Price discounts of co-operative conversions in Stockholm city

Abstract: The conversion of rental apartments to tenancy-owned housing has been a common phenomenon in the housing market in Stockholm during the last two decades. Rental apartment-tenants have the opportunity to purchase their unit for a hefty discount. The existence of the discount has further resulted in banks providing a mortgage that allows the tenant to purchase the apartment with full leverage and without any cash contribution. The households have been able to sell their apartment with high profit and then reinvest it in other housing alternatives at better locations, in better technical condition and with larger living space. The main reason for the discount can be explained by the difference in the valuation methods used by property investors and private households. The property owners value the rental property through the yield method that results in a price that other property investors would be willing to pay. The return generated in a rental property consists of rental revenues. These rental revenues are state regulated according to the use-value method, which means that rents, especially in primary locations, are reduced in order to minimize the segregation in the Swedish society. A price gap appears and consists of the price difference between the present value of the running rental income and the price of each individual apartment on the secondary housing market. The tenant owned association that is willing to buy the property and the private property investor who is willing to sell, usually negotiates a price that both parties are satisfied with. The negotiated price usually results in both parties sharing the profit that arises from the price gap. This study aims to investigate how large the price gap is between the conversion price and price generated through sales of the individual units on the open housing market. The study includes completed conversions in Stockholm within the city customs during the period of January 2010 and January 2016 and condominiums sold in the same associations during the same period. The discount results to an average of 44 % in relation to conversion price and 57 % in relation to the deposit (Sw. Bostadsrättsinsats). On average, the difference between the value of the property during conversion and the value of tenant owned-housing units on the open property market results to 24,444 SEK/m². The difference between the conversion price and the market value of the deposit on the open housing market amounts to 31,231 SEK/m². This means that the average discount that an apartment holder receives amounts to SEK 1,924,025. Among the converted properties, 38 % of the total gross floor area have been sold on the open housing market within the two first years after the conversion. The value difference has resulted in a total realized discount amounting to SEK 5,279,523,434 in relation to conversion price and SEK 6,672,510,151 in relation to the deposit value.