More incentives needed to house low income earners

Kenya’s housing sector is characterised by poor conditions due in part to demand outweighing supply. This shortage is manifested by poor quality housing in rural areas and overcrowding as well as proliferation of slums and informal settlements in urban areas.

The housing situation for poor and low income earners is further exacerbated by the fact that units being built do not cater for this tier.

More than 85 per cent of new houses are targeted at the high and upper middle-income earners and yet the greatest demand is for the low income and lower middle income housing.

This imbalance has been attributed to developers targeting the top tier at the expense of the lower income tier because of higher returns on their investment.

Some of the factors contributing to the imbalance in housing have been the high costs of building.

The different costs to consider in a typical housing development are land acquisition costs, site development fees, planning and building costs, professional fees, project funding and financing costs and the inevitable taxes.

Whether opting to build or buy, all these have in one way of another placed decent and affordable housing far beyond the reach of most Kenyans.

The government has, however, legislated a number of incentives aimed at giving developers the necessary impetus to invest more in low cost housing and at the same time encourage individuals to own homes.

The repealed VAT Act had introduced relief for low income housing. I should point out that there is also a dark cloud of uncertainly hanging on this scheme given that the current VAT law has a five-year sunset clause for remissions granted by the repealed Act.

However, the VAT relief is available to developers who put up more than 20 houses intended for low income earners. To qualify, the houses are required to cost less than Sh1.6m each to put up and should have a minimum living space of 30 square meters.

According to developers, however, these numbers do not add up. Sector players put building costs for low cost housing at about Sh35,000 per square metre.

At this rate, a 30 square metre house would cost Sh1,05 million to construct. Few, if any, developers seem to have taken advantage of this VAT remission scheme because the numbers simply do not add up.

The Sh1.6m cost per house necessary to qualify for the VAT relief is not realistic; it seems to relate solely to the construction costs and does not seem to consider other costs such as land, the high cost of credit and unplanned costs which ideally should be provided by the government.

The scheme requires that the houses should be targeted at low income earners with monthly gross earnings of Sh35,000 or less.

With the mortgage industry requiring that a set percentage of a person’s disposable income be dedicated towards mortgage repayments, it is debatable whether the target buyers would be able to meet the monthly repayments with interest rates averaging 15 per cent.

This emerging picture further discourages would be developers who would typically put up such houses to sell as opposed to renting them out. The reality is that if developers were to put up such houses, getting target buyers does not seem promising.

Most housing projects are financed through borrowed funds from a variety of sources. Considering the time needed for construction, potential delays during planning as well as high interest rates, the cost of credit can weigh negatively on the project.

It is perhaps for this reason that the government introduced REITs as an option for raising the capital necessary for housing developments.

A Real Estate Investment Trust (REIT) is a regulated investment vehicle that enables people to collectively pool money for purposes of acquiring land with a view of developing it.

With REITs, low income earners can pool their individual contributions and invest in real estate projects and earn dividends as beneficiaries of the trust.

Disappointing appetite

Even though REITs and their beneficiaries enjoy a number of tax exemptions on their income, there has been disappointing appetite for the product.

With a minimum subscription of Sh5 million for a development REIT, it is debatable whether a low-income earner would be able to fulfil this requirement. This and other prohibitive conditions would explain why few people have gone the REITs route.

Other incentives are available to individuals. One challenge for would be home owners seeking mortgages has been deposit or down-payment demanded by financial institutions.

The retirement benefits laws were amended to allow members of recognised retirement schemes to assign a determined percentage of their benefits to be used to secure a mortgage.

The guarantee can be used to acquire property, construct a home or even secure financing for deposits. Married couples are allowed to pool their retirement savings for this purpose.

Since no funds are transferred from the scheme, this incentive allows individuals to acquire property and at the same time save for retirement.

A depositor who operates a registered home ownership savings plan (HOSP) is not taxed on amounts saved up to a maximum of Sh48,000 per annum for a period of 10 years.

In addition, the income from the HOSP is exempt from tax and there is no withholding tax on interest earned for balances of up to Sh3m.

Where an individual obtains a mortgage from a recognised financial institution, the interest he pays is tax-deductible against his taxable income up to a maximum of Sh150,000 per annum.

With the Central Bank of Kenya estimating that there are only 20,000 mortgages in Kenya, it means that less than one per cent of the population is taking advantage of this tax incentive.

While on the government has been reaching out to banks to reduce interest rates to encourage mortgage uptake, it should also consider revising the Sh150,000 deductible amount to whet people’s appetite for mortgages.