Rents stagnate as landlords feel taxman’s heat

Landlords are finding it difficult to pass on tax liabilities to tenants of middle-income apartments leading to a stagnation of rents in this segment of the market over the past three months, analysts at Hass Consult have said.

Aggressive enforcement of rental income tax payments by the Kenya Revenue Authority (KRA) has seen thousands of landlords enter the taxman’s net, exerting pressure on property owners to increase charges to cover their revenue shortfall.

The stagnation of rent charges on apartments between April and June is, however, testimony that tenants are resisting any increases, according to a Hass Consult quarterly report released on Tuesday.

“At a time when landlords are looking to cover taxation costs, as the government moves to enforce tax collection in the sector, this stickiness in apartment rental prices suggests some real resistance from apartment tenants to higher rents,” said Hass Consult marketing manager Sakina Hassanali during release of the report.

The Hass Composite Lettings Index, which focuses on changes in rental charges, shows that rents for apartments decreased marginally (by 0.7 per cent) in the second quarter as landlords began to pay the government its share of income.

The KRA commissioner general John Njiraini announced last week that the taxman had collected Sh1 billion in rental income tax last year, and was targeting up to Sh4 billion more from assessments that it had done on landlords.

(Read: KRA moves to enforce payment of rental income tax)

Hass Consult data, which captures average monthly charges for middle income households, shows the rent for an apartment in the second quarter rose slightly to Sh68,037 implying the same apartment was going for Sh68,513 in the first three months of the year.

Hass Consult collects figures from multiple sources including property agents and adverts for apartments, duplexes and triplexes in high-end suburbs across major towns.

Ms Hassanali said consumer spending is still strained, which has limited how far tenants can push rents. She predicted that the trend is likely to continue.

“After the big rises in apartment rents last year, this slowdown in apartment rentals is now likely to be sustained for some time.”

Since 2001, apartments rents have nearly tripled to Sh68,037 from Sh21,638 since 2001.

Standalone houses and townhouses, however, saw their letting prices increase by 2.6 per cent and 5.1 per cent respectively.

KRA has become aggressive at enforcing income tax payment by landlords and is mapping out areas where rental houses are located. It expects to complete the mapping by end of the year.

“For equity and fairness and to ensure that these privileged Kenyans pay taxes, I have once again directed KRA to leverage on technology, map out all rental property in urban areas and put in place a robust institutional framework for bringing all these landlords into our tax net by December, 2013,” said Treasury Secretary Henry Rotich in this year’s budget speech.

Estate agents agreed that KRA’s aggressiveness has caused rents to stagnate as landlords contemplate on their compliance status.

“It has not been enforced but definitely landlords will want to keep their profit margins,” said Samuel Odiembo, a director at Tysons, a property valuation and estate managing agent firm.

Location is a factor that may allow landlords, who have not been remitting taxes, to push rents to tenants and maintain their margins. “It depends on demand and supply, some tenants may move out but there may be others willing to pay that rent,” Mr Odiembo.

The rise in rents and drop in borrowing costs could present tenants an alternative of taking mortgage loans, according to Hass Consult.

Mortgage rates have begun to fall, although marginally, in line with the Central Bank of Kenya (CBK’s) cut in the base lending rate to 8.5 per cent from 18 per cent in December 2011.

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