New Peru leasing law increases home ownership

Although slower demand affected home sales in Peru in 2014 and 2015, stakeholders are hoping that a recently approved rent-to-lease law will have a positive impact. President Ollanta Humala signed the bill into law in July 2015, and the market is anticipating the new regulation to act on three fronts: encouraging banks to raise the level of mortgage lending, increasing the number of families that can save money for a downpayment and spurring developers to continue construction of new homes as existing demand translates into a rise in sales. In 2014 home sales took a tumble, falling 40% compared to 2013, according to the Peruvian Chamber of Construction.

Boost

According to Gerardo Freiberg, general manager of the Mivivienda Fund, which drives government housing programmes by allocating mortgage subsidies, the new measure will encourage the building of 20,000-30,000 new homes in the first two years of implementation. Housing authorities anticipate that 5000-6000 of these will be completed within the first six months of the new law’s application.

The Ministry of Housing, Construction and Sanitation expects a reduction of average mortgage interest rates for rent-to-lease homes, as the risk of non-performing loans continues to decline.

“The new real estate leasing law will have its biggest impact on the middle-income segment of the market, where financial constraints were holding back demand,” Rodolfo Bragagnini, general manager at Padova Inmobiliaria, told OBG. According to a report by BBVA research, 78% of housing demand in 2014 was for units costing $40,000-80,000. Even so, many Peruvians have had difficulty in accessing mortgage products, despite public housing programmes encouraging mortgage lending through subsidy programmes. Beyond the short-term economic benefits from increasing the number of people renting, such as increased formalisation, the new law’s overarching objective is to raise the number of homeowners.

According to local media reports, around 7% of people live in rented units in Peru, compared to 30% in Colombia and 40% in Brazil. However, the statistics are inconclusive, as they exclude informal rental agreements. In Lima the level is slightly higher, at 11%, according to real estate developer Edifica.

Rental Drive

In essence, the new rental law has splintered existing regulation into three categories: regular renting; rent with an option to buy; and financial renting. All three will use a single-contract model, but all contracts are required to be notarised and filed with the Administrative Registry for Housing Rentals and the National Superintendent of Public Registries (Superintendencia Nacional de los Registros Publicos, SUNARP). In the case of regular renting, registering with SUNARP is optional. If the renter wants to have an option to buy, an extra real estate capitalisation fee is added to the monthly rent. Price and timeframe to buy the property must be specified in the contract.

Formalisation

A key component of the new law is the requirement for tenants to pay their monthly rent on time through the financial system. Homeowners are required by law to notify housing authorities of missed payments. “The law will simplify procedures and make renting agreements more formal,” Ángel Ramos Buiza, market analyst at Edifica, told OBG. Another advantage is that by establishing a registry of rent payments, the information can be used by the renter to apply for a housing loan, even if the person requesting the credit has no credit history.

The added protection given to the homeowner wanting to rent out a real estate asset is a significant change for the market. In the past, many homeowners have refrained from renting out unused dwellings because of the legal challenges in dealing with non-complying occupants. The new law’s judicial procedures to remove a non-complying renter from a home will take a maximum of 11 days, although the process to recoup delayed rents will take longer.