Developers now win tax refunds to spend on the infrastructure

Investors in commercial property who spend on social infrastructure such as power, water, sewer lines and roads will be allowed to recover their expenses from tax deductions within four years.

This was part of incentives offered to real estate developers by finance minister Njeru Githae in his Thursday budget speech.

“Where a person incurs capital expenditure on the construction of a commercial building and the person has provided roads, power, sewers, there shall be deducted in computing the profits of that person for any year of income a deduction equal to 25 per cent,” states the Finance Bill 2012.

The deduction will apply for a period of fours years after which normal taxation will resume.

The rule will be effective for those planning to invest in commercial buildings starting January 1, 2013.

Under the provision commercial buildings are identified as office space, shops and showrooms. It shall not however include industrial buildings.

Population growth

For several years now, supply of municipal services and urban infrastructure has not kept up with population growth. In peri-urban areas and within the city, many plots are not serviced with roads, street lighting, sewers, drainage, power and Internet connectivity. 

Because of growing demand for affordable housing, many Kenyans choose to buy plots and homes in these under-served areas.

Servicing land and projects typically falls to local and national government but due to poor capacity in the past, these agencies have fallen behind in fulfilling this role.

Consequently, property developers have played a critical part in filling this gap.  “Infrastructure is expensive and a heavy burden to be carried out by a single company,” said Laila Macharia, the chairperson of the Kenya Property Developers Association (KPDA)

“ This cost is eventually passed on by the builders to the buyers and renters of the homes. It makes housing much more expensive than it needs to be,” she said.

Analysts at PricewaterhouseCoopers (pwc) said incentive could however only benefit large scale real estate developments .

“This is a welcome move for those who intend to invest in commercial buildings on or after January 1, 2013,” said PricewaterhouseCoopers in a tax analysis note. Property developers however said this responsibility is still primarily a government obligation.“