15 Percent Corporate Tax Relief Now Law for Residential Developers

In an attempt to boost the supply of housing for low income earners in the country, President Kenyatta last week signed into law The Finance Bill 2016, which offers a 15 percent corporate tax relief to developers who put up at least 400 low-cost residential houses annually, a reduction from the initially 1,000 suggested by the Treasury cabinet secretary in June.

The move by the President will help curb the current high housing deficit that is concentrated in the low income segment given the following factors:

Tax incentives – Tax has been a big expense hence increasing on the costs incurred by the developers, which in turn discouraged developers from developing low cost housing

Poor performance of high end market – There is a stagnation in prices of high end property due to too much supply that had hit that segment of the market. The sector has well witnessed a 0.2 percent decrease in prices for luxurious houses between April to June 2016.

Lower interest rates – The decreased interest rates by banks will result into reduced the cost of financing real estate developments hence leading to lower project costs, translating to relatively lower selling prices to end users.

Innovation: Creative payment schemes such as tenant purchase will make the low income segment to be an attractive investment option to clients hence increase uptake.

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Last week China – Africa Development Fund (CAD Fund), a private equity firm, signed a deal with the government and two construction firms; Kenya’s Suraya Group and China Civil Engineering Construction Company (CECC) to build 20,000 civil servant houses.

This is meant to be a public – private partnership (PPP) deal, with the following structure; the government will provide land, CECC will be the construction company, Kenya’s Suraya group will be the project management firm and CAD Fund the financiers.

CAD-Fund, controlled by China Development Bank, also opened a representative office in Nairobi; the office will also be used as regional headquarters for Eastern Africa. This signed PPP comes at a time when various local PPP agreements have been deemed to fail over the past years both at the county and national levels because for a PPP to attract private capital into a project, the respective land has to be separated and moved into a special purpose development vehicle that has title to the land and there is currently no framework to enable transfer of public land into special purpose vehicles that can attract private capital and bank debt. However, the already signed PPP with a financier on board has a high probability of success, which will contribute into curbing the current housing deficit that is more concentrated in the low income segment.

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