,
Diffusion of Condominiums
Case of Dalénum JONATHAN BOZA SETH MANDOKI
KTH ROYAL INSTITUTE OF TECHNOLOGY
Spridning av Ägarlägenheter Fallstudie Dalénum
av
Jonathan Boza Seth Mandoki
Examensarbete TRITA-ITM-EX 2020:XYZ KTH Industriell teknik och management
Industriell ekonomi och organisation SE-100 44 STOCKHOLM
Diffusion of Condominiums Case of Dalénum
by
Jonathan Boza Seth Mandoki
Master of Science Thesis TRITA-ITM-EX 2020:XYZ KTH Industrial Engineering and Management
Industrial Management SE-100 44 STOCKHOLM
Examensarbete TRITA-ITM-EX 2020:XYZ
Spridning av Ägarlägenheter Fallstudie Dalénum
Jonathan Boza Seth Mandoki
Godkänt
201X-mån-dag
Examinator
Mats Engwall
Handledare
Thomas Westin
Uppdragsgivare
{Namn}
Kontaktperson
{Namn}
Sammanfattning
Detta examensarbete behandlar den senaste upplåtelseformen i Sverige. Mer specifikt har vi utforskat ägarlägenheter från ett färdigställt projekt i Stockholm, med hänsyn till intressenter som Bostadsutvecklare, Bank, Lagstiftare, och Ägare av Ägarlägenheter. Den generella spridningen av ägarlägenheter har hittills varit lägre än förväntat, och orsaken till detta är inte fastställd. Avsikten med vår forskning var att identifiera de huvudsakliga hindren för ägarlägenheter på den svenska bostadsmarknaden. För att göra detta, så undersökte vi skillnaderna mellan ägarlägenheter och bostadsrätter. Forskningen utfördes med en inledande förstudie bestående av intervjuer med fem olika experter inom området. Därefter utfördes en fallstudie på det färdiga ägarlägenhets projektet i Dalénum, bestående av intervjuer med 10 ytterligare personer av de viktigaste intressenterna. En investeringskalkyl på de olika boendeformerna utfördes för att få en bättre uppfattning av de ekonomiska skillnaderna mellan upplåtelseformerna. Upptäckterna från undersökningen menar att de främsta skillnaderna mellan upplåtelseformerna berör bostadsägarna. Mer exakt framkommer skillnaderna i Kapitalstrukturen, Ägandet, och Möjligheten att Hyra ut . Vidare identifieras fyra huvudsakliga hinder för spridning av ägarlägenheter, det vill säga Moment-22, Kostnader & Regelverk, Grannskap, och Brist på Intresse.
Nyckelord Ägarlägenheter, Bostadsrätter, Upplåtelseform, Dalénum
Master of Science Thesis TRITA-ITM-EX 2020:XYZ
Diffusion of Condominiums Case of Dalénum
Jonathan Boza Seth Mandoki
Approved
201X-month-day
Examiner
Mats Engwall
Supervisor
Thomas Westin
Commissioner
{Name}
Contact person
{Name}
Abstract
This master thesis addresses the latest form of tenure in Sweden. More specifically we have investigated condominiums from a completed major project in Stockholm, including stakeholders as Developer, Bank, Insurer, Legislator, and the Owners of Condominiums. The overall diffusion of the form of tenure has so far been lower than expected, and the reason for this has not been determined. Our research was made with the intention to identify the main obstacles for the diffusion of condominiums in the Swedish housing market.. In order to do so, we investigated the differences between condominiums and cooperative apartments. The research was conducted through an initial pre-study including interviews with five different experts within the area.
Subsequently, a case study on the completed condominium project of Dalénum was made, including interviews with an additional 10 interviewees among the most important stakeholders.
In addition to interviews, an extensive real estate appraisal was made, and the results were analyzed through our theoretical framework. Findings from the research suggest that the main differences between the forms of tenure concern the homeowners. More precisely the differences appear in the Capital Structure, the Ownership, and the Ability to Rent out. Moreover, four main obstacles for the diffusion of condominiums were identified as. Catch-22, Costs & Regulations, Neighborship, and Lack of Interest.
Key-words Condominiums, Cooperative Apartments, Form of Tenure, Dalénum
Contents
1. Introduction 8
1.1 Problem Background 8
1.2 Purpose 9
1.3 Research question 9
1.4 Delimitations 9
1.5 Expected contribution 9
1.6 Outline 10
2. Definitions, descriptions and terminology 11
2.1 Definition of Condominium 11
2.2 Definition of Cooperative Apartment 11
2.3 Taxation and fees 12
2.4 Practical differences 12
2.5 Capital structure 13
2.6 Protected tenancy 13
2.7 Utility value rent 14
2.8 Block leasing 14
2.9 Criticism against condominiums 14
3. Literature review 15
3.1 Previous findings 15
3.2 Theoretical Framework 18
3.2.1 Diffusion of innovations 18
3.2.2 Real estate investment theories 21
4. Research Method 26
4.1 Research Design 26
4.2 Research Process 26
4.3 Data Collection 27
4.3.1 Document collection 27
4.3.2 Interview methodology 28
4.4 Data Analysis 30
4.5 Scientific Quality 30
5. Results 32
5.1 Pre-study 32
5.2 Case study 33
5.2.1 Real estate appraisal 33
5.2.2 Interviews 42
6. Analysis and Discussion 49
6.1 Diffusion of innovation 49
6.2 Real estate appraisal 52
6.3 Differences between condominiums and cooperative apartments 54
6.4 Obstacles for the diffusion of condominiums 59
6.5 Scientific quality 62
7. Conclusion 63
References 65
List of Figures
Figure 1. Diffusion process 21
Figure 2. IRR and NPV 25
Figure 3. Overview of the research process 27
Figure 4. The area of Dalénum from above 34
Figure 5. Diffusion of innovation S-curve 50
Figure 6. Diffusion of innovation communication channels 51
Figure 7. The differences in capital structure of condominiums and cooperative 54 apartments both by purchase price and by monthly costs
List of Tables
Table 1. The people that were interviewed in the pre-study 29
Table 2. The people that were interviewed in the case study 30
Table 3. Data of the three condominiums in Dalénum that have been resold 35 Table 4. Input data for condominium inc. mortgage-deed and cooperative apartment 37 Table 5. Input data for condominium exc. mortgage-deed and cooperative apartment 38
Table 6. Capital budget for condominium inc. mortgage-deed 39
Table 7. Capital budget for condominium exc. mortgage-deed 40
Table 8. Capital budget for cooperative apartment 41
Table 9. The pros and cons of cooperative apartments for owners and developers 55 Table 10. The pros and cons of condominiums for owners and developers 58
Nomenclature
Assess value - The value of a property that is used for taxation
Bank - The creditor who lends out money to developers and property owners Broker - Real estate broker
Condominium association - The joint unit which owners of condominiums in a multi-family house are members of Cooperative apartment - The right to use an apartment in a housing cooperative
Developer - Company that develops real estate properties
Form of tenure - How the resident is tenured (e.g. cooperative apartment, and condominium) Housing cooperative - Determines over the cooperative apartments
Insurer - Insurance company that provide home insurance for the properties KPI - Key Performance Indicators
Legislator - Politician who is member of the parliament Owner - Property owner of condominium
Foreword
This master thesis was made at the department of Industrial Engineering and Management at KTH Royal Institute of Technology in Stockholm, Sweden.
Several people have contributed to this master thesis. First and foremost, Hans Lind was the one who helped us initiate the thesis. His positive attitude, valuable insights, and recommendations to further contacts, made us feel confident to continue the research. Moreover, all the others who took their time to meet and talk to us during the early phase of the research contributed to valuable insights and also helped to form the direction of further research. Olof Pettersson Herold became a milestone in the research since he provided us with important information that was needed for the case study of the Dalénum project. He was very complaisant and contributed to further information regarding the project of Dalénum. Furthermore, all other people who got interviewed in the later phase of the research supplied us with exclusive information that forms the case study of this thesis. Last but not least, our supervisor Thomas Westin, and our seminar leader Mats Engwall, have continuously supported us and given us valuable feedback during the whole time when conducting this master thesis.
Thank you all!
JONATHAN BOZA & SETH MANDOKI Stockholm, spring 2020
1. Introduction
The introduction intends to provide the background of the problem that this thesis will investigate. Subsequently the purpose and the research questions are presented, and so are the limitation, expected contribution and outline.
1.1 Problem Background
Condominiums is a new form of tenure in Sweden which was introduced as an alternative to the more common tenure cooperative apartment (Andersson et al., 2010) (Scb, 2019).
Condominiums are essentially living spaces or apartments that can be separately owned and sold by their occupants. Condominium buildings consist of separately owned units and common areas which are jointly owned. The condominium is defined as a three-dimensional tangible asset which implies ownership of the actual apartment instead of owning a share in a housing cooperative (Regeringskansliet, 2017). Housing cooperatives are the most common way of owning apartments in Sweden, but condominiums are actually more widespread and more common in other European countries (Paulsson, 2007). About a decade after the introduction of condominium legislation in Sweden, the new form of tenure has still not been produced in the expected amount (Karlsson, 2016). According to Persson and Rasmusson (2012) a situation of catch-22 has occurred, where all stakeholders are waiting for the others to start embracing the new form of tenure.
The purpose of introducing the new form of tenure was to empower the mobility in the housing market by providing a new alternative form of tenure for multi-family houses, to encourage diversity, to favor new production of houses, and also to bring more freedom of choice and influence to the people in the housing market (Justitiedepartementet, 2008). However, condominiums have not been produced in the expected amount (Byggmästareföreningen, 2014).
Some argue that the reason for this is because of the lack of information, regulation and financing possibilities for developers (Hallman & Hultman, 2013). Previous research also states that the lack of interest among developers as well as investors is a contributing factor to why condominiums have not been developed in the expected amount (Subasic, 2012). On the other hand, at least two major projects with condominiums have been completed since (Hemhyra, 2010) (Mitti, 2015).
One of the most recent major condominium projects was developed by JM in 2016 in Dalénum, Lidingö. The project was initiated as a pilot project with a newly developed multi-family house consisting of 36 condominiums. Since the project was completed a few years ago, it is now possible to investigate the outcome.
The actual reason for the lack of diffusion of condominiums in Sweden has not been proven scientifically, it could even be a combination of all the reasons mentioned above. However, taking all this into account, we intend to clarify the main differences between both forms of tenure, and in particular to investigate the underlying reasons for the low diffusion of condominiums in the Swedish housing market. Considering the condominiums in Dalénum, they are located in a newly developed area with mixed forms of tenure. The mixed tenure and almost identical apartments in the same location makes this a prime candidate for a case study to further investigate the differences between the two types of tenure in a “everything else being equal” scenario. To
investigate the lack of diffusion of condominiums we will apply a theoretical framework (including “diffusion of innovation” theories) on the empirical data collected from the different stakeholders in the case study.
1.2 Purpose
The purpose of this study is to investigate the reasons for the low diffusion of condominiums in Sweden.
1.3 Research question
The study intends to answer the following research questions.
● MAIN RQ: What are the main obstacles for the diffusion of condominiums in the Swedish housing market?
○ SUB RQ: What are the differences between condominiums and cooperative apartments as a form of tenure?
1.4 Delimitations
Condominium is a word used for describing ownership of property in many countries, however the thesis only considers condominiums as a form of tenure in Sweden. When conducting the research, we have only interviewed people that in one way or another are familiar with the form of tenure. Moreover, the thesis was conducted exclusively considering current legislation.
1.5 Expected contribution
Several studies about condominiums in Sweden have already been made (Ernald Borges, 2011).
Many of them were made in connection with the introduction back in 2009 and are basically describing what the new form of tenure implies (Hammar & Ryberg, 2009) (Melin & Öberg, 2008) (Jonson & Nilsson, 2009). There are also more recent studies that look at condominiums from the developer’s and the real estate manager’s point of view (Djurestål & Hedenström, 2015). In addition, some studies investigating the form of tenure in other countries have been made (Lujanen, 2010) (Cronqvist, 2010). However, no study has investigated the form of tenure after a completed project also considering the condominium owners’ perspectives. The expectation of this study is to fill the existing research gap by contributing with new insights and information about condominiums as a form of tenure in Sweden.
1.6 Outline
The purpose of this outline is to break down the structure of the thesis and to clarify how the different parts are related. Also, it has worked as a guideline when conducting the master thesis.
Chapter 1
The introduction starts with a background describing the context and why you should read the thesis. From that, it states the problematization, which provides the base of the entire thesis.
Subsequently the purpose is formulated, and so is the research question in order to concretize the purpose. Further, delimitations are made to define the scope of the thesis. Finally, in order to enlighten the necessity of the thesis, the expected contribution is expressed.
Chapter 2
In order to grasp the subject, this chapter aims to provide essential information such as definitions, descriptions and terminology regarding the form of tenure. By providing this at an early stage, the intention is to facilitate the apprehension of the literature review.
Chapter 3
In order to understand the context and to identify what has, and has not already been made, the literature review is presented. Moreover, it is made to support the research both by necessary information, and by demonstrating the research gap. The literature review chapter is comprised of two parts. First part enlightens previous findings within the form of tenure, second part contains the theoretical framework used in this thesis.
Chapter 4
The methods, techniques, and processes that have been used in the research are described in the research method. The first model carried out is the research design, whose purpose is to make the problematization researchable by identifying what empirics will help understand the certain phenomenon within the thesis. Subsequently, the overall process used when doing the research is explained. After that, the way of collecting data through document collection- and interview method is described. Lastly, the quality assessment of the thesis is explained in the validity and reliability, while the thesis’ applicability is explained in the generalizability.
Chapter 5
In this chapter the results and findings from the empirical interviews are presented. They have been presented objectively and concisely describing the most important results observed, both positive and negative. Moreover, the results should consist of information that may help answer the research question raised in the introduction.
Chapter 6
Now the analysis of the results presented earlier is made. The purpose is to break down the results by applying perspectives and theories gathered in the literature review. Also, a discussion
is held comprising an interpretation of the results and findings, and also new understandings regarding the problematization stated in the introduction.
Chapter 7
The conclusion presents the most significant conclusions drawn from the empirical and literature results by reinforcing the arguments responding to the research questions, and by emphasizing its validity. In addition, suggestions for future research are presented.
2. Definitions, descriptions and terminology
This chapter presents essential information such as definitions, descriptions and terminology of the different forms of tenure in Sweden.
2.1 Definition of Condominium
Principally, a condominium is defined as a tangible asset that is composed in three dimensions, both horizontally and vertically. This implies that the owner of a condominium actually owns the apartment, and not just a share in a housing cooperative that gives the owner the right to use the apartment. Moreover, the definition states that a condominium must be part of a multi-family house consisting of at least three condominiums. Because of this, owners of condominiums must be part of a condominium association operating on the joint property unit of the multi-family house, and they also have to pay a minimum amount of money to the condominium association for safety- and maintenance reasons. In addition, according to today’s legislation, condominiums can only be formed if the multi-family house is a new production, or if the space of the house has not been used as a residence for the last eight years (Regeringskansliet, 2017).
2.2 Definition of Cooperative Apartment
To own a cooperative apartment implies the right to utilize an apartment under an unlimited period of time. The apartment itself is owned by an economic association, i.e. the housing cooperative and is only granted to the owner of the cooperative apartment against the payment of the purchase price and in most cases a monthly fee (Hager, 2005). A housing cooperative acquires a property and then grants the apartments inside the property to the housing cooperative members, this only happens one time, often when the property is built. Future purchases are handled as deed transfers, new owners must be approved by the housing cooperative. This is an important distinction from the ownership of condominiums where you own the actual property, which is not the case for cooperative apartment ownership. All cooperative apartment owners pay a monthly fee to the housing cooperative, the size of this fee is decided considering the size of the apartment which correlates with the owner's share of the housing cooperative. This fee
covers the cooperative costs, including property fees, interest rates and amortizations for the housing cooperative’s loan, and maintenance costs of common areas (Lundén & Svensson, 2013).
2.3 Taxation and fees
Regarding the taxation and expenses of condominiums, they differ a bit from the ones for cooperative apartments. One of the most significant differences is that when buying condominiums, the buyer needs to pay stamp duties up front. There are two main stamp duties, i.e. title-deed and mortgage-deed. The title-deed stamp duty is a percentage of the sales price or the assessed value, depending which is the greatest. It is 1.5 % for natural persons, and 4.25 % for legal persons. Today this is not the case for buyers of cooperative apartments due to
“packaging” which means that the entire property is sold as a company, thus avoiding stamp duty (Björkvald, 2009). The mortgage-deed stamp duty is 2 % of the loan and belongs to the property which makes it reusable for investors who buy properties that has mortgage stamp duties already.
Practically, it means the mortgage stamp duty is normally paid only once when the investor buys a newly developed property. It is actually the same for both forms of tenures (2 % of the mortgage), yet, it differs in the way that when lending for a cooperative apartment, the initial mortgage-deed is already paid by the housing cooperative and thus a part of the collective expenses, while when lending for a condominium the mortgage deed will have to be directly paid by the buyer (Boräntor, 2017). An important difference between the forms of tenure from the natural person’s perspective is that the cost of interest from loans in the housing cooperative are not tax-deductible, while they are for condominiums (Jonson & Nilsson, 2009). Another cost that differs is the property tax which is set differently depending on factors as form of tenure, the year the property was built, and the value of the property. However, since today’s legislation states that newly produced condominiums do not have to pay the property tax up until 15 years from development and considering that condominiums are and have to be newly produced, this tax will not be considered in the research.
2.4 Practical differences
Considering the existing regulations regarding condominiums, there are several practical differences when comparing with cooperative apartments. Swedish people are already familiar with cooperative apartments. It is a form of tenure where decisions are taken democratically by means of a chosen board. Furthermore, it is a somewhat complex form especially in the developing stage where a temporary board has to be set by the developer consisting of representatives from both the developing company and external professionals. The temporary board needs to arrange economical plans and other regulations before the housing cooperative can be completely passed over to the owners of the cooperative apartments. (Frank & Rovia, 2012). Owners of condominiums on the other hand, are entitled to do whatever they want with their property. The owners have full autonomy over the financial structure of the condominium, which is not the case for owners of cooperative apartments. Other practical implications related
to condominiums are that legal persons may buy them unhindered, that there is no limit in how many you may own, that the ownership can be shared by several people, and because of the autonomy that the owner may rent out as much as she wants (Regeringskansliet, 2017).
2.5 Capital structure
The main capital structure when buying property is obviously decided by the buyer who determines how much of the purchase price that should be financed through mortgage or equity.
However, other factors do play part depending on the form of tenure. Due to the structure of housing cooperative, newly developed properties are initially sold to housing cooperatives including a substantial part of the purchase price in debts (Allabrf, 2017). For the buyers, this structure means they avoid paying for their respective part of the debt initially. Yet, they will have to pay continuously for the interests regarding those debts, and eventually they will also have to pay them back. When buying condominiums, the case is different. Since buyers actually get to own their properties, they will also have to fully pay for their entire properties. This means that they initially have to pay more for their properties than buyers of cooperative apartments. Or, more correctly, it should be said that the buyers of cooperative apartments have to initially pay less than those of condominiums. Furthermore, the mortgage deed which has been explained earlier, follows the same structure as the debts, for buyers of condominiums it is paid initially, while for buyers of cooperative apartments it is a part of the collective debt, and thus a continuous cost (Boräntor, 2017). Briefly, the condominiums are more expensive initially, yet their continuous costs are lower.
2.6 Protected tenancy
Protected tenancy refers to the legal protection the tenant holds in terms of the length of their lease. The tenant is not automatically required to move out on the date stated in the notice if the tenant has been residing in the apartment longer than a specific period of time. When the owner is a legal person doing commercial operation (i.e. renting out more than two properties), the protected tenancy starts the same time the tenant moves into the property (SFS 1970:994). When the owner is a natural person, i.e. renting out less than three properties, the protected tenancy starts two years after move-in (SFS 1970:994). But, at the same time there is a law for letting own property, which implies no protected tenancy for the tenant if the property is owned by a natural person (Hyresnämnden, 2016).
2.7 Utility value rent
The Swedish tax agency decides recommended average rent levels for residential and commercial buildings for different areas, these average rents constitute an indicative rent level which property owners need to adjust their rent levels for (Skatteverket, 2016).
2.8 Block leasing
The notion of block leasing is used when a property owner lets out three or more apartments in a multi-family house to one tenant, who on the other hand lets those apartments to third parties.
The concept is commonly used among municipalities and county councils who may block lease apartments, and then let them to people with health needs and other certain requirements. The concept is also used by industries and businesses that have to be able to provide residence for their employees. The essential difference when block leasing is that the property owner lets to a legal person, this enables for the property owner to take out a higher rent, and also to bypass the stricter rules that apply when renting to a natural person (Ljungkvist, 2001).
2.9 Criticism against condominiums
The former government released a proposition about condominiums in connection with the legislation of the new form of tenure back in 2009. The proposition included critique against the housing tenure. One of the main criticisms against condominiums were claims that the variety in housing opportunities would decrease since rented tenancy tenures could be weakened due to the possibility of transforming them into condominiums (Justitiedepartementet, 2008).
Another critique mentioned in the proposition was the segregation of wealthy and poor people.
The issue concerns the fact that the initial capital investment is higher for condominiums than for cooperative houses (Justitiedepartementet, 2008).
Prior to the introduction of condominiums, a concern was that they could contribute to an increase in less serious landlords, who would affect rental tenants negatively. In contrast to cooperative apartments, neighboring residents in buildings with condominiums are not able to influence who is permitted to acquire the property or who will reside in it (Persson &
Rasmusson, 2012).
3. Literature review
This chapter provides previous findings within the subject and a theoretical framework containing diffusion of innovation- and real estate appraisal theory.
3.1 Previous findings
As mentioned earlier, many studies about condominiums have already been made. For example, Paulsson (2008) published an article ” Ägarlägenheter som ny boendeform i Sverige” in the book “Boende och bofinansiering - med perspektiv på kriser och potential i marknaden ”. She discusses the legal complications an introduction of condominiums could entail. At the time of publication, the governments proposition was recently presented, and her article focuses on the proposition and the Swedish 3-dimensional properties are summarized and how residential apartments with ownership rights could be implemented. She also presents how condominiums are constructed abroad and how key factors like how to define each apartment in terms of perimeters and how to handle disputes. The year prior she published her dissertation on 3D property rights (2007), she studied the 3D property rights by investigating them in a few different countries, Germany, Australia and Sweden with a particular focus on management questions. She classifies the main forms of the property rights, she found common denominations and identified key factors and associated problems. She identified 6 key factors: Boundaries, Common Property, Co-operation between property, Management, Settlement of disputes and Insurance. The problems for boundaries was identified as the location of boundary whether it should be in the center of walls or on the surface of them, and also if it should be private or joint responsibility for structural parts. Common property had some problems with unclear definitions of what is included and for co-operation between property units she identifies the choice of co-operation form as one of the main issues. Should it be cooperation form easement or joint facility? And which areas should be included and which parties that should be involved. On the management side she identifies the main problems as unclear responsibilities, insufficient and unclear regulations as well as the need for professional managers for large and complex developments. When looking at the settlement of disputes the main identified problems was the choice of which resolution method to use in court proceedings and found them to be very expensive and time consuming. Lastly, she identifies some insurance issues as well, it is unclear what should be covered by the private insurance and what should be covered by the joint insurance. The different countries in this study have resolved these issues in different manners and she hopes that her thesis has made a contribution to understanding these issues and provided a foundation for the Swedish legislators in creating this new system of 3D-properties in Sweden (Paulsson, 2007)
Olsson and Dempwolf (2017) recently examined the process of condominium real estate formation in Sweden. They did so through a comparison with the process of condominium real estate formation in the neighboring country of Norway. They examined differences in the
documents created in conjunction with the two separate formation processes. They found that in Norway a lot less responsibility was put on the real estate owner than in Sweden. The shared spaces are also regulated to a higher extent for the formation of condominiums in Sweden. In Sweden the real estate boundaries for condominiums are determined through a coordinate list for each property established by the cadastral authority of Sweden (Olsson and Dempwolf, 2017).
Gustavsson (2015) provides additional evidence supporting the claim that the condominium market in Sweden is highly regulated, even in comparison with cooperative apartments. To enter into agreements for purchasing property in Sweden there are certain requirements regarding the condition of the property put on the seller as well as on the purchaser. For condominiums and cooperative apartments these requirements are essentially the same in most regards, except for the statutory “duty of disclosure” for the seller of a cooperative apartment and what condition it is in at the point of sale. These rules are affected by the buyer’s duty of examination which determine if a defect is relevant or not. These inspections are in most cases done the same way with condominiums, but the law differs somewhat for the type tenure. For condominiums there’s a law regulating the buyer’s “duty of examination” while for cooperative apartments that responsibility is up to the buyer and is only done upon request by the buyer. So, if the “duty of disclosure” is inadequate at a sale of condominium, missed defects would get picked up by the statutory “duty of inspection” which does not exist for the cooperative apartments. Gustavsson (2015) claims because of this fact the purchase of a cooperative apartment is associated with higher risks than the purchase of a condominium. He stresses on the other hand that this stricter responsibility that is put on the seller of a condominium is not justified since there’s nothing to suggest that he has more comprehensive knowledge than a seller of a cooperative apartment has.
Lingholm (2011) investigated the differences in hypothecation of condominiums and cooperative apartments where he concluded that there were substantial differences, and that the current system for hypothecation have flaws. The author characterizes these flaws as crucial and that the investigation the government issued never led to new legislation which entails that these issues are still not solved. Subasic (2012) investigated why the establishment of condominiums does not break through in Sweden. Her findings were that the main factors affecting the establishment are the potential buyers, and the banks. Since the form of tenure was new, there were concerns from both potential buyers and the banks regarding the valuation of the form of tenure. Due to this uncertainty, it was harder for both potential buyers and developers to get loan commitments for condominiums.
However, this study was made back in 2012 and since then the condominium legislation have matured and banks have become more aware of their existence. In an effort to establish whether or not Swedish banks and credit agencies handle lending for cooperative apartments in comparison to condominiums differently, Hollinderbäumer and Ottosson (2017) examined the banks practices. They determine that the borrowers interest rate is not affected by the type of tenure for the real estate purchase. What determines the borrowers interest rate is rather a mix of the loan to value ratio, the banks risks of credit loss etc. (Hollinderbäumer & Ottosson, 2017).
Another study made by Andersson et al. (2010) also investigates what aspects that prevent the form of tenure to break through. The authors conclude that the main obstacles for establishment is the utility value rent, the lack of knowledge from developers and the public, and also the cooperative apartment being well rooted in the Swedish housing market. In particular, the utility value rent - preventing the owner to rent out the property autonomously - is an important obstacle, since the ability to freely decide over one’s property, is the essential difference between condominiums and cooperative apartments.
Tibblin (2016) researched the differences in the costs associated with condominiums and cooperative apartments. She compared fixed and variable costs and concluded that the initial cost for a condominium is higher while the continuous costs are lower. The development costs are the same for the two forms of tenure. However, the main reason for the difference in initial costs, is that about 33 percent of the property’s value is placed as a loan in the housing cooperative instead of being part of the price in a cooperative apartment. This is not the case for condominiums, resulting in the price difference.
A study with respect to the developer’s perspective was made by Djurestål and Hedenström (2015). They conclude that the winning strategies for developers are either to rent out the entire property portfolio, or to sell the entire property portfolio. The alternative, which is selling off portions of the property portfolio gradually, has shown to be successful for few developers. It appears to be expensive implementing new development strategies, and thus many developers keep developing cooperative apartments instead of condominiums.
In an attempt to decide which method to use when valuing condominiums Berg studied investment methods and comparable methods in his study back in 2012. He used comparable sales to estimate market value and investment methods with future cash flows discounted to present value and associated cost method. He talked to key players in the Swedish real estate market, credit institutes and real estate researchers. Due to lack of comparable objects on the market he could not determine the best valuation method, this was back in 2012 when condominiums were just introduced a few years back. He argued that some changes to law had to be implemented to get more comparable objects on the market and that the reformation from rental properties to condominiums should have fewer obstacles. Further, he concludes that more free market rents for condominiums will make yield calculation methods more applicable (Berg, 2012).
Uusikartano (2010) argues in her thesis that the biggest difference between condominiums and cooperative apartments is the free disposal of the property as a condominium owner. And that the condominium owner does not lose the right to ownership of the property if he or she for example is disturbing the neighbors. There is essentially only one way you can lose ownership of a condominium which is if you start defaulting on the loan payments, while cooperative apartment owners can be forced to sell their property if the board of cooperation so wishes. In her study she comes across this as an issue several times that as a condominium owner there is not much one can do to if neighbors are mistreating their apartment and the building resulting in
damages to neighbors apartments. In SOU 2002:21 the inquiry proposed that neighbors should be able to force a disturbing condominium owner to move but still retain ownership of the property. The possibility for the condominium association to take action against one particular condominium owner have since been introduced which makes it easier than for one single owner to face another in court. Uusikartano (2010) concludes that there are major differences in the types of tenure and especially in the right to decide and disposal of one’s property is much stronger for the owner of a condominium.
3.2 Theoretical Framework
The theoretical framework constitutes diffusion of innovations and real estate investment theories. Both have been carefully chosen in order to help understand and eventually answer the research questions.
3.2.1 Diffusion of innovations
Rogers (1962) defined “ Diffusion as the process by which an innovation is communicated through certain channels over time among the members of a social system.” He also stated that there are four main elements that are identifiable in the diffusion of innovation: innovation, communication channels, time, and social system.
Innovation
Starting with innovation, it is either an idea, a practice, or an object that is perceived as new to the recipient who might be an individual or other unit of adoption. It doesn’t matter if the idea is in fact new or not. What matters is how the individual perceives the idea. Thus, an innovation is when a recipient finds an idea to be new. Further, an idea that is perceived as new doesn’t necessarily need to be observed for the first time. An individual may be aware of an idea, yet he or she must not have developed a perception about it, or even determined whether to adopt, or to reject it.
Communication channels
While Rogers (1962) defines communication as “the process by which participants create and share information with one another in order to reach a mutual understanding”, he claims that diffusion is a particular type of communication where the information being shared is implicated by an idea that is new. Moreover, he states that a diffusion process consists of an innovation that is being discussed by individuals who have perceived the innovation, to other individuals who have not perceived it yet. The way these individuals communicate with one another, and what connects them both, is what’s referred to as communication channels. It is stated that mass media channels are great to use in order to reach out to a broad audience fast and efficiently, hence creating awareness. While in order to make individuals grasp a new idea, it is more effective to use interpersonal channels. These types of channels imply more intimate contact between individuals, who preferably have similar socioeconomic status and education. According to
Rogers (1962), most individuals who adopt new innovations, are primarily influenced by other individuals who are like them.
Time
The diffusion process involves time as an important element. The element may be addressed in three main areas, i.e. the innovation-decision process, innovativeness and adopter categories, and rate of adoption.
The innovation-decision process is divided into five steps: knowledge, persuasion, decision, implementation and confirmation. First the individual or decision maker receives knowledge about the innovation by getting exposed by its existence. Then the individual or decision maker forms an attitude toward it. After this, the individual or decision maker reaches a point where action needs to be taken either to adopt or reject the innovation. This choice and the activities that lead to it are referred as decision. When the individual or decision maker starts using the innovation, the process is in the implementation step. Lastly, if the individual or decision maker goes back to the decision step and contemplates the original decision, the process is in the confirmation step.
Innovativeness and adopter categories refer to the order of when different individuals adopt to innovation. Depending on how fast individuals adopt to innovation, they may be sorted into five different categories: innovators, early adopters, early majority, late majority, and laggards. The listed order is descending from the fastest adopter, i.e. innovators, to the slowest adopter, i.e.
laggards.
Rate of adoption on the other hand, refers to the time that a certain innovation is adopted by members of a social system. When plotted, the rate of users adopting the innovation over time creates a characteristic S-curve that may take different shapes depending on different reasons.
Social system
Rogers (1962) defines social system as “a set of interrelated units that are engaged in joint problem solving to accomplish a common goal.” The units may be individuals as well as organizations. Further, Rogers (1962) alludes that innovation diffuses within a social system. His claims are acknowledged in the following examples.
Social structure and diffusion . A social system is considered to have structure if it is composed by individuals or organizations that are different from each other in behavior. Moreover, two different types of structures can be distinguished, i.e. social structure & communication structure.
The first can be found in for example a hierarchical organization where individuals have different positions and thus will behave according to those. The latter can be found in situations where individuals or organizations start communicating with each other for reasons of homophily, which means they are drawn to others who are like themselves (McPherson & Co, 2001).
Structure can on one hand empower diffusion, and on the other hand it can resist diffusion.
System norms and diffusion. Another type of pattern that individuals and organizations may follow in a system are norms. They may be unique for each system, and work as standards suggesting what is accepted or not in a system.
Opinion leaders and change agents. Getting back to the individuals of a social system, there are two important units, i.e. opinion leaders, and change agents. The opinion leader refers to an individual that possesses an informal ability to influence and steer other individuals within the same social system Change agents on the other hand, are individuals outside of the social system that still are able to influence and steer members of the social system, often using opinion leaders to their help.
Types of innovation-decisions. The choice to either adopt or reject an innovation may be done by either individuals of a social system, or by the social system as a whole which in turn can do it centralized or decentralized (Bloisi et al., 2007).
Consequences of innovations. Regardless if an innovation is adopted individually or by the social system as a whole, the consequences of the decision can affect the individual as well as the entire social system. Overall, the consequences may be desirable or undesirable, direct or indirect, and anticipated or unanticipated.
Network structure and Solar Diffusion in a California Neighborhood
Rogers (1962) and colleagues conducted a case study of a Californian neighborhood Solera between the years 1979 and 1980. They studied the diffusion of solar panels in a social system of total 44 households. In this social system they further identified three different cliques or subsystems that adopted the innovation differently. One clique consisted of 18 households (#1-#18), all located on the dead-end street Berenda Way. Second clique consisted of 15 households (#30-#44) located on an adjacent dead-end street named East Floresta. Third clique consisted of 11 households (#19-#29) located on La Cuesta Drive, adjacent the other two dead end streets.
As demonstrated in the picture below, the spatial location of householders in each system is substantial.
The first adopter and thus innovator was household #38. He installed solar panels by himself 1975 in order to provide heating for his pool. He worked as an electrical engineer and was not a local influencer. Second adopter was household #24. They installed solar panels 1977 because they were going to renovate their roof anyway at that time. The household consisted of a man who was a computer specialist, and his wife who first and foremost was an opinion leader in their clique. One year later in 1978, household #10 also adopted to solar panels when installing a new hot tub. This household consisted of a psychologist and his wife who was the most powerful opinion leader in the entire neighborhood. The same year, household #7, also consisting of an opinion leader, adopted solar panels when renovating a new bathroom with jacuzzi. Still in 1978, an older couple living in household #30 adopted the innovation for pool heating. None of the two were local influencers at the time. In 1979 household #8 joined the adoption in order to
provide domestic heated water and heated air. The last household that had adopted solar panels during the time when this case study was conducted was household #5. The adopter was an old lady who had to rebuild her entire house due to a fire. When doing so, she installed a hot tub and therefore also solar panels. The old lady was not a local influencer but was instead inspired by her dear friends from households #7 and #10 who in turn were influential opinion leaders.
According to Rogers (1962), spatial clusters of solar adopters just like in the Berenda Way Clique, are not rare to find in California. He maintains that the spatial vicinity among neighbors facilitates for communication networks, which in turn may favor adoption of innovation. In the case of adopting solar panels in Solera neighborhood, there was also another important enabler,
"cues-to-action", which meant households waited to adopt solar panels until they did some form of change with their house.
Figure 1. Diffusion process
3.2.2 Real estate investment theories
This part presents two main methods being used when appraising real estate investments, the sales comparison approach and the income capitalization approach. Moreover, it presents common techniques that are used for capital budgeting.
The sales comparison approach
The sales comparison approach, also called comparable market analysis, is the method used when comparing and benchmarking with similar objects that have already been sold. The more similar the objects of comparison are with the one being valued, the more precise the appraisal. Factors that are taken into account when comparing are for example location, size, number of rooms, floor level, and the general condition of the property. Also, the time the object of comparison was sold is highly relevant, especially in a fast-moving housing market. In order to make eligible comparisons, ratios like price per square meter and price per rental income are usually applied.
(Hungria-Garcia, 2004).
vg. price per sqm=
A 1n ∑n
i=1 mi2 P ricei
The income capitalization approach
As the name indicates, the income approach is well suited for properties generating income.
According to Persson (2008) the approach consists of two different methods, Direct Capitalization method and Discounted Cash Flow method. Since the latter is analogous with the Net Present Value (NPV) which is explained further on, we only consider the Direct capitalization method (Manganelli, 2015).
In order to understand the method, one must first understand the net operating income (NOI).
This financial ratio is basically the annual revenues (e.g. rents) subtracted by the annual costs (e.g.
operation and maintenance) (Goddard & Marcum, 2012).
OI nnual revenues annual costs
N = a −
Furthermore, the capitalization rate (cap rate) is fundamental for understanding the income capitalization approach. According to Goddard and Marcum (2012), there are different ways to derive the cap rate. Others argue that the cap rate can be seen as the discount rate of a perpetuity (Investopedia, 2017). However, it can be calculated with the same equation as the direct capitalization method but reversed. If the investor’s intention is to rent out the real estate, then the cap rate is particularly interesting since it compares the net operating income and the current sales price. For this reason, the cap rate is usually interesting two times during an investment period, i.e. when buying the object, and when selling it. In general, a good cap rate is between 4-10% and the higher the cap rate, the better (Bethel, 2018).
ap rate
c = sales priceNOI = market valueNOI
This leads us to the Direct Capitalization method which in its simplest form presumes that the net operating income (NOI) and the cap rate will be the same for the entire calculation period (Hungria-Garcia, 2004). Accordingly, the method calculates the value of the property by dividing the net operating income (NOI) with the capitalization rate (cap rate).
alue
v = cap rateNOI Payback period
The payback period is the time (usually in years) it takes for an investment to recover its own cost. According to Manganelli (2015), it is an appreciated ratio due to its quick and simple interpretation. Unlike the net present value and internal rate of return, this method does not consider the time value of money or the discount rate (Investopedia, 2017). The Payback Period may be calculated by dividing the invested money (i.e. equity), with the annual cash flow (e.g.
NOI) (Manganelli, 2015).
ayback period
p = equityNOI
CAPM
The capital asset pricing model is used in order to determine the cost of equity. Looking at its structure it describes the relationship of on one hand the expected return (e.g. on equity), and on the other hand the risk of investing in a security (e.g. equity). The risk of investing in a security constitutes of two parts. One part is the so-called risk free rate which usually reflects a 10-year-old treasury bond which is backed up by the government. The other part is the market risk premium, which basically is the premium an investor should require for risking his/her money in the specific investment. The market risk premium considers the difference between a general market rate, e.g. index, and the risk-free rate. It then multiplies the difference with a beta-value that corresponds to the specific investment compared to the index. This way, the market risk premium takes into account how volatile the specific investment is compared to the general market (Fama and French 2004).
AP M f (rm f)
C = r + B − r
The Discount Rate
The Discount Rate, also referred to as the yield or the minimum accepted-/required rate of return is the rate that is used when discounting future cash flows to a present value (Hungria-Garcia, 2004). More specific, this rate is used to count for capital over a time period without affecting the value of the money (Hörgerud & Svensson, 2014). Moreover, the discount rate serves as an expression of the investor’s cost of capital (Greve, 2003). According to Manganelli (2015), the investor’s cost of capital can be calculated through the weighted average cost of capital (WACC) which is a formula that takes into account that the invested capital may
be financed through both equity and debt. The formula of the weighted average cost of capital (WACC), and thus also the formula for the discount rate, is presented below.
ACC (1 )
W = ke(D+E)E + kd − t (D+E)D
= cost of equity
ke
= cost of debt
kd
= income tax rate
t
= equity
E
= debt
D
The cost of equity may be calculated by different formulas (e.g. CAPM and Gordon’s method).
Regarding the cost of debt, it refers to the interest rate the investor pays in debts, e.g. loans, bonds, and mortgages (Investopedia, 2017)
Net Present Value (NPV)
One of the most common methods used when assessing the worth of any investment is the Net Present Value (NPV) (Grotenfelt, 2011). According to Berk and DeMarzo (2014), this method should be used when deciding whether to invest in an object or not. The Net Present Value (NPV) takes into account both initial invested capital, and future incoming- and outgoing cash flows by discounting them to a present value (Manganelli, 2015). Moreover, the method includes the discount rate explained in the previous section, but also the internal rate of return (IRR) which is explained in the next section. A positive net present value (NPV) means that the sum of the present value of future receipts will be greater than the initial investment and present value of future payments together, which therefore also means that the investment is profitable and should be considered. Hence, the higher the net present value (NPV), the more profitable the investment (Manganelli, 2015) (Olsson, 2005) (Greve 2003).
P V
N = − G + ∑n
t=1 CFt
(1+r)t + (1+r)S n
=total number of periods (e.g. years)
n
= specific period
t
= initial invested capital
G
= cash flow (e.g. NOI)
CFt
= residual value
S
= discount rate
r
Internal Rate of Return (IRR)
The investor’s expected yield from an investment may be presented as the Internal Rate of Return (IRR). This rate is the specific discount rate that makes the net present value (NPV) equal to zero, and thus sets the discount rate that will give a break-even-point for the investment (Manganelli, 2015). Because of this, Berk and DeMarzo (2014) argue that the IRR facilitates for
finding sensitivity errors when using the net present value (NPV). Furthermore, the IRR should be compared to the required rate of return (i.e. the discount rate), and if the IRR isn’t greater than the discount rate, then the investment should not be considered (Goddard & Marcum, 2012).
Following equation shows how the IRR may be calculated, and the figure illustrates how the IRR, being a specific discount rate, is correlated to the net present value (NPV).
P V
N = − G + ∑n
t=1 CFt
(1+IRR)t + (1+IRR)S n = 0
=total number of periods (e.g. years)
n
= specific period
t
= initial invested capital
G
= cash flow
CFt
= residual value
S
= discount rate
r
= internal rate of return RR
I
Figure 2. IRR and NPV
4. Research Method
The intention with this chapter is to give a concrete view over how the research was realized.
First the research design is presented, then the applied research process is illustrated and described. Further, the data collection, data analysis and the scientific quality are presented.
4.1 Research Design
In order to investigate condominiums as a new form of tenure, a qualitative research was conducted. More specifically, we chose to do an exploratory case study of the Dalénum-project so that detailed empirics could be gathered and analyzed (Blomkvist & Hallin, 2015).
By using an inductive approach when conducting a case study, it enabled us to be more open for the empirical results. Also, it enabled us to gather and change the theories systematically after interest and relevance (Blomkvist & Hallin, 2015). Since the problematization of the thesis covers several dimensions and perspectives, we also applied a system perspective when conducting the research. This entailed considering the problem from an individual- and organizational level, from a functional level, and not least from an industrial- and market level (Blomkvist & Hallin, 2015).
4.2 Research Process
The overall process that was used in this research can be divided into three main stages. The first stage was the pre-study where we gathered as much information as possible in order to truly understand the whole context of the subject. The second stage was the case study, where we conducted a real estate appraisal and gathered exclusive empirics especially regarding the Dalénum-project. Finally, the last stage in the research process was the analysis. Here we applied the gathered literature to the results collected in the case study and draw analytical conclusions.
One main piece of the theoretical framework was the Diffusion of innovation theory which was applied on the gathered empirical data in the discussion chapter. In parallel with the three main stages of research, we systematically refined the theories accordingly with the inductive approach (Blomkvist & Hallin, 2015).
Moreover, while systematically gathering information, we used an approach recommended by Engwall (2017). It entailed applying the conventional funnel method by narrowing the research continuously, but it also entailed widening the scope of research from time to time in order to seize potential leads in the periphery, and to not follow a misguided trajectory. This process was used in order to optimize the research capacity.
