Sale of co-operative housing societies yields high profits

An increasing number of co-operative housing societies are opting for liquidation for the purpose of divestment in the market for residential rental properties, which continue to be in high demand by investors. A new Colliers analysis reveals that individual co-op members stand to gain DKK 1.3 million on average in a sale. However, many co-op members not only fetch a handsome profit from a sale, but also stand to obtain favourable terms as future tenants. Is this a passing whim, or will more co-operative housing societies explore the possibilities of liquidation?

Investor demand is strong for old-stock residential rental properties comprised by the rules of cost-regulated rent control. As a result, the prices of this type of property has been surging in recent years. This price trend has been one of the factors serving to whet the appetite of co-operative housing societies for liquidation for the purpose of converting the societies’ properties into residential rental properties. Such sales have typically been quite a profitable business for the housing societies.

Among investors, well-located residential rental properties are considered low-risk assets due to an exceptionally low vacancy risk. Investors are therefore prepared to pay even exorbitant prices for the stable income returns generated by these converted co-operative housing societies.

According to Statistics Denmark, there are about 203,000 housing societies in Denmark today, 56% of which are situated in Copenhagen. It is therefore hardly surprising that Copenhagen has seen the highest number of transactions involving liquidation of housing society properties.

An analysis of about 30 Copenhagen co-operative housing societies indicates that the prevailing dynamics of the property market make it possible for co-op members to achieve substantial tax-exempt proceeds from a sale. Comparing average liabilities of the analysed co-operative housing societies with the prices the properties are expected to fetch as residential rental properties in today’s market, each co-op member could stand to free up equity of some DKK 1.3 million on average.

Why are co-operative housing societies liquidated?
The increasing number of voluntary liquidations of co-operative housing societies is prompted not only by the fact that developments in the property market have driven up obtainable selling prices.

Post-liquidation, co-op members are entitled to continue residence as tenants. When a co-operative housing society opts for voluntary liquidation, it is converted into a residential rental property comprised by the rules of the Housing Regulation Act. The former co-op members (now future tenants) are therefore to pay rent based on cost-regulated rent, which is fixed on the basis of property operating costs, a rate of return for the owner (landlord) as well as allowances for any improvements made. The cost-regulated rent is typically much lower than common rental prices in the general housing market.

In principle, the profits gained from selling properties formerly held by co-operative housing societies are tax-exempt capital gains for the former co-op members. However, if parts of the property in question have been tenanted, the capital gains will be subject to proportionate taxation.

The tax-exempt capital gains obtained by the co-op members are subject to the members having used their flat as place of residence during their ownership period. In order to qualify for tax-exempt proceeds, liquidation and profit distribution must take place in the same calendar year.

The above-mentioned combination of tax-exempt capital gains and the possibility of former co-op members to remain in their home as tenants on favourable terms no doubt appeals to many co-op members. We therefore expect more co-operative housing societies to explore the possibilities of voluntary liquidation. And investor demand is expected to remain intact.

 

Contact
Peter Kaalund Højland Petersen
Senior Associate
+45 61 71 14 10
peter.kaalund@colliers.com