Analysts warn amendments will cripple real estate sector

Tuesday, April 14th, 2020 00:00 |
Real Estate. Photo/Courtesy

The recently outlined measures contained in the Tax (Amendment) Bill 2020 will make property transactions expensive, slow down home ownership plans and deter investment in special purpose vehicles in the real estate sector if passed.

Lawrence Kigera – a conveyance lawyer and an advocate – said the decision by Treasury to re-introduce capital tax on property transactions and the return of withholding tax payable on dividends to non-residents will slowdown activity in the real estate sector that was already hard hit by a slowing economy. 

“The proposed bill was published by Treasury in response to the President’s directive aimed at cushioning Kenyans, their businesses and the economy at large from the effects of Covid-19,” said Kigera.

“Treasury, however, instead of acting on what the President directed, decided to introduce other amendments from the Finance Bill of 2018 whose intention was to help the government raise additional revenue to bridge budget gaps and mix the two.

These amendments by nature appear to go against the President’s directives and would have far reaching adverse effects on the real estate industry which is still reeling from a downturn,”he added.

Home ownership

The Tax (Amendment) Bill 2020 proposes abolishing tax relief to those who save towards home ownership under Home Ownership Savings Plan (HOSP).

If passed, first-time home owners will no longer enjoy a tax deduction reprieve for a maximum of 10 years in respect of contributions made to a registered HOSP up to a maximum of Sh96,000 annually.

HOSP has been instrumental in assisting home buyers cover the 10 per cent down payment required by most property sellers.

“On the HOSP part, this can be viewed as a way of pushing everyone to the new housing initiative saving scheme by killing HOSP.

An analysis also needs to be done on the uptake or usage of HOSP before this change,” said Zamara Actuaries mass and wider market pensions project head Reginald Kadzutu.

Contained in the Tax (Amendment) Bill 2020 is a proposal that withholding tax (WHT) on dividend income for non-residents be raised from the current 10 per cent to 15 per cent.

Currently, there are exemptions for a private residence where the individual owner has occupied the residence continuously for a period of three years immediately prior to the transfer and where the land sold has a value of less than Sh3 million or consists of agricultural land outside a municipality and which is less than 50 acres in size. 

The bill proposes to abolish the two exemptions, which experts say will significantly reduce the level of foreign investment in the country.

Also affected are transactions involving asset transfers and other transactions related to Real Estate Investment Trusts (REITs) and asset-backed securities which will now attract a value added tax of 14 per cent if the bill passes—meaning that the transactions will be more expensive.

“With only one listed REIT, making it expensive to transfer property into the security might discourage many developers and investors who where looking for liquidity through this route.

It will force investors to get involved in the more costlier option of owning property if you want to get exposure to that asset class at the cost of liquidity,” said Kadzutu.

Battered economy

The sentiments by Kigera echoes those from finance professionals who have reiterated that the raft of measures contained in the Tax Amendment Bill – which will be read in Parliament Tuesday – will negatively affect an already battered economy.

Kenya Association of Stockbrokers and Investment Banks (Kasib) this week issued a statement saying that the move to re-introduce capital gains tax will blunt Kenya’s attractiveness to foreign investors who make huge investments in real estate by buying property.

Kasib joins the list of a number of professional bodies that want the amendments re-looked at. Others include the umbrella body Kenya Private Sector Alliance (Kepsa). 

More on National