Developers shun housing tax waiver

Five years down the line, stringent requirements in a proposal to offer Value Added Tax remission to low income housing projects continue to put off builders who hoped to take advantage of the incentive to turn around the sector, writes FERDINAND MWONGELA

When Legal Notice No 115, aimed at giving Value Added Tax (VAT) remission to low-income housing projects came into being in 2008, many developers breathed a sigh of relief.

However, many at the time never realised the stringent, if unattainable, requirements of the notice. Five years later, no one, on record, has been able to take advantage of what looked like a timely incentive.

Suraya Property Group Ltd, for example, came up with the idea of starter homes, targeted at first time home buyers, hoping the tax incentive would help them lower the final prices. But this was never to be.

It soon dawned on the developer that the terms set out by the notice, signed by the then acting Minister for Finance John Michuki, were nearly impossible to meet.

The notice said that the incentive was meant to encourage housing provision to low-income earners, defining a low-income earner as a person with a gross monthly earning of Sh35,000 or less. It defined a low-income house as one put up at a construction cost of not more than Sh1.6 million and of plinth area of not less than 30 square metres.

A low-income housing project, on the other hand, according to the notice, means a project of not less than 20 housing units intended for low-income earners.

The starter homes, in a project dubbed Sucasa in the Mlolongo area off Mombasa Road, are still coming up, but Suraya’s battle to get the terms reviewed to reflect market realities seems headed nowhere.

“I have written a letter to the Ministry of Housing on the minimum requirement that a house be 35 square metres,” says Suraya CEO Peter Muraya. He contends that the given measurements are too big given that many Kenyans live in single room houses of smaller measurements. “Twelve square metres is actually possible,” he argues.

In the Sucasa project, the units included studio apartments, and one- and two-bedroom apartments with a starting price of between Sh900,000 and Sh3.1 million.

Muraya says few developers have tried to go for this incentive because no one wants to be caught up in Government bureaucracy. Something that he understands only too well.

Correspondence

He sent a letter, Ref: SPG/09/GOV/01 in May last year, to the Ministry of Finance (then under Robinson Njeru Githae) through the Ministry of Housing (now under the Ministry of Lands, Housing and Urban Development), with Soita Shitanda as the minister at the time.

“We hereby apply for the VAT remission on the total project, this would enable us to transfer the VAT remission directly to the purchaser,” reads the letter in part.

According to firm’s calculations, a two-bedroom apartment, going for Sh3.1 million at the time, would come down to Sh2.831 million, translating to a Sh269,000 reduction in price to the end buyer.

In the letter, Muraya takes issue with the minimum measurement requirements: “While the minimum plinth is described as 30 square metres, we believe this is not really the threshold for low-cost.” He argues that many live in houses originally designed as servant’s quarters with an average of ten square metres.

In June last year, the Ministry of Housing, in a letter, Ref: MH/HD/8/9/(49), signed by Charles Sikuku on behalf of the Permanent Secretary — the PS was Tirop Kosgey — urged Suraya Property Group Ltd to comply with the requirements of the Legal Notice before they could forward the proposal for VAT remission to the Treasury.

“We note that on your proposal, only the 315 one-bedroom units, each measuring 35 square metres, qualify for tax remission,” reads the reply in part. In a series of correspondence over the next few months, the Ministry of Housing acknowledged that they had written to the Treasury to review legal Notice No 115, in recognition of the high threshold set by the notice. This has never been acted upon.

Cost of construction

Mwenda Thuranira, CEO of Mombasa-based Myspace Properties, says that according to the Institute of Quantity Surveyors of Kenya, the construction cost of low-income housing as at last year ranged from Sh28,500 to Sh35,500 per square metre, depending on whether it is high or low-rise and on the region.

“Working with an average of Sh32,000 per square metre for a 30 square metre house (costing Sh960,000 per house), it is quite limiting to a developer to achieve reasonable profits due to the provision that prices should not be more than 30 per cent over construction cost,” he argues.

Villa Care property director Thinwa Kagai argues that low-cost housing would require higher volumes to make the returns attractive to investors, meaning that the development would need to be of higher density, translating into more land requirements, since the cost of constructing apartments is greater, and so low-rise development is preferred.

“Furthermore, the credit worthiness of the targeted low-cost housing buyers is also not as strong compared to higher income earners. The poorer population ordinarily have a difficult time proving they have a steady income stream to sustain long term mortgage repayments. They may not have adequate collateral or capital to raise the required deposit demanded by financial institutions since their incomes are mainly through the informal sector and, therefore, more difficult to quantify and harder to predict,” he says.

Thuranira adds that two important factors are not well considered, leading to reduced profits to developers. These are the high cost of acquiring land for development and the high cost of marketing low-cost housing developments.

He says that before the implementation of such laws, the government should consider liaising with the stakeholders involved such as development practitioners (like members of the Kenya Property Developers Association) and the government should also engage with the general public to understand their needs through such instruments as surveys.

Pricing restriction

Thuranira, however, has this to say about the pricing restriction: “Though pricing restriction goes against the free market economy concept where property prices are normally fixed as a result of demand and supply forces, it is a good way of empowering low-income earners to own property.”

He proposes that the Government should consider applying the VAT remission on middle-income properties, too, since there will be a tendency of middle-income earners encroaching housing meant for the low-income earners to evade high prices of middle-income-houses.

Thuranira says there should also be less and short approval processes involved, a provision for tax waivers for low-income construction materials, as well as a provision for less statutory fees chargeable to low-income residential developments.

“The main challenge of low-cost housing for developers is not a matter of profitability, but the unattractive business case of pursuing low-cost housing development within the current legal, institutional and administrative framework, coupled with the fact that the risks of the sector are greater when compared to middle-income housing, yet the returns are lower,” says Mentor Holdings Executive Chairman Daniel Ojijo.

He says the challenge can be better addressed with more creative solutions that require greater Government involvement through land grants, infrastructure development as well as Government backed mortgage schemes, to partner with private developers and other stakeholders so as to make the projects feasible and viable for all involved parties.

Infrastructure

Muraya concurs, saying that infrastructure cost is part of the largest expenses a developers incurs when he has to put up trunk services. “There is a need to change the laws so that they make sense…. Look at the bill of quantities, look at infrastructural costs and give us a tax rebate,” he says.

“These incentives are not adequate enough. They do not encourage developers to develop housing targeting low income earners. This is because it’s difficult for a private developer to put up houses targeting this market segment with current economic conditions and requirements,” says Robyn Emerson, CEO of the Kenya Property Developers Association.

She says there is also need for the National Housing Corporation to re-engineer itself so that its focus is provision of serviced land and not building houses.