Despite expatriate housing benefit provision being one of the largest costs that make up the total package of a typical assignment – and over 90% of companies cover all or part of the cost – it often receives much less focus in an assignment policy than other elements such as tax planning or cost of living. While larger companies often take a more structured approach to the provision of accommodation, varying by family size and/or seniority per location, companies with smaller expatriate populations tend to have a more flexible approach, determining budget on a case-by-case basis. Whatever a company’s expatriate population size, establishing some basic ground rules which are clearly communicated to all stakeholders can not only keep costs under control but also manage expectations.
What are you going to base your allowance provision around?
ECA’s latest International Benefits for International Assignments survey shows that over three-quarters of companies take family size on assignment into account when determining the value or size of financial assistance for host country housing, while two thirds also refer to an assignee’s level of seniority or responsibility. Depending on the culture of the company a senior manager may expect a more generous level of housing provision than their staff.
What housing options are possible in the host location?Although some may argue that it seems discriminatory to provide a higher budget for an assignee accompanied by a partner and two children than for a single employee – why, after all, should the single assignee be penalised for incurring fewer costs than a family – this argument could be applied to many aspects of an international assignment policy, from cost of living adjustments to the provision of international schooling.
The fundamental premise to varying policy elements by family size is that assignees will naturally have different needs and incur different costs according to whether or not they have a partner or children. If a company takes family size into account when determining a suitable allowance to pay for host country housing, the intent is not usually to enrich the assignee with the larger family but simply to cover the increased costs required in renting a property of a suitable size and location.
What housing options are possible in the host location?
In many cases, providing host country housing equivalent to the home country size and standard would not be financially viable or even possible, as size and style of properties can vary considerably from one location to another. Properties in North America, for example, are often much larger than those in Asian cities, even though they may have the same number of bedrooms. Likewise, an individual who may be used to living in a house at home may need to adapt to living in an apartment when on assignment to a city like Amsterdam where houses are scarce.
While a single employee may be provided with a two-bedroom apartment in the host country, as this is all that this family size would require, they may have been used to living in a three-bedroom house in the home country and as such may feel they deserve the same size of property in the host location. It is essential, therefore, for employers to manage their assignees’ expectations from the outset.
What host country issues need to be factored in?
There is a whole range of host country issues to factor in when designing an expatriate housing policy. This includes deciding which city districts are suitable, taking commuting distance, traffic congestion and public transport into account, and which areas and properties fit with the company’s image or with the employee’s status or duties (for example, senior executives or diplomatic posts may be required to entertain at home). Security concerns would feature as part of the employer’s duty of care, and tax considerations when deciding whether the benefit is provided as cash or in-kind are also important.
Implementing a perfectly designed housing policy is a luxury and is conditional on the availability of suitable housing: in some locations a company may not be able to choose a suitable budget according to pre-set parameters and may just have to take whatever is available. For example, demand for expatriate-type properties currently far outstrips supply in Nairobi, which keeps prices very high. As such, it may well be that a single assignee is provided with a three-bedroom house because it is the only property available within the compounds that the company has deemed suitable for security and location. This will inevitably cost the company more than what was originally budgeted but it’s a cost they will have to accept if they need people in that location.
How is the policy to be applied consistently?
Setting up housing allowance or budget tables which link to a housing policy can present the opportunity to apply the same consistent approach in all locations, while taking into account local issues such as security. Of course, when establishing housing tables, it is also important to review them regularly to ensure they are still reflective of market conditions. Without a regular review, new assignees arriving into a location will find allowances too low if rental prices have increased significantly even over just one year. On the other hand, it could be that rental prices have decreased significantly since the allowances were set, resulting in overpayment to an assignee where cash allowances are paid. Take Myanmar, for example, where rents in Yangon increased by a staggering 46% between 2013 and early 2014, but subsequently decreased by 13% during later 2014 and 2015 as the market adjusted to an increasing expatriate population. Companies had to review their housing allowances frequently to keep up with the fast-changing market.
Where can savings be made?
The consistency achieved in having housing tables can lead to cost reduction in itself. When a company is looking to reduce costs, the savings made from adjustments to a housing policy can dwarf those made from switching to a lower cost of living index.
Considering that the cost of a mid-range three-bedroom apartment in Hong Kong, Tokyo, New York or London (some of the most expensive expatriate rental markets in the world) averages out at around USD 110 000 per year, even a conservative reduction of 5-10% of a rental allowance or budget can result in huge savings when multiplied out across an entire assignment population. Such a reduction may lead to assignees opting for more affordable accommodation a little further out from the city centre, but assuming safety is not compromised, would it be unfair to expect a commuting time of up to an hour if this is what they were used to in their home country?
A point to note is that the pressure to offer lower cost housing may come from the local business units rather than from the owners of the policy, since the former are likely to be the ones paying for the cost of the assignment. This can lead to conflict with a corporate-level policy: the local business unit may want to provide a budget that is commensurate with typical rents paid by local employees, whereas the corporate policy may be to encourage mobility and therefore ensure budgets are suitable for areas close to international schools. Communicating the intentions behind the policy is important to get buy-in from all involved.
Is an assignee contribution appropriate?
Whether a company decides if an assignee should contribute to the cost of their housing in the host country or not is dependent on the answer to one key question: is the employee expected to continue to pay for housing in their home country while on assignment? There is no single answer to this question. However, where there will be no ongoing housing costs at home, why shouldn’t the employee contribute to the cost of housing in the host country? Under the balance sheet principle, an assignee should be no better or worse off than if they had remained at home, so providing free housing on assignment when there are no housing costs in the home country goes against this principle. Also, an employee who has no ongoing housing costs while on assignment may benefit unfairly compared with an employee who is unable to rent out their home property, if both are provided with free host country housing.
A reason often given by companies who used to implement a home housing norm deduction but who have since moved away from this approach is that, because the employee was forced to sell or rent out their home country property in order to fund the deduction made by the company, the company found themselves bearing the costs and even the responsibility of trying to find a buyer or renter in sometimes difficult market conditions. Another reason some companies do not request assignee contributions is the difficulty in deciding how to calculate them: should it reflect home housing costs or should this be a proportion of the host country costs? If home-related, will it be established by statistical data on housing expenditure, a standard percentage applicable to all assignees, or each employee’s actual costs?
If host-related, will the contribution be the same percentage of host country rent for all assignees or will this vary by location? All of these approaches have their own pros and cons and trying to find a solution that is fair to all can be tricky. Some companies restrict the practice to graduate or junior-level employees who are less likely to be property owners and therefore less likely to have ongoing housing costs at home.
Any company wanting to include a contribution to host housing costs as part of their expatriate housing policy should consider what they are trying to achieve. As is common with most mobility policy decisions, there tends to be a trade-off between equity, accuracy, simplicity, ease of administration and cost. If the main driver is cost-reduction, perhaps this can be achieved through other, less contentious, policy elements.
Does it balance out?
To devise a consistent housing strategy that will please everyone is a difficult balancing act and, as with any policy, there will be exceptions from time to time, for reasons such as lack of availability of suitable housing as we have seen above. However, a solid and well thought through policy should keep costs and administration under control as well as allow assignees to feel they are being treated fairly and equitably. It should be noted that we have only looked at policies for long-term international assignments in this article. Separate policies on housing are often required for short-term assignments and local plus arrangements, both of which have their own challenges!
Need help with your policy?
To find out how ECA can assist you with your housing policy or any other elements of an international mobility policy, or to learn more about the Accommodation Tool please get in touch!