Kenya Property Listings

Four property moves with shocking tax implications

It’s no secret that some of the major perks of homeownership are the tax write-offs and advantages that follow the purchase. In fact, according to a 2015 survey by Lamudi Kenya , 83% of homebuyers see homeownership as a good investment, and 63% think it’s better than investing in the stock market. Reaping the rewards of mortgage interest and property tax deductions is just one way to think of your home as an investment. But there are even more real estate–related tax advantages and disadvantages that can slip under a new homeowner’s radar.

This is why it’s essential to reach out to your tax analyst before every property transaction, no matter how nonsensical a question you may have. We’ve developed a comprehensive list of moves one can make to ensure to maximize on returns;

1. Mortgage Refinancing

When you refinance into a lower interest rate mortgage, the motivation tends to be the lower monthly payment or the ability to pay off your home loan faster with the same payment every month. But don’t forget to calculate the potential tax deduction based on your mortgage interest, which is the largest tax perk of homeownership. Most homeowners are eligible to deduct 100% of the interest they pay on a mortgage, on their primary residence. So if you reduce the interest you pay, you also reduce your mortgage interest deduction.

Here’s some perspective: Fewer than 30% of homeowners take their mortgage interest deduction every year. This may be because at lower income and home price levels, the standard deduction is higher than the itemized deductions for which many homeowners would be eligible. But if you do itemize every year and/or you have a relatively high (or growing) adjusted gross income, you might be surprised at your tax bill the year after you refinance to a lower interest rate.

2. Becoming a landowner

Intelligent property investors know the complicated tax stirrups that come with holding onto, renting, and selling commercial properties. But what

happens if you become a landowner? There are tax implications for being a landlord even when you rent out a room for a few nights here or there, or decide to rent out part or all of your own home for a long period. Landlords will pay a withholding tax on rental income of 12 per cent of gross rent, to be collected only by appointed KRA agents.

3. Remodeling your property

The conventional wisdom is that when you remodel your home, whatever you do, for the love of all that is sacred, save your receipts. And this is not a “save them until tax time” recommendation; it’s a “save them until you sell the place” mandate! The money you invest into improving your home over time gets added to your purchase price, or cost basis, when you sell, bringing down the amount KRA considers to be profit or gain and reducing your chances of incurring capital gains tax . Here’s where many homeowners go wrong: Remodeling projects can prompt tax costs. This is particularly true for home upgrades that increase your home’s energy efficiency, from low-flow toilets and showerheads to dual-paned windows and insulation, even solar systems and tankless water heaters. If you use a home equity credit line to finance your improvements, chances are, you can deduct the interest from that loan on top of your home mortgage interest deduction. Again, don’t forget to mention this to your tax professional.

4. Renting

Renting usually isn’t thought about as an intentional decision; it’s something many people do until they can afford to buy a home or know where their career will take them, geographically speaking. But there are people who have sufficient income, savings, and stability to own a home, but haven’t purchased one yet, for various reasons.

Someone who truly doesn’t want to own a home shouldn’t buy one simply for tax reasons, but if you’ve been ambivalent about it or have been thinking about it and procrastinating, you should at least be aware of the tax implications of your fence-sitting.

As you move up the income ranks, consult with your tax professional about whether home-ownership might get you some tax relief.

A Review Of Stanlib’s Fahari I-Reit

Is Kenya going to join the list of countries which include pioneers USA, Australia, Brazil, Canada, South Africa and France with a trading Real Estate Investment Trust? The answer will be known if Stanlib’s Fahari I-REIT is successful in attracting subscribers and starts to trade on the Nairobi Securities Exchange (NSE) as scheduled on 24th November, 2015. According to the prospectus released on 22nd October, 2015 by the promoter Stanlib Kenya Limited, the REIT offer size is between KSh. 2.6 billion and KSh. 12.5 billion. A total of 625,000,000 units each at KSh. 20/= are on offer and the total cost of the REIT is estimated at KSh. 365,500,000/=. From this, the total maximum net proceed will amount to KSh. 12,134,500,000. The offer is available to Qualified Institutional Investors (QIIs) from East Africa who have an allocation of 55% each while Retail investors have 25% each and foreign investors have 20% each. Qualified Institutional Investors and foreigners have a minimum application size of KSh. 1,000,000 and thereafter in multiples of KSh. 100,000/= while retail Investors minimum application size is KSh. 20,000.00 and thereafter in multiples of KSh. 2,000/=.

REIT’s provide a unique opportunity for investment in income generating real estate in a tax efficient way. REIT provides investors, at low cost exposure to the real estate market. Given its unique nature, investors require special tools to analyse an opportunity presented to help them make an informed decision. While there are many issues to consider, for the purpose of this brief, we have focused on the property management team, made a comparison between the proposed I-REIT yield with yields from alternative investments like high yielding government bonds and quoted shares, analyse the forecast on rental income, assess the credit worthiness of the tenants, examine the underlying real estate assets and its susceptibility to obsolescence as well as examine portfolio diversification as way to mitigate unsystematic risk.

One of the major attractions of a REIT is that, the investor is set to receive passive income and is therefore not burdened with direct management of the underlying pool of real estate assets. An offer to invest in REIT’s comes with a promise that the real estate assets will be professionally managed. Real estate being a complex asset needs a management team that is well educated, has practical and relevant experience and (in certain jurisdictions which include Kenya) the key personnel be registered as real estate practitioners by a state regulator. In Kenya property management falls under Estate Agency and the applicable law is the Estate Agents Act Cap 533. This law which was enacted in 1984 and commenced in 1985 requires all Estate Agents to be registered by the Estate Agents Registration Board. According to the Act only individual (not corporates) Kenyan citizens are eligible for registration and can therefore practice. In the prospectus, the promoter of the I-REIT has listed a management team plus its leaders under an entity known as JHI Kenya (a joint venture between Excellerate Property Service Kenya and Grenadier Group Limited) that will manage the real estate assets. JHI Kenya is a newly formed company that as recently as April this year was scouting for a Chief Executive Officer to lead its Kenya operations. From the provided brief profiles of key personnel and management team, there is need for the promoter to appoint either a professional property management firm or strengthen the existing management team with registered professionals with sector knowledge experience and who meet the requirements of the Estate Agents Act.

Real estate investors are interested in returns. Accordingly investors will put their funds in instruments that will give the greatest return from the available comparable alternatives. From the prospectus, the target IRR before deduction is 14%. The prospectus also indicates that the three seed properties have forecasted yields of between 8.1% and 9.8%. The average returns are estimated to grow from 9.4% in 2016, to 11.5% in 2017, 11.4% in 2018 and drop to 11% in 2019. The annualized average is 11.1%. Given the performance of office real estate submarket, the state and location of the properties, it is doubtful that the I- REIT will achieve targeted yields. According to www.economictrends.com, a 10 year Kenya Government Bond was quoted on 2nd November, 2015 at 15.58% and the average for the period 2004 to 2015 was 11.99%. The site forecasts the 10 year bond to trend around 16.19% in 2020, 18.40% in 2030 and 22.08% in 2050. According to Peter Stanyer, in his book Guide to Investment Strategy: How to Understand Markets, Risks and Rewards “No real estate investment should be undertaken unless it is expected to perform better than the guaranteed return from high quality government bonds”. Stanyer further adds “Any real estate investment should be sold if it is expected to underperform government bonds over some relevant time horizon”.

An alternative to comparing the investment to a high yielding bond is to compare the REIT to quoted shares in a security exchange. The development of public markets for REIT’s has made real estate comparable to the rest of the quoted equity market. In this regard investors have a choice of investing either in a REIT or any other quoted stock traded in an exchange since they can draw comparisons. Kenya has a vibrant and growing securities exchange with over 60 listed companies. While NSE has had a poor run this year and estimated to be 20% down, there are specific counters that have been performing exceptionally well. Investors therefore have a choice of investing their KSh. 20/= per unit in any of the shares already listed in the NSE or in the REIT. For instance Safaricom the largest and most profitable company in Kenya is currently trading at KSh. 14.95 per share. The company has projected to earn KSh. 36 Billion after tax profit for the financial year ending April 2016. In the last financial year, Safaricom made 17.5 billion after tax profit and paid a dividend of 0.64 cents per share. The dividend yield worked out to 4.27%. Stanlib’s Fahari I- REIT is projected to pay KSh. 1.25 per unit and assuming the price holds at KSh. 20/= per unit, the dividend yield works out to 6% for 2016. With KSh. 20,000/= one will acquire 1000 units of Stanlib Fahari I-REIT. With the same amount you can acquire approximately 1,335 Safaricom shares. There are counters that would give an investor exposure to real estate even though it will be to a much lesser extent. Such counters include Centum, Britam and Kenya Re. So given a choice between buying say a Safaricom share and Stanlib Fahari I-REIT where would you place your money?

The income generated from real estate emanates from the tenants who pay rent. This therefore brings to the fore three key issues of tenant credit worthiness, occupancy rate and maximization of development potential. It is one thing to agree to pay rent and another to throughout the lease sustain the ability to pay the rent on time. From the prospectus, two of the seed properties have one large tenant each while a large tenant in the third seed property is under receivership. The two commercial properties are located in industrial area where rents are low, demand for office space weak, infrastructure is dilapidated and there is chronic traffic congestion. In addition, in one seed property, there is a tenant whose lease is expiring in two years’ time with no mention that it will be renewed. The third seed property a retail centre which has over the years’ experienced high turnover of tenants and low occupancy rates. The prospectus does not state the current occupancy rates for the retail centre but project a portfolio high average occupancy rate of 95.90 % from 31st December 2015 and 31st December 2019. In addition land utilisation for the mixed development is low since there is a portion of land measuring approximately 2 acres that is undeveloped. It is not clear why the I-REIT is buying a property with a 2 acre undeveloped land and two obviously redevelopment properties in industrial area yet in its documents it is not anticipating (while the option exists through amendments) getting into property development in the short term.

Rational investors aim to diversify their investments. Diversification is a technique for reducing risk (particularly unsystematic risk) and maximizing returns by allocating investments to various instruments, industries, and classes. The basic reason is to avoid “putting all eggs in one basket”. REIT offers an opportunity for investors to spread their investment funds across various types of properties in several regions and along income groups. For example with KSh. 20,000/= in a REIT with a diversified portfolio one is entitled for instance to a return from a portfolio comprising office blocks, retail centres, hotel resorts, industrial complex located in Nairobi, Mombasa, Kisumu, Eldoret, Kampala and Dar Es Salaam. The aim of diversification is to maximise returns by investing in different properties that would each react differently to the same event. From the prospectus, there are three seed properties of which two are office buildings situated in Industrial area and one retail centre in the eastern part of Nairobi, a highly populated low income neighbourhood. All three seed properties are located in Nairobi. Of the additional 7 properties, 5 are in Nairobi and 2 in Mombasa. The whole portfolio will comprise 7 commercial, 2 retails centres and one mixed (retail and Office) properties, in Mombasa and Nairobi. An adverse change in the office market in Nairobi (which is enjoying surplus supply of office space) will have a significant adverse effect on the returns of the I-REIT. Real estate in Kenya is well diversified in terms of geography, types and income groups. The residential rental market is well established and the hospitality industry is growing. Devolution created 47 counties and brought life into hitherto backward towns (now County Government’s Headquarters) hungry for retail, office, residential and hotel accommodation. The 10 member Property Investment Committee (whose composition needs review) needs to relook at the portfolio afresh and include suitable residential and other types of real estate to diversify and balance the portfolio.

Real estate suffers obsolescence which is a matter of physical deterioration. Obsolescence can also be accelerated by changes in pattern in demand of a particular type of building or location. Obsolescence is an important issue because it is a major and real expense when it comes to real estate. As the asset ages, it wears out and ceases to be functional. The neighbourhood decays and degenerates. In short real estate suffers the risk of economic, physical and functional obsolescence. For this reason a substantial amount must be set aside for maintenance and upgrades including replacement. The two seed properties situated in industrial area have leases issued in the 1949 and 1956 respectively indicating an old neighbourhood in need of renewal. The two have unexpired terms of 33 and 40 years respectively. This means the REIT will soon need to engage in renewal with the possibility that the property will need to be redeveloped. Accordingly, these two properties will either have to be sold or the REIT will be forced to make major capital injections to upgrade/redevelop them. It is not clear from the prospectus how the I-REIT has taken care of obsolescence. It would have made more meaningful reading of the prospectus if the promoters shared the pictures of the seed properties and that of the neighbourhood. Other important consideration that investors need to take into account include the overall expanses of managing the REIT and particularly the payments to the REIT Manager as this reduces the amount available for distribution to the unit holders. Other costs include the acquisition costs of the properties one of which is to be acquired at approximately 5% the above valuation (there are two independent Valuers but only the values of one Valuer has been quoted in the prospectus. It would be interesting to know if the other Valuer had similar figures for the listed properties). The choice of acquiring companies that own the real estate assets may be explained as an effort to save on stamp duty. However this introduces new risks which the investors particularly retail and small QIIs investors (who lack the resources to hire experts) will be unable to take into account in the absence of thorough due diligence reports and contracts signed by the parties or additional disclosures such as availing audited accounts and indicating the directors and shareholders of these entities. In addition, for investors to give meaning to the declaration on “connected party transactions”, the promoters should in good faith reveal the identities of shareholders and directors of JHI Kenya, Excellerate Property Services Kenya Limited, Grenadier Group Limited, Bay Holdings Limited, Signature International Limited and Greenspan Mall Limited.

Generally a REIT is a wonderful opportunity for the public to invest in real estate. The excitement of the opportunity presented by Stanlib’s Fahari I-REIT should however be tempered with sound rational and analysis of the offer. Past attempts to create viable vehicles have largely failed because the promoters have taken for granted fundamental issues of a strong property management team, choices presented by available alternative investments, returns and knowledge and understanding of the dynamics of the property market as highlighted in this brief. Investors will recall in late 2000, Anglo African Property Holdings Limited made investment history in Kenya, when its initial public share offer (IPO) collapsed after investors failed to subscribe. More recently Home Africa which listed a few years ago at KSh. 12/= and reached a high of KSh. 25/= per share open trade has seen its shares price drop below KSh. 1.50/= and the wealth of the shareholders which at peak stood at KSh. 10.1 billion decline to below KSh. 600 million. A review of Stanlib’s Fahari I- REIT Prospectus, reveals that important lessons from the past have not been learned or put into practice when it comes to real estate investing in Kenya.

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Home Staging Tips

Selling your house is not as easy or hard as it is made to look. The position one takes boils down to preparations. The tips outlined below, should enable you to sell your house in an easy way, even in a difficult market. The steps will make it possible for you to turn your house into one of those can’t pass opportunity for potential buyers. The tips are summarised into 5 easy steps as follows:

Decide to sell
This is the most important tip. The decision to sell must be absolute. If there are family members (for example spouse and children) to be consulted and consent obtained, this must be done well before any preparations commence. Putting your property into the market and you are not sure of whether you would like to sell may backfire on you in the years when you finally decide to sell. Buyers would like to deal with sure sellers.

Determine the Price
The price needs to be just right for you the seller and buyer to get value for money. A high price will turn away potential buyers and slows down the sale through protracted negotiations. On the other hand a low price will lead to a loss. It is therefore important that the price set be realistic. A more objective way is to get a professional third party assessment. The alternative is to carry out a neighbourhood market research.

Improve the image of the house
First impression do last and count in buying decision. The image of the house plays a great role in influencing price. Improving the image of the house does not require heavy capital investment. In fact all that is required are relatively low effort, low cost high yielding facelifts such as repainting, repairing the driveway, planting flowers, replacing dated lighting and broken fixtures and fittings.

Clean and Depersonalise
Potential buyers would like to see themselves and their families living in the house. It is therefore important that you erase your personality from the property. This includes removing excessive furniture and junk, family photos, religious items, political and sports posters. For cleaning it is advisable to use professional cleaners who will do a thorough and deep cleaning.

Staging
Ultimately the house you are selling is the show house and you therefore need to stage it. This involves giving rooms obvious roles (bedroom, living room, study etc) the property and turn the spaces into a showroom. Flexibility in viewing times will increase the number of people who will be able to view the house. The best time are morning hours, evenings and weekends. On the days when potential buyers are coming to view, it is advice that you remove pets from the premises.

Home Buying Guide

Owning a home is a life long dream for many individuals and families. A home is a much sought asset because of its various benefits both social and economic. These include shelter, independence, status, security, income savings and a valued investment possession.

Despite its importance, acquiring a home is a time consuming and complex undertaking. The process involves protracted negotiations, large sums of money (e.g. a purchaser’s life savings or inheritance) and different parties who include the Seller (Vendor), Purchaser, Estate Agents, Valuers, Financial Institutions, Advocates and Government (both Local And Central Governments). Read more interesting info and latest news about gambling in Arizona.

With proper planning and advice, buying a home can be an easy and enjoyable reality trip (unlike the trip to the dentist). The following steps are key to a successful and satisfy home ownership attempt:

Step 1: Identify your Needs

A home buyers needs may be determined by the size of the present and future family, income level, preferences in terms of construction type and neighborhood characteristics, privacy and security needs, and distance from place of work shopping centers, schools and other amenities. For instance the size of the family will determine the number of bedrooms.

Step 2: Make a Budget

The next step is to make a budget and come up with a way of financing it. The key elements in the budget are the cost of the house, transaction fees, finance and relocation costs. The best way to come up with the budget is to talk to the various parties involved in the process. These are Estate Agents who will inform you of the availability of your dream house in the market and the prevailing market prices, an Advocate who will advice on procedure and on items of legal costs, a financier on the availability of and cost of finance and lastly a Valuer who will advice on market value and the cost of valuation.

After your budget is complete your may wish to revisit step 1 and make necessary revisions.

Step 3: Viewing of Available Properties

Once you are confident on what you want and confirmed how much it’s likely to cost you, its time to set out and view what is available in the market. Properties for sale are usually advertised by Estate agents or the owners in the property guide section of newspapers, in property magazines, on notice boards of Shopping Malls and through signboards placed on or near a property that is up for sale. Word of caution here is to be aware of offers that appear to be too good to be true. Approach with caution any offer that is way below what you consider to be below market price. Always consult and deal with only reputable Estate Agent.

List the properties that meet your criteria and make appointments to view. It is important that you spend considerable time on each property that meets your requirements. Appointments should be scheduled when it’s most convenient for you. Avoid squeezing viewing appointments with other unrelated personal engagements. Inspection of properties should ideally start from the outside by examining the neighborhood followed by the property itself noting any defects. Try as much as possible, to inspect the properties with your spouse/ members of your family and with your Estate Agent.

Step 4: Negotiation and Execution of the Sale Agreement

After identification of the ideal home the next stage is that of entering into formal negotiations. This may be through a letter addressed to the purchaser or his appointed Estate Agent. During this Stage ensure that all documents relating to the property are availed for you for perusal. These documents include the title deed, approved original copies of building plans including any amendments, current electricity water and telephone bills, ground rent and rates receipts and all maintenance and repairs records. Take time to verify these documents. It is equally important that you verify that the documents availed you relate to the property you actually inspected and you are interested in buying. The negotiations may be handled by you or an Agent appointed by you. Home buying negotiations mainly center on the purchase price, the modes of payment, payment and handling of deposits, default penalties, completion period, and responsibilities on maintenance of the house during the period of the transaction, handing over of possession and apportionment of costs. These terms on agreement are to be translated into a sale agreement, which is to be executed by the vendor and you the purchaser.

Step 5: Taking possession of the Home

Once the sale agreement is signed and all parties have fulfilled the conditions as stated in the sale agreement, the next step is to take possession of the house. Taking possession should ideally be done on site. It should be preceded by an inspection to ensure that all is expected and concluded by signing of handover notes. The hand over notes will confirm the condition of the house as at the time of handing over as well that all documents and keys have been passed on to you the purchaser.

Step 6: Moving In

The last and final step is moving in. this may be after some renovations to the newly bought home or if the house was in perfect condition immediately after the handover. Before moving in, ensure that both electricity and water accounts are opened in your name.

After moving in, the rest is up for you to turn the house into a home and live happily until its time to move on again. Remember that advise is always available and do not shy from seeking it. It may make a lot of difference. Never buy a house that is to be a home under pressure.

Now that would be home buyers know of the steps towards buying their own homes, next time we will go through the steps towards building your own home for those who wish take building route.

 

To Own or Rent: Part II

Many people at some point in their life must make a decision on whether they want to own or rent the houses that they live in.  The decision made is influenced by a number of factors which when rationally analyzed should position a person to make the best tenure (possession) decision given their unique needs and circumstances. For some people owning and renting are substitutes while for others renting is but a step towards owning. Accordingly, the purpose of this article is to provide home seekers with the necessary information to enable them have control in the process of deciding which type or mode of home possession is ideal.

ARGUMENTS IN FAVOR OF RENTING AND BUYING

1.0 ARGUMENTS IN FAVOR OF  RENTING

  1.  It readily permits taking advantage of different occupational opportunities. That is it permits the freedom of mobility for the household from one house to another or one region to another.
  2. It permits changing of housing in order to meet changing family needs more readily than a household, which owns. This will include household integration as well as household growth. A household may move to a bigger house as it grows and vice versa.
  3. There is no risk in the loss of savings due to deteriorating neighborhood and also in defaulting, as is the case in a mortgage.
  4. Renting in most cases does not carry with it the responsibility for upkeep of the property for which many households lack the time and inclination. Costs of such services are usually included in the rent charges.
  5. Renting frequently permits living in a location more convenient to work.

 

2.0 ARGUMENTS IN FAVOR OF OWNING

  1.  As an investment it can be a good source regular income.
  2. It is a good hedge against inflation.

 

CONCLUSION

The decision of whether to own or to rent will ultimately depend on the combination of factors that have the greatest effect on a household. However at any given time it may be more viable to own while in another to rent.