The rise of the €1 home

Welcome back. As the dust settles from last week’s European parliament elections, the previous round in 2019 — with its surge in support for green parties — feels like another age.

Green parties lost 21 of their 74 seats, while rightwing parties surged, especially in France and Germany. The outcome will throw doubt on whether the EU can continue the momentum it has shown in green policy and regulation over the past few years. Still, it’s worth noting that key elements of that drive — notably disclosure regulations — are now firmly in place.

In today’s newsletter, Kaori looks at one European innovation that has been catching on abroad — an effort to help deprived neighbourhoods by tinkering with local real estate markets. And I look at an oft-neglected corner of the debate around calculating financial sector carbon emissions. — Simon Mundy

REAL ESTATE

Inside the social impact of €1 properties

Sicily grabbed headlines when it was first announced that homes on the Italian island were on offer for just €1. Does this sound too good to be true?

The scheme was part of a national initiative launched in 2017 to revitalise areas falling into disrepair because of population decline. The only condition of purchasing a €1 home was that buyers were required to renovate the property within three years of purchase.

Now, that idea seems to be spreading, reaching as far as Seoul, as well as Baltimore and Newark in the United States. Although they are vastly different cities, they all share the need for urban regeneration.

“You drive around any place — in an urban centre or rural community — and there is so much opportunity,” said Bruce Marks, chief executive of Boston-based non-profit organisation, the Neighborhood Assistance Corporation of America (NACA), which began a $1 home ownership scheme a year ago. The problem is that “they’ve been disinvested and run down, and we’ve got to bring them back”, he told me.

In Seoul, a start-up has undertaken a similar “one euro” project, but with a slightly different approach. I spoke to Sungwook Choi, architect and founder of Seoul-based Lokaal Futures, which aims to revitalise neglected buildings and push for urban regeneration by establishing community-focused commercial spaces.

Choi began a pilot project after the owner of an abandoned apartment building asked him to help increase the value of the property, which had been vacant for three years. Two years and a renovation later, the building in the Songjeong-dong area of Seoul now houses several retail stores, a yoga studio and a café, which have together evolved into a gathering spot for the community and tourists. 

The key was to rent each of the sections within the building for a symbolic value equivalent to €1 for three years. “Without the €1 project, the building would have sat empty, creating no value,” Choi said. “Seoul real estate is very expensive, so it’s also become an incubator for new businesses,” he added.

To participate in the programme, businesses needed to agree to foot the bill for renovation for their own spaces, and divide costs among other tenants for common areas, plumbing and electricity. The businesses were selected from more than 80 applicants that went through a vetting process by Lokaal Futures.

Tenants are also required to organise monthly events aimed at community building, such as hosting a gardening club or “plogging” events, which is a combination of jogging and picking up trash.

Unsurprisingly, €1 rents will not in themselves drive profits. Currently, to continue operations, the start-up receives management fees and a portion of earnings from the businesses in the building.

But Lokaal Futures and the building’s owner are mostly playing the long game. Eventually, when the building owner decides to sell the property, Lokaal Futures will receive a portion of the sale.

Tommaso Montagni, co-founder of Rubik, a New York-based artificial intelligence powered real estate platform, said he had considered investing in €1 homes in Italy, but ultimately “shied away”, citing a complicated bureaucratic process to start the renovations. He also pointed out that there was limited financial upside if surrounding homes in the area were not being renovated and reinvested in.

Yet from a social perspective, the impact is undeniable. The Italian scheme for one, has been touted as a success. “This is partially due to their goals,” Montagni said, as the objective of offering these cheap homes was rebuilding the community, attracting tourists and preserving cultural heritage.

The aims were similar in Seoul, where building community and attracting visitors were core goals of the pilot. “People crave the feeling of belonging to a community. In addition to neighbours, we have visitors coming all the way from Jeju Island (the southern tip of South Korea and 465km from Seoul) just to participate in the plogging events,” Choi told me.

Following the three-year pilot project, Lokaal Futures will consider expanding its “one euro model” to other similarly underinvested places in Korea, including rural areas.

“There are massive social benefits” so long as the projects focus on improvements for long-term residents in the communities, Marks said. Issues of crime and lack of services usually stemmed from “the negative impact of people not being invested in their neighbourhood”, he added.

At present, these low-cost properties remain a high-risk investment. But as barriers to entry are dealt with, that could change. “We’ll evaluate opportunities as they come up,” Montagni said. (Kaori Yoshida, Nikkei)

CARBON ACCOUNTING

A missing piece in the financed emissions jigsaw

Financial companies around the world have been struggling to put together comprehensive estimates of their “financed emissions” — that is, the contribution that they make to clients’ carbon emissions through their loans and investments.

The multitrillion-dollar derivatives market has so far received little attention in that drive — which is a mistake, according to a paper published today.

The paper, authored by academics at Imperial College London, and commissioned by JPMorgan and S&P Global, focuses on the $2tn commodity derivatives market.

It notes that commodity companies commonly take short positions in this market to hedge their natural exposure to commodity prices. Looking at a range of commodity producers in North America and Australia, the authors find that this hedging lowers the companies’ cost of capital, by reducing the volatility of their returns and therefore their perceived riskiness in the eyes of their financiers.

Since those who take the other side of these derivative contracts are facilitating the commodity producers’ operations, they should be seen as responsible for a part of the associated emissions, the authors argue. They reject the argument that, since these counterparties don’t typically take delivery of the commodity in question, there is no emissions footprint.

But as for how to calculate this footprint, the authors leave the question open. So far, so has the influential industry-led Partnership for Carbon Accounting Financials, which has given guidance for calculating other sorts of financed emissions but not yet derivatives (though it says it’s undertaking “exploratory work” on that front).

Challenges abound in terms of how to account for contract tenor and holding periods. There’s also the question of how to account for the fact that these derivatives are widely used by smaller and mid-sized fossil fuel producers, but much less so by the biggest ones, which are cushioned from market swings by their huge balance sheets.

So if derivatives counterparties stopped helping those small and mid-sized fossil fuel companies hedge their risks, the effect might simply be to help the supermajors grow their market share slightly — without reducing emissions overall. (Simon Mundy)

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