Kenya's stamp duty is highest in the region

By Home and Away Reporter

Kenya is among leading countries in East Africa with major constraints in real estate investment, according to a World Bank report.

However, the Doing Business in the East African Community 2011 report ranks the economy of the country as the best in the Sub-Saharan Africa and 35th globally.

Other economies in Africa that were highly rated, but below Kenya are South Africa (52) and Nigeria (167).

The report mentions corruption in the Ministry of Lands as a hiccup in business.

The 67-page report also evaluates how countries in the region compare in registering property in the multi-billion shilling sub-sector.

Investors in Kenya, for instance, pay the highest stamp duty when purchasing a home or land in urban areas compared to neighbouring countries.

Currently, stamp duty, which is revenue paid to Government during property transactions, stands at four per cent of the sale price or property value.

In contrast, the same levy is charged at a paltry one per cent of the property value in neighbouring Tanzania and Uganda.

Therefore, purchasing a house worth Sh6 million in Nairobi would attract stamp duty of a whooping Sh240,000 while in Tanzania and Uganda, it would translate to Sh60,000.

Rwanda, on the other hand, charges a flat duty of a paltry $34 (Sh3,128) irrespective of the sale price or market value of the property, thanks to its reforms in 2008.

Transfer delays

"Another constraint that delays transfer of property in most countries in the region is the requirement to obtain prior consent from the government," the report says.

For instance, obtaining official consent in Tanzania takes 18 days.

Kenya, Rwanda and Tanzania require additional tax clearance certificates from respective land ministries, revenue authorities and municipalities.

The report also shows that legal expenses increase the costs of acquiring property across the East African Community (EAC).

Take the case of Uganda, where investors part with an amount between one and two per cent of the property value to draft sale agreements.

"Preparation of the transfer documents and notarisation of the sale agreement cost on average three per cent of property value in Tanzania," notes the report.

In Burundi, where a lawyer first drafts the sale agreement and a notary public verifies it later, legal charges are 3.2 per cent of the value of the home or land.

Construction permits

However, the same costs are lowest in Rwanda where a notary from the Ministry of Justice authenticates the legal documents.

In Rwanda, obtaining a certificate from the Land Registry confirming the registered owner takes 30 days — the biggest bottleneck in the registration process.

"About 30 per cent of local firms identify construction-related permits as a major constraint for investing in real estate in Kenya," says the report.

However, the approval process is faster in Kenya compared to the other countries in the EAC.

In dealing with construction permits, the World Bank report says Kenya introduced risk-based approvals while Burkina Faso set up a one-stop shop.

Other countries in the sub-Sahara, like Benin and Liberia, reduced fees towards making investment in real estate friendlier.

Rwanda, Mali and the Democratic Republic of Congo streamlined the process of issuing permits.

"Improvements over the past six years have reduced permitting delays in the region by 16 days," says the report.

Consolidated requirements

Nevertheless, the cost of investment in the region remains the highest globally at 1,631 of income per capita on average. High fees are charged for water, telephone and electricity connection.

In developed countries, governments have consolidated requirements to issue permits for investors and it now takes 202 days down from 220 in 2005.

"Obtaining approval for building a simple warehouse takes on average 16 procedures, 166 days and 62.1 per cent of income per capita," says the research.

In contrast, complying with formalities in sub-Saharan Africa takes about two months longer. For instance, it takes an average of 205 days — 46 days more than high-income economies — and 120 days to connect utility services.