Why developers have rejected housing tax incentive

Developers are up in arms over what they term as unrealistic inducements contained in last week’s budget speech. In an effort to attract more players to the sector, Treasury Cabinet Secretary Henry Rotich said the government would reduce corporate tax by 10 per cent for developers who construct 1,000 units or more.

In what has become a constant feature in recent budget estimates, Rotich started by reminding us about the acute demand for houses in Kenya that stands at 200,000 units per year against an annual production of 50,000.

“To bridge this gap and also ensure decent low-cost housing, I have introduced an incentive to encourage investors to enter into this sector by reducing the corporate rate of tax from 30 per cent to 20 per cent for developers who construct at least 1,000 units per year,” said Rotich.

Many have questioned how realistic these measures are considering that the country has few investors who have the financial ability to construct such a huge number of houses in one year. Developers have asked whether a single investor can combine several projects in different locations to make up the sum total and if not, lower the threshold to 500 units.

It is also worth noting that the country has had few developers willing to get into the lower segment of the market owing to what they term as small profit margins. Currently, most of the housing stock is in the middle and upper segments of the market that promise higher returns.

In addition, the sector is expected to slow down as the country moves closer to next year’s General Election. This means not many investors might be persuaded to get into property development.

However well-meaning Rotich was, developers say the corporate tax incentive was misplaced since the benefits cannot be passed on to prospective homeowners.

Corporate tax, they say, is only charged on the developer’s profit, and, depending on the profit percentage, this could be negligible.In any case, a developer can never be sure of the proceeds from the next project for him to consider giving discounted prices based on the previous project’s tax rebates.

Some say the government should have instead provided prerequisite infrastructure such as roads, water and sewer lines that take up close to 25 per cent of the costs. That is the only way, they say, they can pass on accrued savings to the consumer.

According to Johnson Denge, the real estate services manager at Cytonn Investments, the proposal is one item among the long wish-list by the Cabinet secretary that can only come to fruition once the Finance Act has been passed in Parliament.

“We need to see the particular conditions that Parliament will come up with to actualise the proposals. For example, a number of projects that are currently under construction were started two years ago. Will such projects benefit from the tax rebates?” asks Denge.

Over the years, says Denge, private developers have decried the high cost of financing, which has been the main impediment to the construction sector. “We would also have wished that incentives be directed to financiers so that they can lower the cost of funding and perhaps bring interest rates to a single digit,” he says.

Anne Muchiri, managing director at Rozana Properties, says Rotich may have made the declaration in good faith considering that the local construction industry is one of the overtaxed sectors.

She would have liked to see the government allow developers claim back the VAT and perhaps pass such benefits to the end user.

Pravin Halai of Mulji Devraj, a building and civil engineering firm, says work on a project’s paperwork in Kenya is so cumbersome and costly that the Cabinet secretary’s incentive is like a drop in the ocean.

He says that this is not the first time for the government to come up with such “sweeteners” in every budget speech yet it knows very well that some of the proposals are unworkable.

“In Kenya, project approvals may take more than a year. Who will build 1,000 houses in one year under such a cumbersome registration process? In the meantime, another budget speech will be read with yet some other ‘incentives’ and the cycle will continue yet again,” he says.

Denge, however, lauds Rotich for doing away with both National Construction Authority and National Environment Management Authority levies, saying the funds saved will be channeled into actual construction.

“We must realise that developers use investors’ money to put up the units. It was, therefore, wrong to divert some of the money to statutory bodies that ought to be funded by the exchequer,” he says. This, he adds, will bring in developers in parts of Nairobi’s Eastlands who felt constrained by the levies and built without proper authorisation: “Such ones now have nothing to fear and can join the rest of the developers in constructing decent, low-cost houses within the framework of the law.”

Rotich may have to go back to the drawing board and come up with a more workable incentive that will make developers pass on the benefits to home buyers.