Tax incentives for developers of at least 400 cheaper residential units, which come into operation this weekend, could make the lower income housing segment the next big investment frontier in the real estate sector.
The Finance Act 2016 was signed into law by President Uhuru Kenyatta in September, handing developers who put up the units a corporate tax rate of 15 per cent, down from the normal 30 per cent.
“Tax has been a big expense hence increasing the costs incurred by developers, which in turn discourages developers from developing low cost housing,” said Cytonn Investments Management Ltd.
During the Budget in June, Finance Cabinet Secretary Henry Rotich indicated that those who construct at least 1,000 low-cost units would be eligible for a tax break and would pay corporate tax at a rate of 20 per cent.
But later the government lowered the number of units to 400 after developers said 1,000 units target was too ambitious.
According to Cytonn Investments, homes exhibitions events held this year indicate most participants have been targeting the lower middle and low-income housing segments.
This is mainly attributed to the enhanced tax incentives and poor performance of the high-end market.
“There is a stagnation in prices in some high-end property due to too much supply that had hit this segment of the market,” the firm said.
“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.”
The investment company expects healthy competition among market players as they get to see new innovations and trends such as use of alternative building materials such as prefabs.
Prefabs are specialist dwelling types of buildings made off-site in advance, usually in standard sections that can be easily shipped and assembled.
The Kenya Bankers Association (KBA) Housing Price Index for the three-month period ending September, showed that middle income apartments still have the largest share of market transactions at 58.6 per cent, while maisonettes and bungalows account for 24.3 per cent and 17.1 per cent of total sales respectively.
They also had the largest number of transactions in lower and middle income markets.
“Apartments in middle income areas such as Kiambu Road, Waiyaki Way, Lang’ata and Ngong Road recorded a 3.4 per cent price change during the quarter compared to high-end areas at 1.8 per cent,” KBA said.
KBA added: “This can be attributed to their affordability and, therefore, they are preferred by the low and middle income earners.
“The slow rise in apartments’ prices in the high end areas is due to relatively slow uptake indicating a possible oversupply in this market.”