The government’s move to enforce tax collection on rental incomes could worsen the current housing shortage, real estate developers have said.
The Mortgage Company managing director, Carol Kariuki, said that strict enforcement of rental income tax and high costs of borrowing would narrow profit margins, making investment in real estate less attractive compared to other asset classes.
The Kenya Revenue Authority has set up a department to enforce collection of a 30 per cent tax on profit earned from rental income, which landlords have previously avoided paying to the taxman.
Kenya has an estimated annual housing supply shortage of over 150,000 units.
The developers said the biggest impact will be on investors who either want to take loans to build houses and rent them out, or those who want to buy and rent out the units.
The average mortgage rate of banks stands at 17 per cent, which developers say is high relative to the Central Bank rate of 9.5 per cent.
Banks, however, contend that they are locked in deposits for which they are paying high interest rates.
The chief executive of online real estate portal Jenga Web, Nathan Luesby, said that taxing rental income would cut margins that are under stress due to the high cost of borrowing.
The stock and bond markets would be beneficiaries of a change in investor preference, he added.
The shortage is likely to hit tenants who will have to pay a higher percentage of their incomes to landlords since shortage of units will increase demand for available units.
“The tax authorities may well consider reducing taxation levels of these investments to encourage investment in affordable housing,” said the Hass Property Index annual report 2012.
The government has remained firm on the plan to have landlords join employees and companies in paying a top income tax rate of 30 per cent on net income above Sh38,000.
Kenya Revenue Authority has already invited tenders for developing a database of property in towns to owners, as well as tracking tax compliance.