In recent, the government of Kenya has been debating about its exercise in lowering taxes to save the economy of the country from the devastating effects of the Coronavirus pandemic. However, economists have been arguing that the new tax relief measures are not the way to go since the state will be receiving a reduced amount of revenue, leading to decreased government operations.
Nevertheless, things seem to have taken a different turn as the government found a new way to earn their revenue. Reports have it that the government has already selected a few sectors from which additional tax will be imposed. The same reports have it that real estate is one of the prime candidates on the list.
In April this year, secluded in a hidden corner of one of the local newspapers, the Kenya Revenue Authority in partnership with the Ministry of Lands and Physical Planning cautioned all leasehold owners about their duty to service land rent annually as per the law under the Section 28 of the Lands Act. This could be a pointer to a new strategy the government could be established in post-Covid Kenya.
In the previous years, there had been a trend where leasehold owners could only pay rent only when transferring or charging property. This shows why the practice was no longer tenable, especially during this period when the government of Kenya needs every penny. There is a high chance that this will soon be adopted by the county governments concerning the payment of land rates.
Automatically, the above will create a spike in financial demand from leasehold owners, who have previously refused to comply. As per now, the land rates are calculated following 34% of the undeveloped site value. However, this is about to change following recent attempts City Hall to revalue land in Nairobi. If their request is approved, the land rates within Nairobi will shoot up dramatically, especially in the high ends and locations that have been proving sharp appreciation in the recent past.
Granted that the new land rates are capped, landowners will still have to part away with sh5.52 million annually. For example, if a piece of land has been lying idle, one will be forced to develop the land commercially or even sell the piece of land to cut on the costs.
If the attempts of the government to normalise revenue collection from leasehold owners are successful, the real estate industry will resemble that of South Africa and America, which have low speculative activities.
Of course, one of the direct effects of this strategy would be a decline in land and property demand as well as the prices. This is because of the current economic situation where it operates on a wing and a prayer.
Finally, mortgage lenders will be on the look to monitor the situation as it could lead to the emergence of underwater mortgages. This term is used to describe a situation where the actual property value is lower than the mortgage value an individual is servicing, which could lead to a negative equity position and cause extensive defaults.