Housing cooperatives as a tool for investing into housing

22. 03. 2021

Source: Building World (March)

Author: Josef Adam

A number of people link housing cooperatives with the old days. It was convenient for their members to build new buildings together in order to live in new flats. Simultaneously, housing cooperatives proved to be a reasonable tool for split the risk of the failure to repay the construction loan, which was provided to the housing cooperative, among more people. Recent development and rising real estate prices have once again made cooperative ownership an appealing alternative to rental housing, and for investors as a tool for attractive investments into residential buildings.

After 1989, housing cooperatives were used mainly for the privatisation of the municipal or state-owned housing stock. Tenants were joining cooperatives to be able to jointly obtain and repay a loan for the purchase of their residential building. As soon as the housing cooperative repaid the loan, it usually adopted a decision to transfer individual flats or non-residential premises into its members’ ownership.

The number of cooperative flats, however, has been falling in recent years. In 2005-2017, this drop was over 40%. This trend and the perception of housing cooperatives as a transition towards the ownership of a flat gives the impression that the potential of housing cooperatives is diminishing and that in the next 20 to 30 years, all the housing cooperatives are likely to cease to exist and will be replaced by associations of owners of individual flats and non-residential premises in the building. In spite of that, there are new initiatives that are attempting to exploit the potential of housing cooperatives even today.

Housing cooperatives and their advantages

So far, the prevailing motivation to join a housing cooperative has been primarily to accommodate a housing need and to acquire the ownership title to a cooperative flat after the repayment of the cooperative loan. During the privatisation of the flats owned by municipalities and the state, this motive was, moreover, often increased thanks to the attractive purchase price of the residential building.

Contrary to the purchase of a flat into one’s own ownership, membership in a housing cooperative is also associated with relatively low initial costs in the form of the basic, and often also additional, membership contribution of a member. Members of the cooperative then pay a regular monthly instalment (annuity) of their share in the total unpaid part of the loan linked to the occupied flat.

Thus, the cooperative member is not the owner of the flat but its user. In the event a member of the cooperative gets into financial difficulties, they may gratuitously transfer their membership to another person (currently, a legal person may also become a member of a housing cooperative) who then continues to repay the remaining annuity.

Protection from defaulters

As opposed to associations of owners, which are formed as special legal entities in buildings with residential and non-residential premises owned by individuals, a housing cooperative has a stronger position towards its members. If members of a cooperative substantially breach the statutes, e.g. by failure to pay the annuity instalments or to make other payments linked to the use of their flat, a housing cooperative may exclude such members.

Their membership share can then be acquired by a new member who joins the housing cooperative on the basis of an application and the payment of a basic, or possibly additional, membership contribution. Hence, the other members of the housing cooperative are protected from defaulters in a better manner than in associations of owners.

This economic setup is a strength of the housing cooperative. Taking into account also the relatively informal and fast transfer of the ownership title from one member to another, cooperative flats are a relatively valuable asset.

On the other hand, where membership of a housing cooperative is not linked to the support from the state or advantageous privatisation of the municipal or state-owned flats, cooperative ownership becomes usually less attractive. This is mainly due to the fact that banks do not grant loans for the purchase of a membership share in a cooperative where this membership share would be the only pledge. Instead, they often require a pledge regarding other real estate recorded in the Land Cadastre.

Support for the construction of cooperative flats has been stagnating

The adoption of Act No. 378/2005 Sb., on the Support for the Construction of Cooperative Flats, which created a legal framework for the provision of support to the construction of cooperative flats in the Czech Republic, was linked to expectations that the number of cooperative flats will begin rising.

The government decree implementing the act expected that the subsidies under the above act can amount to as much as CZK 100,000 per flat and as much as CZK 700,000 per flat for a mortgage. This intention, however, has not been accomplished so far. Currently, the State Investment Support Fund does not offer any special programme supporting cooperative housing.

Another initiative that could reignite interest in cooperative housing to a greater extent was the Project of Affordable Cooperative Housing in the capital city of Prague. The support was based on the free of charge provision of plots from the capital city for the construction of cooperative flats. The legal title for the construction of the buildings on Prague’s land plots was the right of superficies.

It was probably as a result of this institute of the new Civil Code that the uncertainty as to who will be the owner of the construction and the land plot under it after the lapse of the right of superficies, prevented the Prague City Council from discussing the project. Despite the fact that the Project of Affordable Cooperative Housing has not been successful so far in Prague, it could inspire other towns and villages that, unlike Prague, are facing an outflow of their citizens to bigger cities.

Cooperative construction as an alternative to mortgage

Despite the so far unsuccessful public initiatives described above, new projects of cooperative flats on a commercial basis are springing up. Cooperative flats are an alternative to owned flats financed through mortgages, which are not affordable to many people given the higher prices of flats.

Members of a cooperative, however, are not exposed to the high risk of not obtaining a large mortgage in these projects. They merely apply for the financing of the basic and additional membership contribution amounting to approximately 20% of the value of the cooperative flat.

The remaining part of the value is, once again, financed from a loan provided to the housing cooperative, which the members of the cooperative partly repay through the annuity instalments.

Contrary to purely rental housing, the value of membership shares in housing cooperatives increases over time and the members of the cooperative are also motivated by the fact that they will become the owners of the flat once they repay the annuity. Moreover, there is no mandatory period of time during which the cooperative may not transfer the flats to the members’ ownership, contrary to subsidised cooperative flats.

Housing cooperative as an investment tool

Fierce competition on the real estate agency market and the surplus of free funding, moreover, creates space for new products and for the use of housing cooperatives to acquire real estate as an investment.

Some real estate agencies come up with a service where they select a suitable residential building that will be acquired by the housing cooperative established for this purpose from the investors (i.e. the members). The purchase is again financed partly by members’ contributions and largely by a loan. The real estate agency can also procure tenants who will pay rent to the members of the cooperative, which among other things, also covers the monthly annuity payment.

In this connection, one may ask why investors choose the form of a housing cooperative and not a limited liability company of a joint stock company. The reason is probably the fact that it is easier to make a contribution to the cooperative’s equity (it is sufficient to merely accept the related obligation), transferability of the membership share guaranteed by law and last but not least, anonymity of cooperative members.

Related media


Fill in your e-mail and get regular news from the world of law and business.

Contact Us

Copyright © 2024 HAVEL & PARTNERS s.r.o., advokátní kancelář