On April 25, 2020, President Uhuru Kenyatta assented to the Tax amendment bill published on March 30, 2020, as part of measures to cushion the public against the effects of the Covid-19 pandemic. The tax law changes are to impact all industries across the economy with the Real Estate and Development sectors expected to see significant changes, especially relating to investment deductions.
Amendments were made on tax-related laws, including Income Tax Act (CAP 470), Value Added Tax Act of 2013, Excise Duty Act (2015), Tax Procedures Act (2015), Miscellaneous Levies and Fees Act (2016) and Retirement Benefits Act, 1997.
The new law lowers the turnover tax rate from three to one percent; however, the VAT registration limit still stands at KSh5 million but does not apply to income from rental income and management. Furthermore, expenditure on the construction of a public school, hospital, road, or any other similar social infrastructure, with the approval of Cabinet Secretary , was not allowed as deductible expenses against taxable profit.
The Act provides a simplified investment allowance after all the capital deductions, including investment allowances provided under the Second Schedule of the Income Tax Act. As such, new hospital buildings will make a 50% deduction on costs in the first year of use and a further 25% of the residual value per year on reducing balance subject to licensing by the competent authority. Moreover, Commercial and Educational buildings, including student hostels, will be allowed to make a 10% deduction per year on a reducing balance. The Act, however, impacts the construction of hotels and manufactures negatively as investment deduction allowances were reduced from 100% to 50% in the first year of use.
Nevertheless, wherever the capital expenditure is incurred on the construction of a building and before the building is used it’s sold, the seller will not be allowed a deduction but the person purchasing the building will incur capital expenditure equal to the expenditure incurred on its construction or the amount paid by him, whichever is lesser. Additionally, in case an existing building is extended by further construction, the extension will be treated as a separate building, and, as such, deductions will be applied separately. Still, where a building is sold by a person carrying on a business of construction for sale, the qualifying capital expenditure shall be the price paid on the sale.
Income no longer exempt from tax.
It is as well crucial for Real Estate investors and developers to note that Investment income of pooled funds of a registered retirement benefits scheme and interest of a registered home ownership savings plan are no longer exempt from tax.
Amendments have also been made to Section 38 of the Retirement Benefits Act (1997) to allow access to retirement benefits for purposes of purchasing a residential house a measure aimed at increasing homeownership in the country as envisaged under the housing pillar of the Big Four Agenda. Additionally, in a bid to increase government revenue from the property sector, the Kenya Revenue Authority (KRA) urges leasehold owners to shift from making rental payments to the government upon transfer or charge of their property to annual payments, a means to boost government revenue.
The Real Estate sector is one of the sectors that has been adversely affected by the Covid-19 and, consequently, by the amendments made to the Real Estate and Development tax laws. As such, real estate investors and developers should take note of the changes and adjust their cash flows accordingly.
B.) WEEKLY NEWS HIGHLIGHTS
MAJOR ECONOMIC NEWS HIGHLIGHTS.
i.) IMF seeks reversal of tax cuts
The IMF has asked the Treasury to reverse its earlier stand of delinking the tax reliefs to the end of the coronavirus pandemic, meaning that Kenyans will not enjoy the tax reliefs once the virus is contained. Sales levy cuts will be reversed if Kenya agrees with the International Monetary Fund (IMF) to reinstate the higher taxes, income tax, and value-added tax.
ii.) Diesel and super petrol prices fall to the lowest level in over a decade.
Diesel prices fell by a margin of 19.9 percent a litre from Sh97.56 to Sh78.07 per litre – the most significant margin in over a decade. Moreover, Super petroleum will retail at KSh82.28 per litre from Sh92.87, representing a drop of Sh10.59 while kerosene costs will increase by 3.19 percent to Sh79.79. The cheaper fuel is linked to the plunge in crude oil prices after a fallout between Saudi Arabia and Russia to cut production in the wake of the global Covid-19 pandemic, which has also cut demand for energy on reduced economic activities.
iii.) Kenyan Bankers anticipate the banking industry will remain sufficiently capitalized amid covid-19
The Kenya Bankers Association through its Chief Executive Officer Habil Olaka, indicated that a financial crisis in Kenya is unlikely since the majority of banks had high levels of liquidity during the interest rates cap period in the last three years, which was effectively lifted at the end of 2019 with banks increasing their lending activity just two months before the Covid-19 pandemic.
iv.) Cash in circulation falls to Sh241bn ahead of Covid-19 slump
The latest statistics from the Central Bank of Kenya (CBK) showed that the total cash in circulation stood at Sh241.96 billion in February down from Sh265.87 billion in the same month last year, a decline equivalent to 9 percent, an indication of low economic activities and a low demand for cash amid the covid-19 pandemic.
CONSTRUCTION NEWS HIGHLIGHTS
i.) Government to re-advertise contracts for construction of TVET centres in Wajir and Lamu County.
The government plans to re-advertise contracts for the construction of technical and vocational colleges in Wajir and Lamu counties after contractors pulled out citing insecurity issues. In documents submitted before the National Assembly Committee on Education, the Education Cabinet Secretary Prof George Magoha said that a team from the State Department of Public Works is currently assessing the status of the construction of Technical and Vocational Education and Training (TVET) centres in Wajir and Lamu Mpeketoni. The CS further said that the Wajir TVC was 75 percent complete before it was abandoned while the Lamu Mpeketoni was abandoned at 55 percent completion.
ii.) The price of construction sand hits an all-time high in Nairobi.
The bans placed on sand harvesting by Kitui, Machakos and Makueni counties, nearly a month ago, has raised the cost of sand by at least 30% pushing real estate developers on edge. Twenty tons of sand is currently being sold at Ksh40, 000 up from Ksh30, 000 weeks ago.
iii.) Nairobi Metropolitan Service (NMS) reinstates e-construction system
A recent notice by the Nairobi Metropolitan Service (NMS), has reinstated the e-construction development application processing system with effect from 16th May 2020 following a suspension of the system earlier on in the week. Later on, at the end of the week, the suspension was lifted through yet another circular dated 16th May, 2020.
iv.) The coronavirus pandemic to dampen the construction sector significantly
A study conducted by Deloite dubbed the Economic Impact of the COVID-19 pandemic on East African economies, shows that significant disruptions in the sector include shorter working hours, a decline in construction materials due to supply disruptions, and lower demand for housing. Moreover, according to the study, further ramifications on the construction and real estate sectors include a decline in project financing as lenders would be uneasy about financing construction projects because of the uncertainty surrounding the completion of projects. Government infrastructure projects are also expected to stall due to shortfall in revenue collection by USD 658 million.
COMMERCIAL REAL ESTATE HIGHLIGHTS
i.) Trustees seek to stop the use of pensions for buying homes
In its letter to the pension’s regulator, the Association of Retirement Benefits Authority (ARBS) says the week-long period granted for public participation was too short for them to exhaustively review and give a substantive reply to the draft regulations regarding home buying.
ii.) EACC goes for Sonko’s Sh500m Upper Hill property
An alleged property deal between Nairobi Governor Sonko and the Kenya Railways pension scheme is on the radar and investigation by Kenya of anti-graft detectives as Sonko’s family is seeking to buy a 500 million property in the upmarket Upper Hill area along the Matumbato road. However, the deal has now been rocked by controversy, including claims that the land was undervalued. The commission is also investigating the source of the Ksh144.6 million that Sonko, through Primix Enterprises Ltd, has so far allegedly paid out of the Ksh498.5 million purchase price.
iii.) Nairobians brave tough year to build Sh80bn homes
According to the Economic Survey 2020, which was released on April 28, the number of private residential units completed last year was 9.4 percent higher than the 10,785 units realized in 2018 as builders intensified efforts to meet the demand for housing in the city. The number of completed private non-residential buildings stood at 2,174 units valued at Sh13.6 billion up from 1,940 valued at Sh12.4 billion in 2018.
iv.) Ministry of Lands Reopens Partially
The ministry of land and physical planning has partially reopened registries across the country following a public outcry. In a statement on Wednesday, Cabinet Secretary Farida Karoney announced the reopening of the registries and services that will be offered at the customer care centers of the ministries registries countrywide being registration of bank charges, registration of bank discharges, registration of court orders, and verification of sureties.
C.) KENYA REAL ESTATE TRENDS
i.) Athi River gains traction from real estate investors.
In the recent past, there has been a growing appetite for residential development land in areas surrounding the city. According to the latest report by HassConsult, there is a high demand for low, middle-income housing in far-flung Nairobi Metropolis as tenants opt for cheaper units in the wake of the prevailing high cost of living and uncertainty in the economic environment. As a result, many residents have been pushed to live outside the city for cheaper rents.
Athi River is one example of satellite areas that has been gaining traction from investors and developers. According to reports, the town has been snowballing due to several factors, including the administrative role of the town and proximity to the city. The land is also relatively affordable, with a price per acre going at an average of sh4.1 million as compared to other satellite towns such as Juja, Ruiru and Ruaka, read the report.
ii.) Chinese firms continue to profit in Kenyan property market
Chinese firms based in Kenya are emerging as outliers, projecting a bullish image during these dire times as Kenya real estate drops into turmoil owing to reduced buying power among Kenyans. Aviation Industry Corporation of China (AVIC International) is on the verge of completing a KSh40 billion Global Trade Centre (GTC) in Westlands amid Covid-19, while Erdemann Property, which has been developing affordable houses, the bulk of them in Athi River has been attracting considerable sales.
Edermann Property Head of Planning John Rajwayi said that while the challenges experienced by the Industry have hit the firm, it has been able to keep selling apartments primarily due to their focus on affordable housing. That has significantly been attributed to the way Chinese firms are embracing innovation, affordable technology, and maximum exploitation of resources.
D.) GLOBAL REAL ESTATE TRENDS
i.) Massive Consolidation continues to be on the rise in India
The Indian real estate sector has been consolidating for the past few years. With the onset of the Real Estate Regulation and Development (RERA), financially weak players found it difficult to adhere to compliance norms and were either going out of business or consolidating with more significant players. The liquidity crisis in India further worsened the situation, and a new wave of consolidation kicked off.
Survival of the fittest and financially healthiest is the new norm in Indian real estate, and a rise in the share of new launches by branded players has been witnessed. According to reports, the share of tier I developers in 2018 new launches was around 56% as compared to 41% in 2015. In 2019, the share increased as the liquidity crisis hit the weaker players significantly. Reports also indicate that the consolidation phase is likely to continue amidst the current COVID-19 pandemic.
ii.) Re-evaluation of the office space on the rise in the global market
Following a large number of Barclays bank staff working from home, the bank is re-evaluating how much office space it needs. According to Barclays Boss Mr. Jes Stanley, having thousands of bank workers in big, expensive city offices may be a thing of the past.
In recent years, there has been a trend where large banks in the worldwide market have been shifting workers away from the expensive skyscrapers in financial hubs. Consequently, the Barclays Bank is re-evaluating how much office space it needs, with future retail branches being used by investment banking and call Centre workers.
Businesses re-evaluating the office space they need is a notable trend in Kenya, as some offices have been shut as a result of businesses being unable to keep up with rent payment amid the Covid-19 pandemic.
E.) COMMON REAL ESTATE & DEVELOPMENT CHALLENGES, AND SOLUTIONS
Disputes Resolution Mechanisms in Construction Development Projects:
One of the major challenges in Construction Development Project is dispute resolution mechanism for disputes arising out of various contractual or non-contractual engagements between various players in the construction and real estate supply chain. The most common dispute is between the Construction Developers and Construction Contractors, which range from dispute related to claims for variations of works, work payments, and delays in completion of works.
Contract Dispute resolution in Development Construction Projects involves any process targeted to bring about the settlement of a dispute. This can range from the most informal negotiations between the parties in the dispute, to more directive intervention from external neutral third parties, as well as to full court hearing.
The following Dispute Resolution Mechanisms exists in Kenya Construction Industry for Development Construction Projects. The mechanisms have been presented in the order of efficiency in managing time and costs between the parties:
i) Negotiations: This is the most efficient dispute resolution mechanism in relation to managing time and cost. The parties attempt to settle their differences through various techniques ranging from concession, compromise, coercion, and confrontation. The process usually requires goodwill between parties for it to work. It is also recommended for the parties to reduce the outcome of the negotiation in writing for the agreement to be binding.
ii) Mediation: Mediation is a voluntary dispute resolution process in which a neutral third party helps the parties to reach a negotiated solution to the conflict, especially when negotiations have failed. The third party can be a profession with contract management expertise in the construction, or any other person who can understand the particulars of the disputes.
iii) Conciliation: Conciliation is a mediation process in which the neutral third party can propose a solution to the conflict. In this case, the conflicting parties lose control of the process to the neutral third party.
iv) Mediation-Arbitration Combination: This is a combination of both Mediation and Arbitration, whereby the parties agrees to mediate, but if they fail to reach a settlement solution, then the dispute is referred to Arbitration. The parties may also opt to arbitrate first, and thereafter opt to resolve the dispute through mediation mechanism.
v) Expert Determination: In this case, the conflicting parties submit their case to an expert in the field or area of dispute for determination. The expert would then give his decision based on his expertise, for example a Quantity Surveyor valuing the value of work done, or an Engineer testing the structural strength of concrete works in a building.
vi) Adjudication: An impartial, third party neutral person known as an Adjudicator is appointed in Adjudication dispute resolution process to make a fair, rapid, and inexpensive decision on a dispute arising under a construction development contract. Adjudication is meant to be operated under tight time scales, mostly less than 30 days. The decision arrived by the Adjudicator is binding unless the matter is referred to Arbitration.
vii) Arbitration: Arbitration is a dispute resolution mechanism governed by Acts of Parliament and Civil Procedure rules. Arbitration usually arises when all the other processes have failed. The dispute resolution mechanism involves a neutral third party either appointed by the parties in the dispute or an appointing authority to determine the dispute and give a final and bidding award settlement
viii) Litigation: Litigation also arises when all the other processes have failed. It involves the parties taking their claims to a court of law adjudicated by a Magistrate or a Judge, whose judgment is final and binding to the parties, but with right of appeal to the parties.
For easy dispute resolution, parties are encouraged to enter into written Contract Agreement with the assistance of a qualified profession in the Construction Industry, such as Quantity Surveyors or an Architect for Development Construction Works, or an Engineers for Infrastructure developments.
THE CONSULTANT TO ENGAGE:
F.) THIS WEEK ON FREQUENTLY ASKED QUESTIONS (FAQs), AND ANSWERS
The approval requirement for a project depend on the scope of works, the type of the property being undertaken, and the location in relation to proximity to physical features like water bodies and infrastructure features like airports. Below are approval requirements for various scope and type of works:
i) Simple Renovations and Repair Works: Simple renovations and repair works that do not require knocking down of walls or erecting new ones just require a simple permit from the County Planning Department. These works include general repair works, painting, roof repair, repair of floor finishes, and any other works that does not involve new structural works on an existing building.
ii) Single Residential House development: Approvals required for this type of development include:
- Architectural drawings approvals, at the County or Sub-County Planning Department.
- Structural drawings approvals, at the County or Sub-County Planning Department.
- Occupation Certificate, at the County or Sub-County Planning Department, after project completion.
iii) Commercial real estate projects and other major development projects: These type of developments require the following approvals, in addition to Architectural and Structural drawings approvals mentioned in item “b” above:
- NEMA approval, at the local National Environmental Management Authority, after Environmental Impact Assessment.
- Change of User of the land property, to the proposed use of the proposed property, at the local county planning department, if the conditions of ownership documents or title deed are not already in the proposed use of the property.
- Registration of the Project with the National Construction Authority (NCA), before commencement of the construction.
- High rise building projects near major airports infrastructure may require approval from Kenya Civil Aviation Authority (KCAA).
- Projects that are near water catchment areas, or likely to have an impact on the water catchment also require approval from Water Resources and Management Authority (WARMA).
- During Construction, the Contractor may also require other licenses from the Local County Planning Department, such as Hoarding License when erecting hoarding around a construction site, as well as other Health and Safety Licenses procured by the Contractor that is involved in the building works.
G.) THIS WEEK ON DEVELOPMENT COSTS ANALYSIS – PARKLANDS AREA, NAIROBI COUNTY
This week’s focus on Development Cost Analysis is for Parklands Area, Nairobi Country, an upmarket area of Nairobi that has seen a lot of construction activities lately, following recent congestion of neighboring Westlands Area of Nairobi. The Development type in this area according to the land-use and county zoning regulations includes Apartment Blocks, Maisonettes and Town House, Hotels, and Shopping and Retail Complex,
Below is an analysis of Construction Cost per Square Meter (SM), for the option of procuring the development project through a Building Contractor, or an option of direct procurement of the Materials and Labour through Labour Contractor on some specific building types.
H.) THIS WEEK ON REAL ESTATE PRICE ANALYSIS – PARKLANDS, NAIROBI.
The Real Estate price analysis focus for this week is on land, sale, and rental prices for a 2 and 3 bedroom apartment in Parklands Area, Nairobi. The data were obtained through surveys, and analysis of asking prices on property listing in Nairobi.
i.) Sales price – Apartment and houses
ii.) Rent price – Apartment and houses
iii.) Land price per acre (commercial/residential)
I.) CENTRAL BANK OF KENYA INTEREST RATE WATCH – (T-BILLS)
The money market was liquid during the week ending May 15 with an appetite for government securities escalating. This was also supported by government payments that offset tax remittances. The average interbank rate was 4.21 per cent on May 15 compared to 4.05 per cent on May 08, with the excess reserve standing at KSh39.9 billion in relation to the 4.25 cash reserve requirement.
91 day T-bill rose by 0.01% from 7.212% previous week rate to 7.27%. CBK offered a total of Kshs 4 billion, and bids amounted to Kshs 7.670 billion, of which 7.651 was accepted. Volume on bids received increased week on week basis. 182 day T-bill rose by 0.04% from 8.151% previous week rate to 8.191%. CBK offered a total of Kshs 10 billion, and bids amounted to Kshs. 4.485 billion, of which 11.892 was accepted. The 364 day T-bill rose by 0.01% from 9.16% previous week rate to 9.17%. CBK offered a total of Kshs 10 billion, and bids amounted to Kshs11.932 billion, of which 11.892 was accepted.
J.) KENYA EQUITY MARKET INDICES
The equity market was on a downward trajectory over the week with the NSE 25, NASI, and the NSE 20 share index losing by 6.7, 6.02, and 3.48 percent, respectively. The total shares traded during the week rose by a margin of 14% to 22,444,600 million from the previous session 19 million, while the Market capitalization declined by 1.179 percent, indicating depreciation in prices due to reduced trading. I-REIT turnover was 50,000 recorded in 4 deals.
K.) KENYA CAPITAL MARKET ANALYSIS
During the week, Kenya Airways stock was among the top gainers with its stock rising by 9.58 percent, a move that was generally attributed by the government initiatives to partially lift bans on international flights following a public outcry by Kenyans in the diaspora. Equity and KCB shares plummeted further to new lows of 33.7 and 35.9, respectively, while Sasini’s and Longhorn publisher’s stocks dipped to 14.85 and 4.61 respectively. Uchumi supermarket has seen its stock inch upward slowly over the past weeks as it continues with an upward trend generally attributed to the rising demand for foodstuffs.
L.) CURRENCY HIGHLIGHTS
Kenya’s shilling is under intense pressure due to rapidly depleting foreign reserves, mainly triggered by a fall in diaspora remittances, in the wake of the coronavirus pandemic. Central Bank data shows that the country’s forex reserves have fallen 13 percent in the past four months to $7.74 billion (4.66 months of import cover) in April, down from $8.88 billion (5.4 months of import cover) in January. According to the parliamentary budget office, a weaker shilling will make it more expensive for manufacturers to source raw materials and intermediate goods for industrial production, resulting in cost-push inflation.
M.) FACTORS THAT WILL SHAPE THE REAL ESTATE AND OTHER MARKETS IN THE NEXT ONE WEEK.
i) Border closure
Following a case of 9 drivers testing positive to Covid-19 at Namanga border, the government may be considering possible border closure with Tanzania to contain the cross border transmission. There is also the possibility of Busia border closure following a press statement by the Council of Governors (CoG) urging the government to come up with protocol of dealing with the neighboring countries that will only allow limited access, if any, in order to contain the disease. In Lamu County, activists and locals expressed concern over the situation as the most affected towns of Mogadishu, Puntland and Hirshabelle are much frequented by Kenyan traders.
A survey conducted by the East Africa Business Council (EABC) shows that retail and logistics have a significant reduction in cash flow at 63% and 75%, respectively, following border closure. The reduction of cash flow will continue disrupting value chains, sourcing aw materials, and may lead to the total closure of businesses and investment projects in the border. The retail sector, a significant component of the real estate business with a variety of construction materials like timber being imported from neighboring countries, will be severely affected as traders close retail shops, and restaurants. Besides, the situation will be worsened if total closure is effected.
ii) Petrol prices
Diesel and super petroleum prices significant fall will hugely affect the market in the coming week. On May 14, 2020, Diesel prices fell by a margin of 19.9 per cent a litre from Sh97.56 to Sh78.07 per litre – the largest margin in over a decade. Moreover, Super petroleum will now cost Sh82.28 per litre representing a KSh10.59 drop while kerosene cost will increase by 3.19 per cent to Sh79.79.
The price of fuel is a significant gauge of the cost of living, determining what Kenyans pay for transport and the cost of goods, and therefore, communities that rely on the delivery of goods from other areas might see an improvement in their local economy. Besides, lower prices on fuel means that more disposable income will be in the economy, and hence more money will be freed up to spend on rent in both residential and commercial real estate.
N.) UPCOMING REAL ESTATE EVENTS AND TRADE SHOWS IN THE NEXT ONE WEEK.
1.) How to Understand Commercial Property Underwriting & COPE
Time: 1430hrs EAT
Event Organizer: Independent Insurance Agents and Brokers of America
Event Details: https://www.independentagent.com/Education/Webinars/Pages/live-webinars/HowToUnderstandCommPropUnderwritingAndCOPE.aspx
2.) Real Estate in Africa: Understanding the Impact of Covid 19
Time: 0430 Pm
Event Organizer: Invest Africa
Event Details: https://investafrica.com/event/real-estate-in-africa-understanding-the-impact-of-covid-19/
Writer of the Report:
This Report is written by Buildafrique Consulting Group, Kenya multi-disciplinary consultancy, that offers END-TO-END DEVELOPMENT CONSULTANCY, REAL ESTATE, and PROJECT FINANCE solutions through specialized subsidiaries. Among our solutions includes:
- Feasibility Studies and Market Research.
- Project Finance and Capital Raising.
- Project Management.
- Investment Design Appraisal.
- Quantity Surveying
- Construction Cost Consultancy
- Physical Planning and Planning Permissions
- Environmental Management and Impact Assessment
- Real Estate Development and Structured Investment Solutions
- Property Valuation
- Marketing and Property Sales Agency
- Property Management and Facility Management
- Office: Navigators, Kindaruma Road, Nairobi.
- Website: buildafrique.com
- Email: [email protected]
- Tel: +254 20 8058493 / Mobile: +254 722 474285
The information contained in this report is for general information purposes only. While we endeavour to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the information contained on the report for any purpose. Readers are therefore advised in all circumstances to seek the advice of Registered and Licensed professionals in all matters related to Real Estate Investment and Project Development.