Roll out incentives to spur growth in real estate sector

The processes associated with construction should be eased. FILE PHOTO | NMG 

By SABINA ONYANGO

Summary

• Prices of houses being built are too high for most Kenyans and therefore there is demand for more affordable housing.
• Failure to meet this demand is what has led to the mushrooming of slums and buildings collapsing due to use of low-quality building materials.

Prices of renting and buying houses for low and middle income segments of the market have been on an upward trend since demand far outweighs the supply. Prices of houses being built are too high for most Kenyans and therefore there is demand for more affordable housing.
Failure to meet this demand is what has led to the mushrooming of slums and buildings collapsing due to use of low-quality building materials.
United Nations Sustainable Development Goal number 11 aims to promote sustainable building and affordable housing for all.

The Kenyan government recognises the need for safe and inclusive housing and introduced a new regime for taxation of rental income for residents in the Finance Bill 2015.

Taxpayers who are resident and who own income generating residential properties in Kenya would be taxed at 10 per cent (reduced from 12 per cent) of the gross rent received where the annual rental income is up to Sh 10 million.

This would be the final tax. The property owners also have a choice of computing their taxable income and paying taxes as per the third schedule of the Income Tax Act.

The Finance Bill 2016 proposed a reduced rate of corporate income tax of 20 per cent from 30 per cent for real estate developers who construct at least 1,000 qualifying units annually. Stakeholders viewed 1,000 units as too high and initiated lobbying efforts to reduce the number.

These efforts paid off in the Finance Act 2016 where the number was reduced to 400 units and the tax rate also reduced to 15 per cent.

Recently, some developers have held discussions with the government to push for the reduction in number of houses to 100.

The incentive is a commendable step, but the law is not clear on a number of issues. There is no clear definition of what affordable housing means.

KRA will certify if the houses are affordable but we still need a clear definition to ensure that it is not just low cost houses that are being constructed, but that the houses are also of quality and that the right construction materials are used.

READ: Kenyan houses are unreasonably expensive

Housing developments are undertaken over a number of years. The developments cannot stand alone and have to be connected to infrastructure such as sewerage, transport, water and power, implying extra cost and time. The government should provide incentives by developing such infrastructure.

It is also important that the government provides clarity on whether the lower tax rate will be applicable in the year the development will be completed or over the whole period of the development.

There is an option of public-private ownerships where the government can partner with companies to transfer technology and operational know-how and invest money in development of the housing sector.

In such a case, the government would need to have a framework in place that ensures transparency, fairness and predictability, including reliable policy and regulations that investors can trust.

The processes associated with construction should also be eased, such as applying for and acquiring building permits and the associated costs.

Better technology and raw materials need to be made available. Incentives such as lower import duties would reduce the cost of obtaining the requisite products.

Sabina Onyango is a consultant with PwC Kenya’s Tax consulting and solutions team.