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The Aftermath: Kenya’s 2019/2020 Budget and The Real Estate Industry

ON THE SPOTLIGHT

Every year, the annual budget speech brings its fair share of anxiety among the general public and more so the business community. This year’s budget was read against the background of a seemingly declining economic performance going by the number of job losses announced by top tier companies in the country. Themed Creating Jobs, Transforming Lives - Harnessing the “Big Four” Plan, the budget sets out an ambitious social-economic development agenda that seeks to move the nation to the next level of development.

Big Four agenda is now a common lingo in government development policy activities. However, if you are hearing it for the first time, Big Four agenda is President’s Kenyatta legacy plan which lays out key initiatives that will put Kenya on a bold new path of rapid and shared economic growth, jobs creation at an unprecedented pace and reduced poverty on a sustained basis. The agendas, in particular, are universal health coverage, food security, manufacturing, and affordable housing.

The budget statements are usually critical for every stakeholder in different sectors of the economy given the policy and laws that may come out of it. So, it is important for any business regardless of the industry to be conversant with the ramifications of the proposed policies and laws. From a general point of observation, this year’s budget didn’t have extreme aftermath and it can largely be termed as largely conservative.

Generalities
Through the statement, the government is keen on creating an enabling environment for businesses, and in particular for the micro, small and medium enterprises in order to accelerate the growth of the economy and create more jobs for the youth. Indeed youth unemployment levels are fast approaching crisis levels. World Bank notes that in the period 1998-2005, aggregate unemployment fell from 15% to 12.5%, but the share of the youth in unemployment rose from 60% to 72 %. And the rate of joblessness is almost 40% of youth or an estimated 5.2 million young adults. Undoubtedly, responsive policy issues that could spur employment should be fast-tracked.

In this respect, the government promises to continue pursuing the ongoing business reforms in order to reduce the cost of doing business and encourage private sector innovation and entrepreneurship. Currently, Kenya is ranked at position 61 out of 180 countries in the World Bank’s doing business indicators. The government is hoping the reforms being rolled out as well as those impending will push the country’s rank to top 50.

Specifics
Moving on to specific aspects of interest to the real estate industry, the National Treasury also made policy and legal proposals that would affect the players in the real estate industry. One of the most outstanding issues addressed in the statement was of course tax. A country’s budget must make due consideration to tax policies and procedures. The two are greatly intertwined. Granted, the government proposed a number of measures relating to taxation but we’ll limit ourselves to those directly impacting the real estate industry.

Taxation
The government intends to lower the VAT Withholding Tax from 6% to 2% to eliminate the need for KRA to make refunds. This will not only help reduce the buildup of VAT refunds but will also help enhance the cash flow in real estate businesses.

Additionally, the government will review the Capital Gains Tax upwards from 5% to 12%. This amendment will hit hard real estate investors who deal in property buying and selling. Investors may mark up the actual property values to cater for the increase in the CGT. This ultimately may adversely affect the listing time for properties in the marketplace. However, market forces will have their way eventually. While the raise has been opposed by major players, the Cabinet Secretary noted that Kenya charges the lowest rate in the entire East Africa Community region where the rate ranges from 20% to 30%. The disparity was meant to give some sense of differential perspective disguised as a relief.

Still, concerning revenue mobilization, the National Treasury collaboration with the Council of Governors will implement the National Policy to Support Enhancement of County Governments’ Own-Source Revenue. The bill, the County Governments’ Revenue Raising Process Bill 2018, was submitted to the National Assembly and it aims to regulate the introduction of levies by County Governments while ensuring that Counties do not prejudice national economic policies, cross-County economic activities; or, national mobility of goods, services, capital or labour.

The County Governments have been in the past introducing fragmented and unpredictable levies in a bid to maximize their revenue collection on the background of budget cuts by the National Treasury. These actions have consequently adversely affected the business community including those in the real estate sector. If passed, real estate companies, as well as other businesses, will be able to operate under a reasonably predictable tax and levies regime with minimal disturbances while the County Governments be able, still, to optimize their revenue collection. The bill will ensure better regulation of the process of introducing new levies by County Governments to safeguard the gains made in improving the business environments in the devolved units.

Supplier Payments
Bold proposals were also made about supplier payments. The government intends to make amendments to the Competition Act to empower the Competition Authority to deal with abuse of buyer power and ensure prompt payment to suppliers. The proposed amendments shall also provide for penalties for infringement of these provisions. Contractors and other material suppliers in the real estate industry will need to adjust their payment procedures so as not to get caught in the bad side of the law.

Affordable Housing
Since the idea of affordable housing was first pronounced, the government is finally taking practical actions in ensuring that existing housing deficit is met. Already, the affordable housing scheme in Nairobi has kicked off with the first phase of public housing being built in Pangani. In a bid to further the cause, the government has this year allocated Ksh 10.5 billion to cater for social housing and construction of affordable housing units, including housing units for the Police and Kenya Prison. The allocation includes Ksh 2.3 billion for the Public Servants Housing Mortgage Scheme and Ksh 5.0 billion for the National Housing Development Fund, as contributions by Government for its employees. Contractors and building suppliers stand to benefit immensely in the provision of goods & services as the construction of public housing takes off.

The affordable housing programme also received a significant boost with the recent establishment of the Kenya Mortgage Refinance Company which now opens access to affordable mortgage loans for those who would like to acquire homes. KMRC has received a capital injection of Ksh 1.0 billion from Government, and Ksh 35 billion credit line from the World Bank and the Africa Development Bank. KMRC has also received Ksh.1.2 billion from other shareholders (Banks and SACCOs), and a further Ksh 400 million is expected from other Development Financial Institutions (IFC and Shelter Afrique) in form of equity injection. Developers in the affordable housing market segment stand to gain more customers due to accessibility to cheap finance. Already, the government had given them a 15% corporate tax relief in last year’s budget statement.

Infrastructure
The government is also making critical investments in the country’s infrastructure which is a key component in real estate business. This fiscal year, the government will allocate Ksh 180.9 billion for on-going roads construction projects as well as the rehabilitation and maintenance of roads. They have also provided Ksh 55.8 billion for the completion of Phase 2A of the SGR, Ksh 11.0 billion for the LAPSSET Project; and Ksh 7.2 billion for the Mombasa Port Development Project. A further Ksh. 1.0 billion has been allocated for street lighting and Ksh. 1.5 billion for transformers in the constituencies. Developers who intend to put projects in areas marked for infrastructure improvement will significantly improve their value.

Corruption
For a long time, the real estate industry has been the patsy for illicit financial flow. As the government intensifies the war on corruption and improvement in governance, the industry will slow down. The various agencies responsible have received increments in their budgetary allocations, an indication that we are in for a long fight. The allocations are as follows Ksh Ksh 2.9 billion to the Ethics and Anti-Corruption Commission, Ksh 3.0 billion to the Office of the Director of Public Prosecutions, Ksh 149.0 million to the Unclaimed Assets Recovery Agency, Ksh 50 million to Asset Recovery Agency, Ksh 540.8 million to the Financial Reporting Centre, Ksh 7.1 billion to the Criminal Investigations Services, and Ksh 5.7 billion to the Office of the Auditor-General. In this respect, developers must be wary of those buying their properties using proceeds of crime and should not be seen as purveyors of the corruption.

Further to this, building contractors and suppliers engaging government will be under increased scrutiny. The Public Procurement and Assets Disposal Board will continuously publish and publicize all details of procurement information and contracts awards on the Public Procurement Information Portal. To date, 385 Public Entities have been registered in the portal, and 5,236 contracts published valued at Ksh 146.5 billion. We expect further transparency with the implementation of a new end-to-end e-procurement system fully integrated with IFMIS.

Timber
After concrete, timber is the next vital building construction component. However, the government placed a moratorium on logging of trees to stop deforestation. The good gesture has had unintended consequences. The ban has led to a shortage in supply of timber spiking the cost of this important building material. To address the challenge while protecting the country's forests, the government has reduced import duty on raw timber from 10% to 0%. An ad valorem rate of import duty at 25% with a corresponding specific rate of import duty on the products has been retained to protect the timber and furniture industry from the proliferation of cheap finished timber products and to enhance local production.

Interest Rate Capping
The debate surrounding interest rate capping still sticks out like a sore thumb. Among many things that have brought the executive and legislative arms in government to unison, this particular issue has driven a wedge between them. The Central Bank of Kenya backed by the Kenya Bankers Association have been trying in vain to repeal the interest cap law that was enacted in September 2016. The legislature is simply not yielding. No rational arguments have worked so far including the most common one that alludes slowdown in economic performance due to the starvation of cash in the marketplace. Since the enactment of the law, the bankers have opted to lend the government instead of businesses who seem risky but worthwhile. The effect of this is out there for everyone to see.

As expected, the CS National Treasury is making a third attempt to reverse the provisions of Banking (Amendment) Act, 2016, section 33B. In my crystal ball analysis last year, I had predicted that the repeal will go through but it turned out I was over-optimistic. The real estate industry is one of the most affected by the law. Given the fact that real estate involves huge sums of capital, credit plays a crucial role. It’s not clear how the executive and other supporters of the repeal will convince the legislature to drop the controversial section 33B. There are allegations that banks are sitting piles of cash with no one to lend. Will the deadlock be broken?

Digitization of Land Transactions
The clamour for the digitization of government services is not a new proposition especially in the age of advanced information technology. The motivations behind this have been to stamp out corruption and improve efficiency as well as effectiveness in the provision of citizen services. The progress this far is impressive with now several critical government services digitized e.g. passport application, driving license, and NHIF among many others. Indeed, E-citizen is now the hallmark of digitization efforts in the country.

At the moment, the government is in the process of digitalizing land transaction services. This single act will go a long way in improving the ease of doing business in the real estate industry. Processing of title deeds and transfer of ownership will now become easier. The delays in the issuance of title deeds and leases have been a thorn in the flesh for most property buyers that has created a rift between them and the sellers. While the idea is welcomed, it is already experiencing headwinds from the legal fraternity who are alleging that the reforms are not in accordance with the law. The bone of contention is not clear but whispers say that the digitization will cut off the learned friends from the gravy train and this worries them deeply. It will be interesting to see how the land digitization ends up but one thing is for sure, the reforms are long overdue.

Parting Shots
As with any government plan, the intentions are always good. This year’s budget statement hasn’t really shaken the real estate industry to the core. Save for the increase in Capital Gains Tax and digitization of land transactions, the sector will not be affected so much. For those looking forward to opportunities in the industry, it is no longer a secret anymore that affordable housing will continue to be the dominant theme in this fiscal year and a preferred playground for many years to come in Kenya’s real estate sector.

AUTHOR´S NOTE:

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