Starting 1st January 2023, the Capital Gains tax (CGT) rate in Kenya increased from 5% to 15% following the amendment of the Income Tax Act, through the Finance Act of 2022. CGT is levied on the net profits from the sale or transfer of property and the responsibility to pay lies with the person selling the property.
The policy change intended to boost government revenue introduces significant adjustments for serial property investors, developers, and the broader real estate market in Kenya.
Impact of the Increased CGT Rate.
- Decline in Property Transactions.
In a survey conducted in 2024 by the Kenya National Bureau of Statistics (KNBS), it was found that there was, “a slight decrease of 1.73% in property income tax collected in the 2023/2024 period compared to the previous year’s 2022/2023 period”. Sellers, now facing an increase in their tax liability on capital gains may be hesitant to sell properties, specifically those who had purchased property as a long-term investment.
- Impact on Property Prices.
According to a KNBS report, “there was a decrease in the total value of buildings approved by Nairobi City County from Kshs. 16.2 Billion in February 2024 to Kshs. 13.6 billion in March 2024. Specifically, the value of approved residential buildings decreased from Kshs. 12.6 billion in February 2023 to Kshs. 11.6 Billion in March 2024. Similarly, the value of approved non-residential buildings dropped from Kshs. 3.6 billion to Kshs. 2.0 billion during the same period.”
Interestingly, despite the increase in CGT, property prices did not experience an immediate decline. Instead, the KNBS report suggests that “average property prices in urban areas, especially Nairobi, remained relatively stable, with a slight increase of 1.2% in 1st quarter of 2024 compared to 4th Quarter of 2023”. This stability can be attributed to the market anticipation of some tax changes and the strong demand for real estate in urban centers.
- Rise of Alternative Investment Vehicles.
The higher CGT has generated interest in alternative investment vehicles, such as Real Estate Investment Trusts (REITS). A 2024 survey by KNBS, “indicates a rise in the usage of REITs usage in the first quarter of 2024”. REITS offer an appealing choice for investors aiming to minimize their direct exposure to capital gains tax on property transactions. They offer diversification and professional management, enabling investors to capitalize on the growth of the real estate sector.
- Foreign Investment Trends.
Foreign investment plays a vital role in driving the development of high-end real estate in Kenya. According to a quarterly report from the National Treasury, “the foreign exchange reserves held by the Central Bank stood at USD 7,669.8 million in February 2024 up from USD 7,176.6 million in February 2023”. Additionally, the Kenyan shilling appreciated in the first quarter of 2024. These positive trends signify an enhancement in the country’s financial stability, which is likely to boost confidence among foreign investors.
- Affordable Housing Development.
The government’s Affordable Housing initiative, known as “Boma Yangu” has experienced substantial expansion in early 2024, thanks to increased funding and development projects. Developers are shifting their focus towards the more stable and politically favorable affordable housing sector. Government incentives, including financial support and increasing demand for affordable housing are driving this trend. It is anticipated that this change will result in a rise in tax revenue for the government.
Conclusion.
The National Treasury’s report indicates “a 17.8% increase in revenue from property-related taxes in the first quarter of 2024 compared to the same period in 2023.” This growth is a favorable indicator of the government’s fiscal health and could positively impact the real estate market environment.
While the tax increase is aimed at boosting government revenue, it also poses challenges that market participants need to address. The long-term impact of this policy change will depend on how investors, developers, and policymakers adapt to the new landscape and whether additional measures are implemented to foster sustainable market growth.
Please contact us at info@cfllegal.com should you require further information.
