The real estate sector has, for some time now, continued to blossom contrary to the expectation of many economic pundits.
Many articles have been written in the past on eminent real estate bubble, but years have passed by and the sector is still booming. Of course proponents of the bubble were oblivious of our large housing deficit and instead solely qualified their reason on the high-end housing prices that had proliferated as being unsustainable.
The real estate bubble is not a subject for my discussion today, though I continue to be asked in many forums if it's about to occur. Well, I don't think we are there yet but there are issues we need to address as a country to avoid the bubble.
In the minds of many Kenyans, real estate developers and by large anyone in real estate industry mints a lot of money.
While I agree that some developments are overpriced, the cost of construction has too become an impediment to reduction in sale prices. The unwritten rule of thumb for real estate investment is to make an annualised return better than any bank fixed deposit and the Treasury bill rates.
In most cases currently any annualised return of 15 per cent and above is considered good. That said, in the project overall financial feasibility, land and construction cost are the most critical determinants of house sale prices. A cost reduction in these two is a sure way of lowering sale prices.
The construction industry is overtaxed in my view. There just too many taxes levied in the construction sector and these costs are ultimately passed to the house buyer. Firstthere is the Value Added Tax (VAT). Most construction materials are vatable hence subjected to this tax; in addition the various project consultants also pay VAT on their fees.
The public road toll Act established the transit toll levy that is charged on construction transport vehicles. Then we have Road maintenance levy that is derived from the road maintenance levy fund Act. This is mostly factored in the fuel prices used by construction plant and equipment.
The Standard levy as per Standard Levy Act cap 496 applicable to all manufacturers also affects construction. Stamp duty is another of the taxes in the construction industry. This tax is levied on various transactions involving property transfer. Capital gain tax (CGT) is the latest tax introduction into the real estate sector.
This tax is chargeable on a whole of a gain which accrues to a company or individual. Income tax also affects construction sector through pay as you earn (PAYE) and withholding tax. Lastly is the excise duty tax established under the Excise Duty Act that affects some construction materials.
In my view taxation, as illustrated above, is a large contributor to the high construction cost we complain about and it would be dishonest to debate on lowering the construction cost without looking at construction taxation.
Can some be eliminated or even lowered? We must be bold and begin addressing the high construction cost since it's unsustainable, if not in the fullness of time, the bubble will catch up with us.