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The 2018/19 Budget: Resulting Waves for Kenya’s Real Estate Industry

ON THE SPOTLIGHT

Each year, every sector waits for the country’s budget statement with unabated breath to find out special (positive or negative) implications on the sector and this time, it was no different. The Cabinet Secretary for National Treasury unveiled the Ksh.2, 556.7 billion budget which is equivalent to 26.3% of the country’s GDP and it detailed country’s financial plan for the next one year. Of this, recurrent expenditure will amount to Ksh.1,550.0 billion (equivalent to 15.9% of GDP), development expenditure is projected at Ksh.625.1 billion (equivalent to 6.4% of GDP), and transfers to County Governments will amount to Ksh.376.4 billion (or 3.9% of GDP). With the deficit of Ksh.558.9 billion (equivalent to 5.7% of GDP), the government hopes to plug the budget gap from net external financing amounting to Ksh.287.0 billion (equivalent to 3.0% of GDP) and domestic financing amounting to Ksh.271.9 billion (equivalent to 2.8% of GDP).

The Big Four Agenda
Themed “Creating jobs, Transforming Lives and Sharing Prosperity,” the budget is hinged on the “Big Four Agenda”, President’s transformative plan that is targeting manufacturing, health, housing and agriculture sectors with the sole goal of providing Kenyans a better livelihood. To achieve “the Big Four” Agenda, the government plans to put in place critical enablers namely: (i) continued macroeconomic stability; (ii) enhanced security; (iii) targeted infrastructure; (iv) expanded technical training; (v) technology innovation; (vi) and finally addressing vigorously the cancer of corruption.

Reforms for the Housing Sector
Provision of affordable housing is one of the most critical Big Four Agenda that the government is keen on implementing owing to the fact that right to decent shelter is a constitutional requirement. To meet this requirement, the government plans to increase the supply of affordable houses by partnering with the private sector to develop homes in the serviced land. The Cabinet Secretary has proposed reforms in property registrations, access to affordable financing, and adoption of new low-cost building technologies. When looked at with a perspective of real estate player, these reforms in our view will benefit greatly the real estate industry at large, from low market segments to high market segments. Property developers will now transfer properties to customers much faster thereby mitigating the rising dissatisfaction rate among home buyers due to unnecessarily prolonged property registration process. Also, with the adoption of low-cost building technologies, property developers will be able to build housing schemes at a much lower rate than they do currently. In the process, they'll enjoy an increase in profit margins while customers will enjoy a reduction in home prices. Additionally, property developers and aspiring homeowners will enjoy access to affordable property finance. Already, the government has taken practical actions towards this with the establishment of Kenya Mortgage Refinance Company (KMRC). With these reforms, everybody wins.

READ: The Kenya Mortgage Refinance Company: Kenya’s Housing Shortage Panacea?

Comprehensive Housing Package
The government has developed a comprehensive housing package that will incentivize the private sector in the construction of low-cost housing. This includes reduction of corporate tax rates to 15% for developers who construct at least 100 units per year. Additionally, the government plans to establish a National Social Housing Development Fund and strengthen the National Housing Corporation (NHC) to take up more strategic roles in resource mobilization and management of 10 tenant purchase schemes and provide alternative financing strategies for low-cost housing and the associated social and physical infrastructure. On this resolution, private developers could enter into a partnership with these state agencies to provide housing schemes for aspiring homeowners. This initiative will get a boost with the proposed amendment of the Employment Act to provide that an employer shall contribute to the National Housing Development Fund, in respect of each employee’ in his or her employment 0.5% of the employees gross monthly emolument subject to a maximum of Ksh.5000 while the employee will contribute 0.5% of their monthly gross earnings. This will see more business for property developers and more so uptake of affordable units as employees take up tenant purchase schemes by the developers.

Budget Allocation for Public Housing
The government will be working closely with the private sector to implement the public housing scheme under the Big Four plan. To roll out the housing programme, the government has provided Ksh.3.0 billion for construction of affordable/social housing units by the Government and Ksh.1.5 billion for construction of housing units for police and Kenya prison officers. We have also provided Ksh.1.5 billion for the Civil Servant Housing Scheme Fund to support the offtake of the housing units. The suppliers of building materials, as well as contractors, stand a chance to win lucrative tenders with the implementation of this groundbreaking programme. Additionally, the government plans to provide infrastructure and utilities to urban land owned by both National and County Governments and invite the private sector to develop affordable housing units. To this end, the state will restructure the Kenya Urban Support Programme, Kisumu Urban Project and Nairobi Metropolitan Services Improvement Project, to provide Ksh.18.4 billion to support the servicing of land in various towns in the country to bring in private developers into the affordable housing programme.

Tax Proposals
The tax proposals submitted through the 2018 Finance Bill are designed to generate an additional Ksh.27.5 billion in tax revenue for the FY 2018/19. In addition, the proposed tax measures are intended to incentivize the achievement of “The Big Four” Plan and offer strategic incentives. The government has proposed an increase on import duty for iron and steel products from 25% to 35% in a bid to protect the local manufacturers. These products literally form the foundation of housing projects. This tax proposal will adversely affect property developers who have suppliers that import their steel. The anticipated cost increase may affect the locally produced steel as well depending on how well the supply markets are structured. The government also plans to introduce a Robin Hood Tax of 0.05% on any amounts of five hundred thousand shillings or more transferred through banks and other financial institutions. Transactions in real estate are large in nature and this tax proposal will greatly affect both the sellers and buyers; Property developers transferring funds to suppliers and home buyers transferring property purchase funds to the developers.

Insurance companies have invested significantly in the real estate industry in Kenya. The government plans to introduce capital gains tax on the transfer of property by general insurance companies. It argues that some streams of income from this sector, including payments to non-residents persons and capital gains made by general insurance companies are not taxed under the current legal framework.

Attracting Investors
To facilitate investment by targeted investors, the Government will provide special fiscal incentives through a special operating framework arrangement that outlines the specific conditions and deliverables that are measurable and with specific timelines that must be met. The government proposes to develop a framework to introduce special incentives in the VAT Act, Excise Duty Act, and Miscellaneous Fees and Levies Act, and provide a preferential tax rate under the Income Tax Act in order to encourage investments.

With revenue enhancement measures, the government project revenues to rise by 17.5% to Ksh 1, 949.2 billion (equivalent to 20% of GDP) in the FY 2018/19 from the estimated Ksh.1, 659.6 billion collected in the FY 2017/18. In retrospect, the 2018/2019 budget holds a brighter promise for the players in the real estate industry. There are no significant tax regimes that may hinder growth and the several planned public investments will see the sector continue to thriving.

AUTHOR´S NOTE:

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