New increased property taxes means developers will pay more to put up new housing units and pass the additional costs to buyers, writes KEVIN OGUOKO

Let’s take a hypothetical example. A man in his 20s, inherits a one-acre piece of agricultural land in Kiambu. He is business minded and wants to make good use of his land instead of selling it.

Owing to the rise in population and economic activity in the area for the past couple of years, he decides to construct a mini-supermarket on a portion of the land.

He approaches his county government — Kiambu County — to change the land’s user from agricultural to both agricultural and commercial use. He finds out that this is not a walk in the park.

For change of user, the county charges two per cent of the current value of the land. In his case, that would be Sh1.2 million going by the current prices of Sh60 million for an acre in a prime area near Runda.

Kiambu’s fees increase and the logic behind it has been sharply criticised when compared with other counties. In Mombasa, the same fees are leaner and more thoughtful as they are not based on the value of land, although they still represent a significant increase. The fees have been increased from Sh20,000 to Sh120,000, depending on the user and the location.

Kiambu’s woes do not end there. Supposing you want to renew your lease, you would have to part with two per cent of the value of land. The effect of this would be catastrophic, especially to farmers in Kiambu whose land prices are much higher, thanks to the bulging real estate industry going on around it.

The previous amount used to be Sh20,000. This is also high compared to Nakuru’s increase, which is 100 per cent of the old value but not based on the value of land.

“A poor lad would have simply sold a cow and paid the Sh20,000 before. But now, he would have to part with hundreds of thousands of shillings, if not millions, just to continue possessing and using his piece land. Since he can’t pay it, he would have to sell it most likely to private developers who are currently swarming up the area,” says Collins Kowuor, immediate Chairman of the Institution of Surveyors of Kenya (ISK).

Rationale

He adds: “When I asked the county government of Kiambu about the huge increase, their rationale was that they were trying to encourage agriculture. This is punitive as the young man in Kiambu would eventually be forced to sell the land to people who can actually afford to pay those rates, discouraging economic activity among the locals in the long run.”

According to a recent report by Kenya Property Developers Association (KPDA) and Hass Consult, the sharp increases in land rates and the county government construction fees have increased financial disincentives to real estate development.

According to the report, construction permit fees were raised by between 200 and 1,250 times. By the fourth quarter of last year, these newly increased charges generated Sh114 million or 23 per cent of the Nairobi County’s revenue. Turning Nairobi into a world-class city has always been a major talking point since the early days of the Kibaki administration in 2003.

At one time, the city was even rewarded with a standalone ministry — the Ministry of Nairobi Metropolitan Development, at one time under a fast-talking and ambitious Mutula Kilonzo – which involved turning Nairobi into a metropolitan city covering areas as far as Thika and Kikuyu with expansion of transport system and expansion of the Nairobi central business district.

“The government and industry are working to deliver a master plan for the city’s development, which may never be realised without a shift in gear; from exploitation of construction activity as a source of public revenue, to facilitation of a 13-fold increase in construction to reach the plan’s goals,” noted the KPDA report.

Article 209 of the Constitution gives county governments the power to impose property taxes such as land rates and property transaction-related taxes. The same clause, however, says that “the taxation and other revenue-raising powers of a county may not be exercised in a way that prejudices national economic policies, economic activities across county boundaries…”, which is seemingly what is going on right now.

Article 201 of the same Constitution provides that the public, including professional bodies, has to be consulted on all public financial matters. The national government has seemingly adhered to this since enactment of the new constitution in 2010, but the county governments are turning a blind eye to this as they have gazetted the new land and property taxes much to the surprise and dismay of real estate stakeholders.

Property taxes and building permit approval fees are not unique to Kenya. Developers in world-class cities have to pay fees for the approval of building plans to respective local authorities. What differs is the amount paid from city to city. Building permit fees of houses in Nairobi has now been set at 1.25 per cent of the estimated cost of the house. A medium bungalow, which is most preferred by middle-class homeowners in Nairobi, with an estimated cost of Sh4,410,000 would attract permit approval fee of Sh55,125 up from Sh26,065 previously.

This value does not seem much until you compare it with what developers in other cities pay. In Uganda, for instance, the amount is Sh8,190, while in Tanzania, it would be Sh2,250.

The amount also compares poorly against other major African cities like Johannesburg and Pretoria, which are Sh20,790 and Sh14,280, respectively. The Sh55,125 fee is only cheaper when compared to Singapore, where developers have to part with Sh175,000 for a Sh4.4 million medium bungalow.

However, it is cheaper to submit building plans for a shopping mall in Singapore than for a shopping mall in Nairobi. For a Sh1.85 billion shopping mall, one would have to pay a submission fee of Sh23.2 million in Nairobi, while in Singapore, the fee is Sh4.4 million.

“We are not against the rates, but we need to see the master plan that is accompanying such high rates and that it is indeed being ploughed back to benefit citizens,” says Kowuor.

Despite its lower submission costs and property taxes compared to Nairobi, Johannesburg’s tap water rates among the cleanest, safest and healthiest in the world. The city was also ranked number one in Africa and 11 globally as the best emerging market for commerce, according to 2008 MasterCard survey.

A closer look at Nairobi reveals a grim picture of residents and investors having to live at the mercy of the local authorities with minor improvements over the past couple of years.Located on Lower Kabete Road in a lush setting is Spring Valley Business Park being developed by Suraya Property Group. Phase one will comprise six office blocks, while phase two will feature a modern four-star hotel.

For it to be approved, City Hall insisted that the establishment would have to have to meet the costs of a larger sewer line for use on the establishment and its environs, which is primarily supposed to be a bill paid for by City Hall as part of its social services to the developers.

Governors are yet to convince the public why they have increased property taxes and land rates.

- koguoko@standardmedia.co.ke