Kenya bets on tax cut to boost supply of low cost housing

Low cost housing
Low cost homes are ideally build for people who earn Sh40,000 to Sh60,000. PHOTO | FILE
Low cost housing is set to become the next big thing in the Kenyan real estate sector following the enactment of a law that has lowered the corporate tax rate for investors in this market segment.

The Finance Act 2016, which was signed into law by President Uhuru Kenyatta in September, has lowered the corporate tax rate by half for developers who build at least 400 low cost homes.

“The reduction of corporate tax rate for investors who put up 400 and above (low cost) residential houses seeks to promote housing development,” State House spokesman Manoah Esipisu said.

Treasury secretary Henry Rotich in his June 8 Budget speech had indicated that developers who put up at least 1,000 low cost houses would be eligible for a 10 per cent tax break and would pay corporate tax at a rate of 20 per cent.

Industry analysts and developers were quick to point out that the 1,000 units target was too high and that only a handful of local investors had the capacity to finance such large projects.

Deloitte East Africa associate director Gabriel Ouko noted that for the tax incentive to be effective the government would need to lower the number of units from 1,000 in order to rope in many investors.

READ: Kenya’s largest bank unveils big plans for low cost housing

In September, the government, through an amendment to the Finance Act 2016, heeded the call of experts and decided to give developers a more generous offer than the initial offer made by Mr Rotich.

Although the government is yet to interpret what a low cost house is, market players define it as a development that cost a maximum of Sh2 million to build.

“The house is ideally build for people who earn an income of between Sh40,000 and Sh60,000. (These) houses are mainly located in peri-urban areas and do not go beyond three bedrooms,” says Homes Universal CEO Daniel Ojijo.

Following a glut in the high-end market segment, developers are increasingly launching low cost housing projects that target low income earners as they seek to tap into the rising demand for truly affordable housing in the country.

Cytonn Investments recently said that exhibitions held last year had shown that most developers were targeting the lower-middle and the low-income housing markets, which were previously seen as less profitable.

“The lower-income housing segment is thus the next investment frontier for the real estate sector as developers embrace it and the market gets enlightened on the available products in the market through increased advertisements and events like expos,” Cytonn said in a press statement.

Data from the Central Bank of Kenya shows that the average mortgage stands at Sh8.3 million, a figure that locks most Kenyans out of the homeownership club.

EDITOR'S NOTE: Read the latest issue of Construction Business Review. Flip through the pages of the paper real-time or download a copy to read offline. Sign up for a FREE subscription to get the paper delivered to your inbox every month.