Dawn of A New Decade: Outlook of Kenya’s Real Estate in 2020
New Year provides a perfect opportunity for us to reflect on past experiences and plans for the future. For players in the real estate section, it important to ponder on the past and future of the industry as enter the new decade with bigger ambitions and renewed drive. The talk among many real estate players is that 2019 was one of the most difficult years in recent times as performance slumped. However, according to Kenya National Bureau of Statistics (KNBS) Quarterly Gross Domestic Product Report Q3’2019, the real estate sector grew by 4.8% on average from Q1’2019 to Q3’2019, 0.3% points higher than the growth rate recorded over the same period in 2018. The growth was supported by investment in affordable housing projects, infrastructural developments, and population growth.
According to Cytonn Research, commercial office, retail, residential, mixed-use developments and serviced apartments sectors registered average rental yields of 7.5%, 7.8%, 5.0%, 7.3%, and 7.6%, respectively, resulting to an average rental yield for the real estate market of 7.0%, 0.4% points lower compared to 7.4% recorded in 2018. Therefore, with a capital appreciation for existing properties at 2.0%, average total returns came in at 9.0%, 2.2% points decline from 11.2% recorded in 2018.
In 2020, some of the key factors expected to shape the real estate sector include;
The Affordable Housing Initiative – The Kenyan Government’s affordable housing initiative focused on delivering 500,000 units by end of 2022, is expected to push developers’ effort towards the provision of more housing for the lower middle- and low-income earners segment. In support of the initiative, several tax incentives through the Financial Act of 2019, which include;
- a) A reduction in the Import Declaration Fee (IDF) on inputs for the construction of houses under the affordable housing scheme approved by the CS Finance from 2% to 1.5%,
- b) Exemption of companies implementing projects under the affordable housing scheme from the application of thin capitalization rules, and
- c) Exemption of goods supplied for the direct and exclusive use houses under the affordable housing scheme approved by the Cabinet Secretary (CS) for Finance from Value Added Tax (VAT).
For home buyers:
- a) An exemption of stamp duty for the transfer of a house constructed under the affordable housing scheme,
- b) Exemption from income tax of withdrawals from the NHDF to purchase a house by a first-time homeowner and,
- c)Exemption of the National Housing Development Fund from income Tax.
With the above tax and policy reforms, we expect more potential homeowners to join the affordable housing program in 2020, given the significantly reduced financial burden in the strive towards homeownership, and developers and other private sector players taking up affordable housing projects as they are bound to maximize on the reduced costs.
Also, the government allocated Kshs 10.5 bn of the Kenya National Budget 2019/20 in support of the initiative and hence we expect increased development activities in 2020,
- a) Improved Mortgage Market – Following the National Treasury launch of the Kenya Mortgage Refinancing Company (KMRC) in 2019 and its successful mobilization of capital, we expect the institution to become fully operational in 2020, stimulating the mortgage market by enabling lenders to offer long-term mortgages. Also, we expect the recent interest rate cap repealing will result in borrowers being able to access housing finance as banks increase credit advancement to the private sector.
- b)Devolution – Devolution has led to the increased population at County Government headquarters and neighbouring towns through the relocation of County Government officials and businesses creating demand for commercial office and retail spaces as well as residential units. Also, counties were allocated Kshs 371.6 bn in the 2019/2020, and we expect this to support infrastructural development.
- c) Government Partnerships – In 2020, the government is expected to enter into various partnerships such as Public-Private Partnerships (PPPs), County Government & National Government partnerships and government & government partnerships, which we expect will support development and financing for the real estate sector, especially affordable housing and infrastructure.
- d) Government Incentives-With the growing focus towards plugging the housing deficit, we expect to see more government incentives geared towards creating an enabling environment for home-buyers and developers such as those introduced in the Financial Act 2019 including exemption of VAT for affordable housing construction materials, exemption of companies implementing projects under the affordable housing scheme from the application of thin capitalization rules, and reduction of Import Declaration Fee on construction materials from 2.0% to 1.5%