for the developer, contractor, and the realtor – there is very little development of low- and middle-income housing. 58 7. Relevant regulations and procedures Permitting process The Building and Housing Ordinance of Sint Maarten is the main legislation for housing construction and design. Pursuant to this ordinance, every construction project must obtain a building permit before the work begins. Building permit applications must be submitted in writing to the Permits Department within VROMI and cost a flat fee of ANG 200. Permit applications are evaluated for compliance with the building ordinance, zoning ordinance and/or applicable spatial development policies. Box 7.1 details the permit process and building permit fees. While the permit process is supposed to take around 6 weeks, the actual turn-around time is much longer. The lengthy and uncertain permitting process was a sticking point for many of the stakeholders interviewed for this study. They reported that for a single home, the process can take up to 6 months, and for larger and more complex projects anywhere between 10-18 months. The Permits Department faces many challenges: First, the permits and inspections departments lack capacity, both in terms of manpower and personnel qualifications. These insufficiencies have created a backlog of permit requests, which have only increased since Hurricane Irma. Further, the agency has no structural engineers on-site, so for complex projects outside experts must be hired, which adds to the time and cost. Second, there is no differentiation based on level of complexity; thus all projects, from a simple house to a complex project, must go through the same process. Only after Hurricane Irma was a special expedited application for roof repairs created, which takes between 3-4 weeks to process. Finally, the entire process is paper-based, which not only causes delays (to print and physically transport documents from one department to 59 another), but also is difficult to track (there is no systematic storage or filing system). Every now and then documents get lost. Given these conditions, it is not unusual for people to start construction without permit approval, especially when it is a repair or an addition to a current structure. As the permits and inspections departments are already overburdened with work, there is little control over these informal construction projects. Yet, some stakeholders mentioned that this lack of regulation has allowed for rapid reconstruction after the hurricane. Box 7.1 Building permit process The Building and Housing Ordinance provides the rules for construction and design to ensure safety and public health. All construction works require a building permit from the government. Applications must be submitted in writing and include the names of the applicant, his profession and his place of residence. The application usually also requires: A copy of proof of ownership of the real estate property or the long-term lease; Drawings of the building, which should include, among other things: - the dimension and height, thickness and structure of the walls; - the calculations and details of structure, strength and stability; - the accessibility of light and ventilation; - the name of architect and/or builder; planning permits; subdivision plan; foundation plan; site plans; structural drawings; electrical plans; plumbing plans; and floor plans. Permit applications require consultation with different departments within government, such as the local fire department to ensure fire prevention 60 requirements and inspections. Building permits for factories, hotels and condo/apartments have additional legal requirements. Depending on the type of construction, the government may ask for additional information, and the applicant is obligated to provide it. In such a case, the applicant is notified by letter and has 4 weeks to make the necessary adjustments. A building permit may be refused if the building plans do not comply with the pertinent requirements. The government’s reasons for refusal must be clearly stated and explained. If the applicant disagrees with the decision, he or she can file an appeal with the government. If the government’s decision is unsatisfactory or takes too long, the appellant is entitled to file an action in Court. After the evaluation of the application is completed, the draft permit is prepared and sent to the Minister for approval. Once approved, an invoice is issued for a permit fee. The amount of the Building Permit Fee depends on the estimated cost of construction based on the legesverordening: A.B. 1994 nr. 22. The Building Permit Fee is calculated based on: Construction value Fixed Plus a per mille for every USD 556 amount of the construction value up to and including USD 27,777 USD 111 USD 27,778 – USD 277,777 USD 389 9 per mille (9/1000) USD 277,778 – USD 555,555 USD 2,639 8 per mille (8/1000) USD 555,556 and more USD 4,861 7 per mille (7/1000) Source: https://www.doingbusinessdutchcaribbean.com/st-maarten/real-estate-construction-law-sxm/construction- regulations-sxm/ and VROMI Permits Brochure. 61 Building code Sint Maarten’s building ordinance was drafted in 1935 and has not been updated since, and does not cover hurricane or earthquake risk. According to the Head of Permits, the Florida Building Code is being used as a guideline for hurricane- and earthquake-resistant building construction, but this is not enough in terms of ensuring and enforcing proper standards. There are current efforts to update the building ordinance and the building code. The new building ordinance will form part of a larger legislative reform package for VROMI. It is not only important to have a strong building code on paper, but also to ensure that it is properly enforced. This underlines the issue of the departments for Permits and for Inspection’s lack of capacity. Hillside Policy The Hillside Policy concerns all hillside lands located above an elevation of 50 meters, where only residential development is allowed. The objective of the policy is to conserve the green hillsides, limit erosion and water run-off. The policy delineates guidelines for development (density, lot size, ground cover, number of floors etc.) – see Table 7.1. Table 7.1 Building guidelines on hillsides Slope 0-10° 10-20° 20-30° 30-40° Between 50-100 mt altitude Min. lot size 400 m2 800 m2 1,200 m2 2,000 m2 Ground cover 35% 30% 25% 15% Max. # floors 2 2 3 3 Between 100-200 mt altitude Min. lot size 800 m2 1,200 m2 2,000 m2 3,000 m2 Ground cover 30% 25% 15% 10% Max. # floors 2 2 2 2 Source: http://www.dcnanature.org/wp-content/uploads/2012/09/D7A-SXM-HillsidePolicyExtended.pdf 62 While well intended, it appears that zoning such large lots of land for relatively low-density development might result not only in much higher infrastructure costs (resulting from more spread-out developments), but might also put large amounts of available vacant public land into private use. Regulations pertaining to gated communities When selling a property, developers can incorporate their own building regulations and rules in the deed of transfer. This is typical for wealthy gated communities, and is done to ensure that all the houses within the community are consistent in quality and design, and to reassure buyers that their property (and surrounding subdivisions, if they are designated as part of the community) will not be “devalued” by potentially “unsightly” or undesired developments in the future. This is done in the form of third-party and perpetual clauses that can stipulate, among other things, that an owner must obtain prior written approval of the developer for any building plans. Such restrictions are legally enforceable.53 To understand more clearly, it is helpful to consider the following scenario: a large tract of land is subdivided by a master-developer into multiple parcels; one parcel is developed into a gated community, and the rest are sold to other individuals. In such a case, the master developer can impose regulations on not just the gated community development, but also on all the surrounding (as yet undeveloped) parcels with respect to their future development. This has been a common occurrence in Sint Maarten for generations, as a result of which many land parcels are designated for exclusive high-end development. This may partly explain the prevalence of so much luxury and super-luxury housing as opposed to the more affordable and high-demand middle- and lower- income housing on smaller subdivisions. Property tax There is a Real Estate Property tax (grondbelasting). This annual tax of 0.3% is supposed to be levied on the value of both unimproved property 53 https://www.doingbusinessdutchcaribbean.com/st-maarten/real-estate-construction-law-sxm/ construction-regulations-sxm/ 63 and improved land with structures, and is charged to the owner of the property.54, 55 However, field interviews revealed a lack of awareness of the tax – or its enforcement. This needs further review, but the property tax could be a valuable source of revenue for the Government, to use towards the development of public infrastructure. In addition, the lack of enforcement of the tax means that owners or lessees of vacant land are not penalized for hoarding land, and this may explain some of the speculative behavior prevalent on the island. Hazard insurance The insurance market in Sint Maarten comprises five large companies: Ennia, Fatum, Gulf, Island Heritage, and Nagico, which are supervised and regulated by the Central Bank of Curaçao and Sint Maarten (CBCS). All local insurance companies are part of the Sint Maarten Insurance Association (SMIA). Insurance companies offer a wide variety of products but are primarily focused on indemnity products (properties and cars). Life insurance and property insurance are a requirement to obtain a mortgage. A hazard insurance policy tends to cost between 1-2% of reconstruction cost. Homeowners are advised to revalue their property every three years and insure accordingly, but this is an uncommon practice. Further, houses built outside of the banking system tend to be uninsured. Insurance claims played an important part in the reconstruction efforts in Sint Maarten. After Hurricane Irma, insurance companies received 6,100 claims for a total value of over USD 667 million. Four months after the hurricane, around 80% of the claims had been settled, with a total payout of over USD 303 million (46% of all claimed damages).56 As the numbers suggest, payouts were substantial, but also significantly lower than the original claim amounts. This is attributed to a combination of factors: contractors inflating estimates for reconstruction, the high incidence of owners having under-insured their properties, and/ or owners being unaware of their own liabilities. 54 https://www.doingbusinessdutchcaribbean.com/st-maarten/tax-sxm/ 55 https://decentrale.regelgeving.overheid.nl/cvdr/xhtmloutput/Historie/Sint%20Maarten/448776/448776_1. html 56 https://stmaartennews.com/parliament/post-irma-insurance-premiums-go-30-60-percent/ 64 Faced with declining profits and solvency issues post Hurricane Irma, insurance premiums are expected to increase between 30-60%, becoming unaffordable for many.57 57 https://stmaartennews.com/parliament/post-irma-insurance-premiums-go-30-60-percent/ 65 8. Housing affordability House prices According to the field research, the price point for the cheapest houses for sale in the market is USD 200,000-250,000 (2-3BR, 2-bath, 120-150 m2). Rentals in the formal housing market start at USD 600-800 for a studio or a 1BR. People renting in informal settlements pay between USD 300-600 for a small plot (with or without a house) depending on location and infrastructure conditions. Defining “housing affordability” As a conventional rule-of-thumb, a ‘non-poor’58 household can typically afford to spend approximately 25-30% of gross monthly household income on housing-related expenditures (rent, mortgage, maintenance, property tax, etc.). Poor households, on the other hand, spend a disproportionate percentage of their income on food and other basic consumables, and therefore, it may be presumed that they can allocate smaller fractions of their income on housing – anywhere from 0-20%. Another indicator of housing affordability often used at the aggregate level – for example, regional, city, or neighborhood level – is the Median Multiple, which is the ratio of median house price to median household income. Normatively, a Median Multiple of 3.0 or less signifies ‘affordable’, with higher thresholds defined as ‘moderately’, ‘seriously’ and ‘severely’ unaffordable (see Box 9.1).59 58 Poor households are defined here as those earning less than the poverty line, who are likely to be in the lowest quintile of the income distribution. 59 Source: http://www.newgeography.com/content/006201-15th-annual-demographia-international-housing- affordability-survey-2019 66 Box 9.1. Understanding the Price Income Ratio The Demographia International Housing Affordability Survey defines middle- income housing affordability using the “Median Multiple,” which equals the median house price divided by the median household income. The Median Multiple is a common indicator used to understand the health of housing markets and compare housing affordability in a transparent way. It also offers a foundation to evaluate structural policy options to achieve housing affordability in the local housing markets. Housing Affordability Ratings Median Multiple Affordable 3.0 & Under Moderately Unaffordable 3.1 to 4.0 Seriously Unaffordable 4.1 to 5.0 Severely Unaffordable 5.1 & Over Median multiple: Median house price divided by median household income A very high Median Multiple would not help determine what is wrong with the housing market, but it serves an indicator that something is not working properly in the real estate supply system. While a high Median Multiple always reflects a divergence between housing supply and housing demand, a low Median Multiple doesn’t necessarily mean that the housing market is healthy. Thus, the Median Multiple should always be related to demographic and economic growth. 67 If a city or country presents a very high Median Multiple, it is important to evaluate the market in depth, as this can have significant social and economic impacts. As a city or small country like Sint Maarten grows, the need for more urban floor space for housing and for the provision of services also grows. The delivery of the additional floor space is possible only if a city or country can expand out and up quickly enough to accommodate the new demand without creating real estate price inflation. However, this process is often hindered by inadequate land management policies and arbitrary land use regulations, and by the lack of mechanisms to finance new infrastructure. Sint Maarten faces the additional challenge in terms of land given its topography and the fact that it is an island. Source: http://www.newgeography.com/content/006201-15th-annual-demographia-international-housing-affordability- survey-2019 Housing affordability without formal finance. For people with no formal bank financing (or otherwise significant savings to purchase in cash), rental housing is the only option in Sint Maarten, and even that is limited. As shown in Table 9.1, even households with two USD 1,500 incomes (i.e. a monthly household income of USD 3,000, or an annual income of USD 36,000, which is higher than the median income household) have very limited choices. This is the first marker of an unaffordable housing market in Sint Maarten. 68 Table 9.1 Housing affordability based on sliding ratio scale of affordability Monthly Monthly HH Annual HH % of monthly monthly housing Current housing Individual income, income HH income for expenditure options available income assuming avg (USD) housing deemed deemed for rental (USD) 2 earners (USD) affordable* affordable (USD) 300 600 7,200 10 60 none 500 1,000 12,000 15 150 none 900 1,800 21,600 20 360 Social rental housing 1,200 2,400 28,800 25 600 Social rental housing 1,500 3,000 36,000 30 900 1.5BR rental in less desirable location 2,500 5,000 60,000 30 1,500 2BR rental in desirable location 4,000 8,000 96,000 30 2,400 2-3BR rental in desirable location 7,000 14,000 168,000 37 5,180 3BR rental in good location 10,000 20,000 240,000 37 7,400 Luxury villa or condo in good location Note (*): the percentage of income a household can comfortably afford to spend on housing is presented here as a sliding scale, increasing with household income. Housing affordability with mortgage finance. A second marker is affordability based on the availability of mortgage finance and the ability of prospective homeowners to access it. Tables 9.2(i) and (ii) illustrate what households with different incomes can afford with mortgage financing with two different LTV ratios. As an illustration, let us consider a household with a gross annual income of USD 36,000. 69 Assuming a 30-year loan @ 7% APR60, this household can qualify for a loan of USD 166,841. With an LTV of 80:20, this household will qualify for a house priced at USD 208,552, but have a steep upfront cost of about USD 66,737 (20% down payment plus 12% closing costs). With a 95:5 LTV, the household can qualify for a house priced at USD 175,623, with a much lower – but still high – upfront cost of about USD 29,856 (5% down payment plus 12% closing costs). Table 9.2(i) Housing affordability based on access to mortgage loan (LTV 80:20) Gross monthly 300 500 900 1,200 1,500 2,500 4,000 7,000 10,000 individual income (USD) Gross monthly 600 1,000 1,800 2,400 3,000 5,000 8,000 14,000 20,000 HH income (USD) Gross annual 7,200 12,000 21,600 28,800 36,000 60,000 96,000 168,000 240,000 HH income (USD) Debt service ceiling 222 370 666 888 1,110 1,850 2,960 5,180 7,400 (37% of annual gross income), assuming no other debt Qualifying Loan Amount: 33,368 55,614 100,105 133,473 166,841 278,069 444,910 778,593 1,112,276 Principle (80:20 LTV) (USD) Down payment, 20% of 8,342 13,903 25,026 33,368 41,710 69,517 111,228 194,648 278,069 house sale price (USD) (A) Total house sale price 41,710 69,517 125,131 166,841 208,552 347,586 556,138 973,242 1,390,345 (USD) (B) Transaction cost at closing 5,005 8,342 15,016 20,021 25,026 41,710 66,737 116,789 166,841 (registration, transfer etc) (USD) (C) Upfront cost to buyer 13,347 22,246 40,042 53,389 66,737 111,228 177,964 311,437 444,910 (down + closing) (USD) (A+C) Actual house cost = sale price 46,716 77,859 140,147 186,862 233,578 389,297 622,875 1,090,030 1,557,186 + 12% transaction cost (USD) (A+B+C) Current housing inventory none none Very little Some Some Available Available Available Available 60 For ease of calculation, the interest rate of 6% is rounded off to an annual percentage rate (APR) of 7% to include additional costs like application fees, appraisal, mortgage insurance, hazard insurance etc. 70 Table 9.2(ii) Housing affordability based on access to mortgage loan (LTV 95:5) Gross monthly 300 500 900 1,200 1,500 2,500 4,000 7,000 10,000 20,000 individual income (USD) Gross monthly 600 1,000 1,800 2,400 3,000 5,000 8,000 14,000 20,000 40,000 HH income (USD) Gross annual 7,200 12,000 21,600 28,800 36,000 60,000 96,000 168,000 240,000 480,000 HH income (USD) Debt service ceiling 222 370 666 888 1,110 1,850 2,960 5,180 7,400 14,800 (37% of annual gross income), assuming no other debt Qualifying Loan Amount: 33,368 55,614 100,105 133,473 166,841 278,069 444,910 778,593 1,112,276 2,224,552 Principle (@95% LTV) (USD) Down payment, 5% of 1,756 2,927 5,269 7,025 8,781 14,635 23,416 40,979 58,541 117,082 house sale price (USD) (A) Total house sale price 35,125 58,541 105,374 140,498 175,623 292,704 468,327 819,572 1,170,817 2,341,634 (USD) (B) Transaction cost at closing 4,215 7,025 12,645 16,860 21,075 35,125 56,199 98,349 140,498 280,996 (registration, transfer etc) (USD) (C) Upfront cost to buyer 5,971 9,952 17,913 23,885 29,856 49,760 79,616 139,327 199,039 398,078 (down + closing) (USD) (A+C) Actual house cost = sale 39,339 65,566 118,018 157,358 196,697 327,829 524,526 917,920 1,311,315 2,622,630 price + 12% transaction cost (USD) (A+B+C) Current housing inventory None None Very little Some Some Available Available Available Available Available There are several important takeaways from this analysis. First, the market inventory has a very limited stock of housing available in the USD 150,000-200,000 range. Even if financing were available, it would not imply that one can find a house that is suitable and affordable. Second, even if housing is available, and monthly mortgage payments affordable, often the upfront costs pose a significant burden to households in this income segment. Last, but most importantly, for the majority of households earning less than Sint Maarten’s median household income of approximately USD 2,000 per month, options to purchase a house in the market are scarce to non-existent. This 71 includes not just informal sector workers or self-employed persons, but also government employees with regular wages. As a result, most are forced to rent or to save money to buy a plot of land and then build incrementally. 72 9. Why housing is unaffordable in Sint Maarten This section presents the various components of housing that have a direct bearing on its market price and value. Land In addition to the fact that Sint Martin is an island, it also has a hilly terrain, much of which is not suitable for development. Of the limited amount of developable land available, there are large tracts of government-owned land under long-term leases that remain un- or underdeveloped,61 and also large parcels of privately-owned land with unresolved inheritance issues that cannot be developed. Other factors that may be contributing to a highly constrained land market, include: Large parcel sizes mandated by Hillside Policy promoting forest preservation that encourage lower density and more spread-out developments; and62 Absence of any penalty or tax on privately held vacant land, which contributes to speculation by wealthy landowners, both individuals and corporations. As a result, land comes at a premium in Sint Maarten. It can range anywhere between 30-60% of the overall selling price of a property. By contrast, in a well-functioning housing market, the cost of land should be in the range of 20-30% of the overall selling price. Construction cost Virtually all components of the construction process contribute to the high base cost of construction in Sint Maarten: 61 The Domain Affairs department reports that many undeveloped parcels of land on the island are not in compliance with the terms of their land leases. 62 The Hillside Policy applies to all hillside land above an altitude of 50 meters, where only residential development is allowed. 73 Hilly terrain and the hurricane exposure, both of which require more concrete – for example, to build retaining walls and RCC roofs; Imported construction materials; Imported labor for large projects; No economies of scale for small housing projects; and High contractor profit margins due to elevated levels of financial, occupational, contractual, and natural-disaster related risk. Building permits Time is money for a developer; delays and uncertainty in the current permitting process add risk to the development of real estate and housing. Delays in obtaining inspections and permits have an opportunity cost, as developer capital is tied up in non-productive use. Developers may also have to pay interest on borrowed funds while waiting for approval. Further, outdated building codes add to the cost of housing and create vulnerabilities in the housing market. This is factored into the pricing, which is passed on to the buyer. Closing costs on house sale/purchase Realtor fees. Realtors charge anywhere between 6-8% of the property value for house sales. These fees are typically paid by the seller. Property transfer costs. Title to real property, or a  long-term land lease, may be transferred by means of a transfer deed, which must be executed before a civil law notary. After effectuation of the transfer, the civil law notary registers a copy of the executed deed of transfer in the public registers. The notarial costs involved with the transfer of a real estate property are fixed and are dependent on the purchase price of the property, varying from approximately 2% for properties up to USD 50,000 to approximately 0.4% for properties of USD 1,000,000 and more. 63 Transfer taxes are approximately 4% of the purchase price (or the registered value, if this value is higher). The transfer tax is paid to the civil law notary, who is responsible for the payment of the transfer tax to 63 https://www.doingbusinessdutchcaribbean.com/st-maarten/real-estate-construction-law-sxm/transfer- of-real-estate-sxm/ 74 the local tax authorities in Sint Maarten. 64 A search for liens, recordings and registrations costs approximately USD 265. Turnover tax. A flat turnover tax of 5% is levied on the delivery of all goods and services rendered ‘within the territory’ by resident or non- resident entrepreneurs within the scope of their business. This applies to all housing developments, regardless of price-point or whether the target market is low-income or luxury housing.65 House size Sint Maarteners have a culture of living in single family homes. While this aspiration is not necessarily negative, it could mean the difference between accessing a decent house and not. The homes for sale on the market, in addition to many of the social houses for rent by SMHDF, are 2-3 BR units with footprints of more than 100 m2. It is little wonder that these houses cost upwards of USD 250,000. In the meanwhile, middle- and low-income Sint Maarteners must make do with less than adequate living conditions. As stated in the Housing Supply section, the majority of locals live in rental accommodation. Many of these are smaller 1-2 BR units, typically attached to a landlord- occupied main unit. This stock of housing should be analyzed in order to address the real housing needs of lower income households. Utilities Sint Maarten has one of the highest energy consumption rates in the region, with the average customer consuming around 1,500 kWh monthly.66 Thus, the average electricity bill for domestic consumers is between USD 250-300, representing a significant portion of housing expenditure.67 64 https://www.doingbusinessdutchcaribbean.com/st-maarten/real-estate-construction-law-sxm/transfer- of-real-estate-sxm/ 65 https://www.doingbusinessdutchcaribbean.com/st-maarten/tax-sxm/ 66 Government of Sint Maarten, National Energy Policy, 2014. 67 Electrical energy and water in Sint Maarten are supplied by N.V. GEBE, a fully owned government company. The company’s infrastructure and energy distribution system suffered severe damages after Hurricane Irma, and according to media coverage the company has been struggling financially. The electricity tariffs consist of a base rate (set by Government at ANG 0.25-0.,29 per kWh) and an adjustable fuel surcharge which varies month-to-month. 75 Table 10.1 shows that electricity prices in Sint Maarten are much higher than those in the United States, but comparable to regional peers.68 Electricity prices tend to be high in the Caribbean for several reasons, including: (i) dependence on imported fuels, (ii) small economies of scale, (iii) the energy industry is dominated by monopolies as each island has an isolated grid, and (iv) limited renewable and alternative energy projects. Table 10.1 Average electricity prices (2013) USD/kWh Surinam 0.05 – 0.11 Orlando, FL 0.11 Nevis 0.21 Haiti 0.28 St Lucia 0.35 Sint Maarten 0.35-0.36 St Vincent 0.36 Barbados 0.38 Curacao 0.42 Bahamas 0.42 Source: Government of Sint Maarten, National Energy Policy, 2014. 68 Since this 2013 data many of the Caribbean islands including Aruba, Curacao and Bonaire have implemented Renewable Energy sources which are supposed to bring costs down. 76 Guidance and Recommendations 77 As presented in the Situation Analysis, housing has become unaffordable for many Sint Maarteners and has led to the expansion of informal settlements and overcrowding. This section outlines recommendations that could help address the gaps in the housing sector. While the recommendations are organized by themes, Table 11.1 prioritizes the actions for the short (0-3 years) and medium term (3-5 years). The short-term recommendations are considered actions/investments that the Government can start to implement with greater facility and that can have important effects on the housing sector. The medium-term recommendations may require more time to develop and/or be more complex to implement. It is important that these recommendations are viewed as guidance to help start a dialogue with the Government regarding possible investments and policy action. They will need to be further developed and discussed with the Government and relevant stakeholders to make them actionable. 78 1. Promote the development of “affordable” housing Unaffordable housing in the formal market is one of the key reasons for people living in inadequate conditions – in poor quality housing with inadequate infrastructure, and in undesirable or less desirable locations. While this affects all households with limited access to decent housing for purchase or for rent, those at the extremes of the demographic and income spectrums – children, youth, elderly, as well as the more vulnerable low-income households, including women- headed households with single incomes – are especially impacted. Increase the supply of social housing It was outside the scope of this study to quantify the exact demand for social housing in Sint Maarten, but the mismatch between incomes and rent levels clearly demonstrates the demand for social housing. Assuming no formal bank financing, there are few affordable options in the formal market for people in the 60th income percentile and below (those that earn USD 1500 a month or less). The 2012 Housing Vision estimated a demand of over 3,200 units of affordable housing over the 2012-20 period. Post Irma, it is likely that the demand has increased. As is highlighted in the recommendations relating to institutional building capacity, the SMHDF should be supported to become the engine for the development of social housing in Sint Maarten. Its operational and financial structures need to be strengthened to ensure its sustainability, as well as its ability to meet the housing needs of low-and middle-income households. Currently, the World Bank is supporting these efforts through the development of a new business plan for the organization. Incentivize private developers Private developers could be incentivized to move down market through a combination of actions including abatement of the turnover tax, an expedited permitting process, and, on a limited basis, access to land at a subsidized price. 79 Currently, the 5% turnover tax is applied at multiple points in the housing supply chain, resulting in a significant cumulative impact on the cost of producing housing. It is levied on the purchase of materials, on the revenues of the construction company, and on the developers’ profit upon sale of the unit. This flat rate is applied regardless of home price. There is an opportunity to differentiate the application of the tax based on the value of the property or income group. For example, the lower the property value, the lower the tax rate. Additionally, the tax could be waived for all housing units below a certain price threshold (i.e. USD 250,000). Aruba has recently implemented a tax reform following these principles, and their experience can be taken into consideration.69 Another incentive that could be offered to developers is an expedited permitting process. Currently, all building permits follow the same review process regardless of construction type or design complexity. Delays in approvals result in uncertainty for the developer and increased financing costs. Housing developments with sale or rental prices below a specified price point or unit size could be fast-tracked through the permitting process. This fast track would place affordable housing projects at the front of the permit approval line. This approach would not only reduce the cost of affordable developments but would also increase the cost of luxury developments as the wait for this would increase accordingly. A scheme for reduced permitting fees might also be evaluated for affordable housing projects. The Government of Sint Maarten could also incentivize the development of affordable housing by selectively providing land at a subsidized long lease rate, with sale or rental prices below a specified price point or unit size. Encourage smaller homes in denser developments Due to its scarcity in Sint Maarten, developable land represents a significant portion of the total development cost of housing. The promotion of denser housing developments with smaller and higher numbers of units would help to drive down the per unit cost. A shift from stand-alone, single family housing to townhomes or garden-style walk-up condominiums could help address affordability by increasing 69 https://taxinsights.ey.com/archive/archive-news/aruba-enacts-2019-tax-reform.aspx 80 the quantity of housing available in the market, as well as reducing the per unit purchase price. In addition, higher density developments make more efficient use of existing trunk infrastructure as well as spreading the cost of new networks among a greater number of housing units. Thus, a better expansion model can release significant financial resources that can be used for other public-interest uses. To promote denser developments, especially in underutilized infill sites and areas that already have access to roads and other basic infrastructure, the following instruments can be applied: flexible and mixed-used zoning, up-zoning, or allowing greater floor-area ratio (FAR). Introduce progressive property tax policy for housing A progressive property tax for housing could be introduced targeting high value properties. For housing priced less than USD 100,000- 200,000, a tax write-off at all levels (turnover tax, property tax, income tax) could be considered, as it would stimulate the development of housing in that price range. A tax write-off should be seen only as a market-correction measure and should contain a sunset clause. Make mortgage financing more accessible through the Mortgage Guarantee Fund As highlighted in the National Recovery and Resilience Plan, the Mortgage Guarantee Fund could enable households to more easily access housing finance. The Netherlands, the United States, as well as some developing countries such as Morocco have established successful mortgage guarantee funds, which could be adapted to fit the local context of Sint Maarten. 81 2. Improve land supply Review and update the Hillside Policy Rather than dispersing hillside development with large plots, the same proportion of built-up area could be achieved through smaller subdivisions (say, plots of 200 m2 in elevations of 50-100 meters altitude and plots of 300-400 m2 in elevations of 100-200 meters, with careful consideration of the slope/ topography), and tighter building regulations. This approach would concentrate the development in a smaller area of the hillside, allowing the rest to be conserved as forest land. Smaller plots would also be more efficient for the provision of infrastructure. They would also allow for more effective management of land supply, with the Government retaining large tracts and releasing plots for development in a phased manner, as needed. Identify ways to unlock “frozen” succession lands Succession lands embroiled in legal disputes represent an unknown portion of land on the island but are assumed to constitute some of the largest tracts of undeveloped (or informally developed) land. Based on field interviews, it is legally required to have full agreement from all presumed heirs in order to sell or develop a piece of succession land. Disagreement on what to do with the land parcels has therefore resulted in “frozen” assets. It may be possible to craft a majority-rule approach for determining the use of the properties, thereby overcoming this legal hurdle. Another alternative is to establish a special arbitration entity for these cases. But clearly, this issue needs further investigation to arrive at feasible solutions. 82 3. Improve land management Develop a centralized inventory of public and private lands Currently, all long lease land is tracked by Domain Affairs using an excel file. Alternatively, to access data held by the cadaster, a request must be made on a parcel-by-parcel basis. This cumbersome process does not allow for easy analysis of the overall portfolio of land. It would serve the government well to establish a centralized database of public and private land that links information currently housed in the Domain Affairs excel file with the property data held by the cadaster. Accelerate efforts to update the building code It was been pointed out by VROMI officials that the new building ordinance is expected to be approved by Parliament by December 2019. The importance of getting this new building code enacted cannot be understated. Additionally, the Organization of Eastern Caribbean States (OECS) commission is working with the Eastern Caribbean countries to update their building codes, which might open an opportunity for cross-collaboration. Update land rents to reflect prevailing land values According to Domain Affairs, long lease land rents are currently based on a price table of unknown origins. The rates currently charged are well below market levels, thereby providing a windfall to the lease holder upon sale of the property. Land rents should be updated to reflect prevailing land values in order to maximize income to the Government, rather than to the leaseholder. To do this, a comprehensive analysis of land and property values on the island is needed. Additional resources could be used to fund public infrastructure projects. Enforce collection of land rents on domain land An analysis of the inventory of land held under long leases is needed to determine which leaseholders are in arrears. Enforcement of land rent collection would increase revenue to the Government. It could also allow for the clawing back of land that is in arrears or has remained 83 undeveloped past its 2-year limit. Bringing back long-leased public land under these circumstances is already written into the law; the problem is enforcement. Enforcing this could solve two problems: first, it would bring more developable land back into government control so that it can be put to more effective use; and two, it would increase revenue collection, assuming that the ground rents are adjusted to better reflect market values. Introduce vacant land tax Currently, there is no disincentive to holding vacant land, either privately owned or on long lease from the Government. The Government might consider the introduction of a vacant land tax to dissuade owners from speculating on land value appreciation, while at the same time promoting development and boosting housing supply. For example, in Yucatán, Mexico vacant land is taxed 2.5 times the rate of built property; Puerto Alegre, Brazil has implemented a system of ‘progressive’ vacant property taxes in which tax rates on urban plots are periodically updated by the Government. If such approaches are politically unfeasible in Sint Maarten, then consideration should be given to enforcing the property tax on the real value of the land. 84 4. Make the rental housing market more robust Support and enhance the existing rental market Enabling the development of a formal rental housing sector could help solve many of the housing needs in Sint Maarten. A healthy rental market is important for several reasons: (i) it provides a decent housing alternative for households that do not have sufficient income to purchase a home or make a down-payment, or for those with informal incomes that do not qualify for a mortgage loan; (ii) it allows for greater labor mobility, especially in a country with high immigration; and (iii) enables more compact developments. Many of the rented units in Sint Maarten are informal and not compliant with building standards. However, they are a critical source of housing that addresses the needs of the average household. Thus, it is worthwhile to conduct a deeper analysis into the informal rental market for several reasons: (i) to better understand the actual usage of housing space and the needs of tenants, which can inform future development of social housing by SMHDF70; (ii) to explore the possibility of mainstreaming this type of small-landlord housing supply; and (iii) to consider providing support to upgrade some of the existing settlements to enhance their disaster resilience. Additionally, the Government should craft laws and regulations to ensure that the rights of landlords and tenants are balanced and that properties are safe and habitable. Important aspects to consider are: (i) the standardization of rental contracts, (ii) the development of guidelines for the duration and termination of contracts, and (iii) the enforcement of effective and fair processes to resolve conflicts and deal with evictions. 70 Many of the social houses offered for rent by SMHDF are 2-3 BR units larger than 100m2. 85 Introduce a well-targeted rental subsidy (voucher) program The government could consider developing a voucher program to help eligible71 low-income households pay the rent on private market-rate rental unit for a temporary period, thereby addressing the shortfall in SMHDF’s social housing portfolio.72 Many countries have established this type of demand-side subsidy, including the United States, the United Kingdom, and most recently, Chile. The design of the program depends on the local context. For example, Chile’s program targets low-and moderate-income young families and offers a flat-rate, time- limited subsidy, which allows a degree of administrative simplicity and payment flexibility for tenants facing income volatility. The success of such a program is very dependent on the supply of suitable rental housing, which leads to the next point, below. Support small property owners to build rental housing This proposes legal reform and financial support (grants) to small landlords to provide a steady supply of rental housing targeted to lower income households. Formalizing Accessory Dwelling Units (ADUs) 73 and small extensions promises to improve affordability while incrementally injecting “gentle density”74 into otherwise low-rise, low- density family neighborhoods, without destroying their character or their infrastructural carrying capacity. ADUs can be a win-win: an inexpensive, flexible way for more people to live in in-demand neighborhoods and for small landlords to make some additional income.75 In order to protect landlords and tenants, existing ADUs would have to be improved – and new ADUs constructed – pursuant to formalized building standards. Basic parameters of health and safety 71 Eligibility would need to be clearly articulated, but at a basic level, it should prioritize the most vulnerable groups, including possibly low-income households, women-headed households with single incomes, elderly with low or no incomes, disabled persons, and young people (students, young professionals). 72 The specifics of such program would be developed as a follow-up to this technical assistance and in close consultation with the Government. 73 Backyard units, granny flats, garage apartments, mother-in-law suites – all different types of ADUs – are typically modest homes, often the size of a studio apartment, but with a separate entrance. 74 https://www.strongtowns.org/journal/2019/1/23/legalizing-more-homes-it-matters-how-you-do-it 75 Starting in 2009, Vancouver allowed ADUs nearly citywide, on what totaled more than 65,000 lots. No additional parking was required, no public hearing or approval from neighbors, and no expensive or cumbersome design requirements. One could build an ADU on just about any residential lot in Vancouver, behind just about any style of house. The result? The city is adding more than 1,000 of these small, affordable homes every year, and the total share of single-family houses with legal ADUs is up to a staggering 35%. (Source: https://www.strongtowns.org/journal/2018/9/11/if-youre-going-to-allow-adus- dont-make-it-so-hard-to-build-one ) 86 would have to be observed. The permitting process should be easy and streamlined for prospective, non-professional landlords. Once in the formal market, new landlords could choose to make their units eligible for the rental subsidy scheme proposed above. Waive income tax on rental income for small landlords During field interviews, it was reported that landlords must pay income tax on rental income. To incentivize landlords to rent out their properties or formalize rental contracts, this tax could be waived for small landlords (those, say, with < 5 units within a certain price range) to reduce their cost of operation. This would increase the quantity of units in the market. 87 5. Provide targeted assistance to low-income and vulnerable households Expand and scale-up financing for roof repair Roof repair programs supported by the Government (i.e. through the Emergency Recovery Project) could be scaled up to reach more low- income households. Financing program for incremental house construction/ improvement In addition to a targeted roof repair program, a subsidy program to help low-income households improve other aspects of their homes would help to improve living conditions and resilience to natural disasters. Implement pilot project for informal settlement upgrading Many low-income households currently live in informal settlements on public and private land. Settlements often lack proper infrastructure and access to services. Therefore, the Government should consider piloting a program to retrofit selected neighborhoods. Such a program would typically feature the following: participatory planning and development, strengthening of tenure security for residents, and provision of infrastructure and basic services such as roads, water, sanitation, and electricity. International experience has shown that settlement upgrading can incentivize private investment in housing and improve the quality of life of settlement residents.76 76 Imparato, Ivo; Ruster, Jeff. 2003. Slum Upgrading and Participation: Lessons from Latin America. Directions in Development. Washington, DC: World Bank. World Bank.  88 6. Improve technical and financial capacity of government institutions Field interviews with VROMI departments as well as the SMHDF revealed a need to build technical capacity and to increase human resources. Domain Affairs It was reported that the Domain Affairs department currently oversees 3,000 long-lease land parcels with a staff of only 5, including the acting head of department. An assessment of capacity needs should be conducted to determine the appropriate staffing arrangements and skill set for the department. Permitting and Inspection Based on field interviews, the permits and inspections departments lack capacity, both in terms of manpower and personnel qualifications. Insufficient human resources have created a backlog of permit requests, which has grown since Hurricane Irma. An assessment of capacity needs should be conducted to determine the appropriate staffing arrangements and skill set for the permits and inspections departments. Furthermore, the entire permitting process is paper-based, which not only causes delays, but is also difficult to track and sometimes results in lost documents. It is recommended that a digitized system for handling permits requests be implemented. Housing policy There is currently no staff member within VROMI responsible for housing policy on the island. A housing expert, supported by a core housing team, should be appointed to serve as the single point of accountability charged with defining, coordinating, facilitating, enabling and implementing the country’s housing policy. The collection and analysis of housing sector data, as described below, would also fall under the purview of the housing expert. 89 Sint Maarten Housing Development Foundation SMHDF should be strengthened to become the engine for the delivery of social housing in Sint Maarten. It manages a portfolio of almost 800 housing units with a staff of only 14 individuals, and it lacks the financial and human resources to sustain its operations. As part of the World Bank’s support to the SMDHF, an evaluation of its operational model is being undertaken. This includes review of the organization’s lines of business, the performance of its existing properties, as well as its organizational structures, human resources, and financial flows. Past operational performance will be assessed based on this evaluation, and recommendations for modifications to the organizational structure and requirements for ongoing subsidy from the Government of Sint Maarten will be provided. Strengthen the role of Rent Committee The Rent Committee could play an important role in arbitrating disputes between landlords and tenants, but should initially only handle cases in which the monthly rent is less than USD 800 or for properties that are valued less than ANG 250,000. These limits would restrict the committee’s jurisdiction to the lowest income segment. Should this be successful, increasing the monthly rental ceiling to include middle- income renters could be considered. The capacity of the Committee would need to be accordingly increased to handle more cases. Community consultation and participation There is no formal mechanism for community consultation and participation regarding housing issues in Sint Maarten. Such mechanisms are needed to keep the community informed and involved in important decisions, as well as to sensitize people to key topics such as the benefits of higher density housing and housing insurance. This should be the responsibility of the housing team within VROMI, and it is important that adequate resources be put into this aspect of policy- and decision-making. 90 7. Improve data collection Data on incomes, house prices, housing inventory, housing demand Currently, data on the housing sector is limited and derived from disparate sources. The most comprehensive source of information on housing quality and quantity is the 2011 Census. This information is very useful for policy development, but the periodicity limits the accuracy of the data. The Labour Force Survey, conducted more frequently, provides data on incomes as well as data on household tenure and unit sizes. The Household Budget Survey provides some useful information on housing expenditures. The Statistical Yearbook provides data on population growth and residential permits. Finally, aggregate mortgage finance data is available from the Central Bank. However, there is a need for a more comprehensive and frequent collection of housing- related data (house prices, household incomes, mortgage data, etc.) disaggregated to a level that can meaningfully inform policy making and budgeting. Some of these data points could be obtained through the permitting and inspections process. Additionally, it is recommended that a bi-annual housing survey instrument be introduced on the island, to be implemented by the Stats Department. Housing indicators A set of standard housing indicators to track the status of the housing sector in Sint Maarten is highly recommended. As an example, the following indicators may be considered for inclusion in the bi-annual survey proposed above: number of households, household size, household composition, tenure, unit size, key unit attributes, housing expenditures, and household income. In addition, these indicators could include data related to the housing market, such as: construction costs, mortgage issuance, home construction starts, and home sales. 91 Table 11 Summary of recommendations Recommendations and Actions Responsibility Short-term Development of “affordable” housing: VROMI (0-3 years) -Increase the supply of social housing -Incentivize private developers in the development of affordable housing (smaller units, multifamily versus single family configuration) -Encourage smaller homes in denser developments - review and reform zoning/ building/ planning standards -Make homeownership more accessible through the Mortgage Guarantee Fund Improve land management: Domain Improve land management - development of a centralized - Affairs, database/inventory of public and private lands VROMI Continue efforts to update building code - Strengthen institutional framework: VROMI, Develop a housing policy - SMHDF, Rent Improve capacity of Domain Affairs, and Permits and - Committee Inspections departments (technology, staffing, funding) Improve technical and financial capacity of SMHDF and - Rent Committee Establish channels for community consultation and - participation in policy- and decision-making Data collection and management: STAT, VROMI Improve systems for data collection – data on incomes, - housing prices, housing inventory, housing demand Develop housing indicators - Support the development of a rental housing market: Government Conduct study to understand informal rental market and - of SM, Rent support policies to develop a robust rental market Committee Support small property owners to build rental housing - Waive income tax on rental income for small landlords - Provide targeted assistance to low income and Government vulnerable households: of SM Scale-up financing for roof repair program - 92 Recommendations and Actions Responsibility Address informality: Government Conduct mapping of informal settlements - of SM, VROMI Develop pilot informal settlement upgrading project - Medium-term Address housing informality and rental markets: Government (3-5 years) Carry out pilot project for informal settlement upgrading - of SM, VROMI Introduce a well-targeted rental subsidy (voucher) program - Improve land supply: VROMI Review and reform Hillside Policy - Review and reform policy on succession lands - Improve land management: Domain Update land rents to reflect real land values - Affairs, Enforce termination of long lease contract for holding - VROMI undeveloped land after 1 year, and for non-payment of rent Review and reform taxation structure: Government Introduce progressive property tax policy for housing - of SM, VROMI Reform property tax to discourage speculation and - hoarding of land 93 94