A policy can be defined as a plan of action adopted to control or enable an activity. Often, policies are instituted by a country’s governing body. Real estate development is subject to government policies. Today, we look at the policy issues that will affect the Kenya real estate sector in 2018.
Interest rates have had a major impact on real estate. When the interest rates are high, the overall cost of borrowing is high. Therefore, investors’ appetite for borrowing diminishes. Similarly, when the interest rates are low, more money can be advanced to investors as the cost of borrowing is low. Since capping of interest rates at 14 percent in the year 2016, Kenyan banks have become more stringent in issuing of loans. More people are not qualifying for loans despite the low cost of borrowing. This was experienced last year as the amount of credit advanced was reported to be less than the demand. To counter the unavailability of funds, more developers are partnering with foreign investors to develop real estate. However, the demand may not be adequately met. The Interest rate cap is expected to be revised to drive back the demand for credit and supply of funds as banks push for a consultative process with the government. With reports on low uptake of mortgage loans in 2017, investors will need to provide flexible payment options for buyers.
In its initiative to boost housing for low-income earners, the government handed low-cost housing firms a 15 percent tax break late 2016. According to the amendments of the Finance Act 2016, investors who put up 400 and above housing units to promote housing development will enjoy a reduction in the corporate tax rate of 15 percent, down from the standard 30 percent. Investors are likely to yield much this year as low-cost construction takes the focus in 2018.
On the other hand, the withholding tax on rental property which became effective in January 2017 continues to be termed as a slur to the real estate and construction sector. According to the Kenya Private Developers Association, the tax imposed by the Kenya Revenue Authority undermines the incentives provided to the industry by the government. The withholding tax which is charged on the gross rent, makes the service charge included in total income taxable hence reducing the returns on investment for property owners. For investors to achieve optimum returns, they will need to observe tax compliance guidelines as those who comply are not affected by the tax. The Kenya Revenue Authority has recently embarked on activities to curb tax evasion in the property market citing immense growth in the sector which is disproportionate to tax returns.
In budgeting, the government is set to revise public spending for the year 2017/2018 after the Treasury announced a 50 billion overrun on the national budget early October 2017. The treasury recommended suspending spending of Ksh 43 billion in low priority expenditure which is inclusive of several national government projects such as the LAPSSET project. In a report by the Treasury, the changes in the supplementary budget have led to a downward revision of targets for crucial policy interventions such as the ongoing public investments in roads and industrial investments including Special Economic Zones as well as industrial parks. In retrospect, a revision of the expenditure set for infrastructure will hamper real estate development as it is reliant on infrastructure. The LAPPSET project is one of the national development plans that is going to be affected by the revision. The revision on spending in development projects cut has been met with hostility as economists cite that the move may choke GDP growth in all sectors across the board. The real estate sector, which is heavily dependent on infrastructure development will more likely be affected at the county levels. Investors will therefore have to adjust their investment options by looking at how time overruns in the national infrastructure projects will affect property development.
While there are a few policy issues affecting the Kenyan property market, the sector has received immense support from the national government through incentives such as the existing subsidies in low-cost housing. The construction industry is one of the most liberal and streamlined sectors in Kenya.
This article is written by Buildafrique Consulting Group; a Kenya Real Estate Consultant and Development Solutions provider that offers End-to-End Financial, Development Management, and Investments Solutions to help Developer, Investors, and prospective Home Owners manage risks and realize value for their investments in a fast evolving Real Estate market.
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