As a consequence of having been colonised by Britain, Kenya is a common law jurisdiction.
The main laws governing the real estate sector in Kenya are as follows:
The main market trends in the real estate sector in Kenya have been as follows:
The government of Kenya is working towards providing affordable housing for its citizens. This has been necessitated by the housing deficit resulting from the mushrooming populations in urban areas due to rural-to-urban migration. In order to achieve this, the government has proposed the establishment of a housing fund into which employees will make mandatory monthly contributions. The affordable housing framework requires a developer to build houses priced at a maximum of KES3 million (USD30,000), with the government guaranteeing uptake in three years.
There has been an emergence of master-planned communities in Kenya through the creation of alternative cities – mixed-use developments, such as Tatu City, Infinity and Tilisi, that have arisen as a result of development in other cities. These alternative cities are built with a focus on the principles "live, work and play"; they include industrial, commercial, retail and residential development as well as schools, hospitals and recreational facilities.
Less Centralised Development
Devolution, which was introduced in 2010, has also changed the real estate sector significantly. This is because unlike under the previous regime in which Kenya only had a centralised government, leading to concentrated real estate development in Nairobi, Mombasa, Kisumu and a few other large towns, real estate developers now have a choice of 47 alternatives (ie, the county government headquarters) in which to venture.
Green Building Technology
In order to reduce operating costs and provide a safe and healthy environment for workers, developers have been employing green building technology. This has also increased employee productivity. Green building entails the creation of structures that have low environmental impact throughout their life cycle, encompassing their design, construction, operation, maintenance, renovation and demolition.
The most significant deals in real estate in Kenya have been Tatu City, Tilisi Development and Konza City.
Disruptive technology is technology that takes the place of established technology and changes the face of an industry. Where an existing and established technology has been improved upon, this change is called a "sustaining technology".
The government of Kenya is committed to embracing the use of technology in the delivery of services to its citizens. The e-citizen portal is a platform on which citizens can access various government services such as business, land, immigration and civil registration. The State Department of Information, Communication and Technology (ICT) and Innovation under the Ministry of Information, Communication and Technology is tasked with promoting government information technology services.
The Business Reforms and Transformation Department under the Ministry of East African Community and Regional Development is also aimed at promoting the ease of doing business in Kenya by proposing amendments to various laws including those relating to information, communication and technology.
In line with the above government initiatives, the Ministry of Lands and Physical Planning (MoLP) has embarked on digitisation of land transactions across the country with the key aim of improving the delivery of services through a digitised platform. Adoption of blockchain technology, decentralised finance, proptech and other forms of disruptive technology contributes to a large extent towards implementation of this initiative.
A blockchain is a time-stamped series of immutable records of data that is managed by a cluster of computers not owned by any single entity. Each of these blocks (of data) is secured and bound to the next one using cryptographic principles (ie, a chain). Since it is a shared and immutable ledger, the information in it is open for anyone and everyone to see. The element of blockchain that makes it a disruptive technology in real estate is the fact that it eliminates the need for third-party intermediaries.
The MoLP has adopted the Land Information Management System (LIMS) which is based on blockchain technology and is aimed at preventing fraud and double ownership, thus preserving the sanctity of title. LIMS enables people to undertake various land transactions, such as conducting searches over properties, querying and paying land rent, applying for valuation, and booking of documents for registration.
Decentralised finance describes a financial system that is built on public blockchains where anyone with an internet connection and a smartphone can access financial services. Users have custody of their wealth and can transact securely without the need for validation from a central party.
Decentralised finance has been adopted in Kenya in the form of financial technology, which is aimed at delivering essential financial services in a way that better serves the needs of customers and ultimately delivers value to the investor. Payment technologies available in Kenya include mobile money, cards and PayPal.
In Kenya, people are able to pay for various land transactions via mobile money through the e-citizen portal. Such transactions include paying for land rent, consents to transfer, lease or charge, and booking fees.
Property technology (proptech) is a collective term used to define start-ups offering technologically innovative products or new business models for the real estate markets. The need to change the way property is built, used and managed in order to achieve more operational efficiency and cost reduction is central to proptech. Real estate firms are increasingly putting technology at the forefront of their business operations as the industry adjusts to a brave new world brought about by advancements in proptech.
xPodd Company Limited, a proptech-focused real estate firm, has expanded its reach in Kenya, thus providing a real-time platform for real estate solutions in the country. The online platform enables the public, businesses and real estate developers to connect on one platform where they can identify, acquire, let or rent property, eliminating middle men where some real estate agents have been duping unsuspecting property seekers and owners. The firm offers solutions for both commercial and residential properties across major towns in Kenya by allowing seekers and finders of property to connect.
In order to fully implement these new technologies, Kenya will be required to build new capabilities and capacities. If fully adopted, these disruptive technologies will make the real estate marketplace more meaningful, since users will be able to connect easily. Users could be buyers, sellers or dealers. The transparency associated with these disruptive technologies will also reduce cases of fraud in real estate transactions.
Digitisation of Land Transactions
Land transactions, from physical planning and survey to land registry transactions, are carried out manually in Kenya. The MoLP appointed a taskforce in August 2018 to prepare guidelines for their digitisation. The purpose of this initiative is to ensure efficient and effective service delivery that will lead to enhanced access to information, increased customer confidence, reduced business timelines and enhanced revenue collection.
The taskforce has since completed its report on the proposed implementation of the digitisation process. The recommendations of the report include amendment of various laws touching on land transactions to allow for digital processes. The success of this programme will require the co-operation of the Ministry of ICT for the purpose of creating the necessary digital platform at a national level, as well as the Treasury for the purpose of integrating suitable payment solutions relating to capital gains tax, stamp duty, land rent and rates and registration fees.
Land Dispute Resolution through Alternative Dispute Resolution Mechanisms
The CoK encourages the use of alternative dispute resolution mechanisms. These are advantageous in that they are less costly and take less time. Land disputes are mainly handled by the ELC. The proposal in this case is for an amendment in the statute establishing that the ELC provides a limit on the matters that are filed in this court. This will reduce the backlog, leading to quick resolution of land cases.
The two main property rights that can be acquired in Kenya are freehold and leasehold interests.
A person has a freehold interest when they are the outright owner of land or property for an unlimited period. Leasehold interest, by contrast, is a temporary right to occupy land or property subject to the payment of a fee to the grantor.
The main laws that deal with transfer of property in Kenya are the LA and the LRA. The LA is the substantive law on land transactions, while the LRA contains procedural provisions on transfer of title.
The SPA deals with transfer of sectional title in Kenya.
The process of acquisition of property begins with the purchaser’s advocate conducting a search on the property.
The seller’s advocate prepares the agreement for sale for execution by the parties upon approval by the purchaser’s advocate.
The seller then embarks on preparation of the completion documents. In the meantime, the purchaser’s advocate prepares the transfer document for execution by the parties upon approval by the seller’s advocate.
The transfer is then filed at the Lands Office for valuation purposes. The purchaser pays stamp duty once valuation is finalised.
Once stamped, the transfer is filed for registration together with the completion documents. Upon registration, the purchaser is issued with a new title.
There are no mandatory requirements for purchasers to buy real estate title insurance. As such, title insurance is not common. However, financing companies would require that insurance be obtained in the case of a financed purchase.
A certificate of title issued by a registrar upon registration is taken as prima facie evidence that the person named as proprietor is the absolute and indefeasible owner subject to any registered encumbrances, and the title shall not be subject to challenge except on the grounds of fraud or misrepresentation to which the person is proved to be a party or where a certificate of title has been acquired illegally, unprocedurally or through a corrupt scheme.
The three ways of investing title are searches, pre-contract inquiries and requisitions.
There are two types of searches:
Pre-contract inquiries are preliminary inquiries relating more to the physical condition and location of the property, as well as to matters not covered by the searches.
Requisitions take the form of forthright questions arising after a perusal and assessment of the title document.
Some of the typical representations and warranties include warranties to the effect that:
Representations and warranties are not statutorily prescribed but are freely negotiable by the parties.
A misrepresentation by the seller will typically entitle the buyer to claim damages and termination of the transaction, where the misrepresentation goes to the root of the transaction.
The most important areas of law for an investor to consider when purchasing real estate in Kenya are:
A buyer of real property becomes strictly liable for any contamination of the property that pre-dated the sale, even if it was caused by the seller.
To avert this liability, it is important for purchasers of real estate to conduct environmental due diligence before purchasing real estate.
Zoning is a system of land-use regulation in various urban areas and cities which designates permitted uses of land based on mapped zones.
The three main zoning classifications are residential, commercial and industrial.
Due diligence will basically involve review of the relevant county zoning by-law, including communication between the seller and the relevant county regarding the current degree of compliance with zoning laws.
Special conditions of the title would also indicate the permitted use of the property. It is therefore important to conduct a search on the title to confirm the permitted use.
Development agreements between public authorities and developers are not provided for in the statutes.
Article 40(3) of the CoK allows the state to compulsorily acquire property where the property is required for a public purpose or interest. Such acquisition should be followed by prompt compensation of the person affected.
Section 107 of the LA provides the procedure for compulsory acquisition of land by the government as follows:
Real estate sale and purchase transactions are by law subject to taxation. The applicable taxes are stamp duty (payable by the purchaser) and capital gains tax (payable by the seller).
Stamp duty is payable at a rate of 2% of the value of the property for agricultural land and 4% for properties in urban areas.
The following transfers of property are exempt from payment of stamp duty:
Capital gains tax (CGT) is comprehensively discussed under 8 Tax.
Registration costs are not prescribed in statute and vary from one registry to another. They are payable by the purchaser.
Stamp duty is chargeable at a rate of 1% if a property is registered as a company, and transfer is by way of shares rather than title.
Gains made on the transfer of shares of private companies within Kenya are subject to CGT, and incidental costs are allowable to reduce the tax due.
The CoK restricts ownership of land by non-citizens to leasehold of not more than 99 years. It further provides that if a provision appears to confer on a non-citizen an interest in land greater than 99 years, this will be regarded as conferring a 99-year leasehold interest and no more. A corporate body is only regarded as a citizen if it is wholly owned by Kenyan citizens.
Under the LCA, the LCB is not permitted to approve applications with respect to transactions involving agricultural land where the beneficiary is a foreigner.
Real estate lending requires that the borrower issues collateral for the title to be charged to the lending institutions. Commercial real estate could also be funded through REITs and, in the case of government-owned real estate, through public-private partnerships (PPP).
These financing options are also possible for other categories of real estate.
A borrower acquiring or developing real estate will provide a legal charge over immovable property in favour of the lender.
There are no restrictions on granting security over real estate to foreign lenders. Similarly, there are no restrictions on repayments being made to a foreign lender under a security document.
Kenyans seeking to invest in the US would have to fulfil the criteria to be developed by the Committee on Foreign Investment in the United States (CFIUS).
Stamp duty is payable at a rate of 0.1% of the amount being advanced for registrable securities. For unregistrable securities, the stamp duty payable is nominal.
Legal fees are payable to advocates involved, as prescribed in the advocates’ remuneration order. Registration costs are also payable to the registry.
It is necessary for a company to demonstrate commercial benefit before issuing its real estate asset as security for a loan to a third-party company, even if the third-party company is a related company. Where commercial benefit does not exist, the companies are required to enter into a commercial benefit agreement for payment of an agreed fee to the company providing the asset.
Financial assistance relating to the acquisition of real estate assets is not prohibited provided that commercial benefit can be demonstrated.
Financial assistance in relation to the acquisition of shares in a private company is permitted. Public companies, on the other hand, are prohibited from giving financial assistance for the acquisition of their shares except where the principal purpose of the financial assistance is not to facilitate the acquisition, or the giving of the financial assistance for that purpose is only incidental to achieving some larger purpose of the company and is given in good faith.
In relation to share acquisitions, if a person is acquiring or proposing to acquire shares in a private company, a public company that is a subsidiary of that company may not give financial assistance (directly or indirectly) for the purpose of the acquisition before or at the same time as the acquisition takes place. Also, if a person is acquiring or proposing to acquire shares in a public company, neither the company nor any subsidiary of it may give financial assistance (directly or indirectly) for the purpose of the acquisition before or at the same time as the acquisition takes place.
Where there is a valid security and the borrower defaults in its loan repayments, the lender can exercise the statutory power of sale.
Before exercising this power, however, the lender is required to serve the borrower with one month's notice stating the nature of the default and what the borrower needs to do in order to remedy the default. This is followed by a 40-day notice of sale.
Before exercising the right of sale, the lender is required to conduct a valuation of the charged property.
Once appointed, the auctioneer is required to serve the borrower with 45 days' notice within which the borrower may redeem the property by payment of the outstanding amount.
Unless otherwise provided in the charge, charges rank in the order in which they are registered.
The rule on priority of security is based on date of registration with the earliest-registered security taking precedence. Where it is necessary for existing secured debt to be subordinated to newly-created debt, this may be achieved by the registration of a deed of variation in relation to the existing security, coupled with an inter-lender agreement to record that understanding.
A lender holding or enforcing security over real estate has no liability if it did not cause environmental pollution, since the creation of security (such as registration of charge) does not transfer interest in the property from the owner to the lender.
Insolvency does not affect the security interests of a secured creditor. Section 590 of the Insolvency Act provides protection to secured creditors by expressly providing that an administrator should not do anything that affects the right of a secured creditor of a company to enforce the creditor’s security.
The key consequences of the expiry of LIBOR in 2021 will be as follows:
In order to manage the risk associated with the expiration of LIBOR in the US, the Federal Reserve has tasked the Alternative Reference Rate Committee (ARRC) to be responsible for the transition from LIBOR to a new benchmark rate called the Broad Treasury Financing Rate (BTFR). The BTFR contains a broad set of US treasury market-based financing transactions.
The BTFR will run in parallel with LIBOR for several years in order to help determine a fair compensating credit spread between LIBOR and the BTFR for those financial assets that will be affected.
However, except for external debt, most borrowing in Kenya is governed by the Central Bank Rate published by the Central Bank of Kenya.
Planning in Kenya is undertaken by both the national and county governments. The national government is responsible for formulation of the laws while the implementation of the laws is undertaken by the counties.
Each county has a legislative framework which is based on the national laws that impose planning and zoning controls. The county planning laws apply to all sub-counties within a county.
Part XI of the County Governments Act requires county planning frameworks to integrate economic, physical, social, environmental and spatial planning.
The PLUPA is the main statute dealing with physical development in Kenya, and vests the functions of physical planning in the Office of the Director of Physical Planning.
The PLUPA establishes physical planning liaison committees whose functions are to act as a mechanism for appealing decisions of the Director of Physical Planning.
The PLUPA provides for separation of powers between the national and county governments. It provides that policy and strategy formulation, including the preparation and approval of the National Physical Development Plan, are functions of national government, while the power to consider and give development approval is vested in the county governments.
A number of regulations which were enacted under the Physical Planning Act No 6 of 1996 (now repealed) to deal with various aspects of physical development are still applicable under the PLUPA pending promulgation of new regulations. These are the Physical Planning:
The NCA Act establishes the NCA which is mandated with overseeing and co-ordinating the development of the construction industry in Kenya. Every construction project is required to be registered with the NCA prior to commencement of the project.
County governments are empowered to regulate the use and development of land in the interests of proper and orderly development. The applicable legislation is the PLUPA and the county by-laws.
Section 57 of the PLUPA makes it an offence to carry out development within a county without development permission having been granted by the county government.
Section 58 of the PLUPA provides that any person requiring development permission has to make an application to the relevant county accompanied by such plans and particulars as are necessary to indicate the purposes of the development.
When considering a development application submitted to it, the county may consult with various officers including but not limited to the Director of Survey, NLC and the Chief Engineer (Roads).
The county may then either grant the applicant development permission, with or without conditions, or refuse to grant permission stating the grounds for refusal.
Third parties will only have an opportunity to object during public participation which is required before an environment impact assessment licence can be issued.
Any person who is aggrieved by the decision of the county may appeal against the decision to the County Physical and Land Use Planning Liaison Committee.
Any person aggrieved by a decision of the County Physical and Land Use Planning Liaison Committee may appeal to the ELC.
Large development projects will require the developer to enter into agreements with government agencies or suppliers for the provision of certain services. These include agreements with the county governments for provision of sewerage services, with the Kenya Power and Lighting Company for provision of electricity, and with the road authorities for the construction of access roads to the development.
The approval for the development, once granted, will stipulate adherence to certain conditions. If the county discovers that a development has been or is being carried out without the required permission or that any of the conditions of permission have not been complied with, the county may serve an enforcement notice on the developer.
Unless an appeal is lodged over the enforcement notice, the enforcement notice will take effect once the notice period expires.
If a person is aggrieved by the notice then they may, within the notice period, appeal to the relevant liaison committee.
Any person who is aggrieved by a decision of the liaison committee may appeal against its decision to the National Liaison Committee.
An appeal against a decision of the National Liaison Committee can be made to the High Court.
The main investment structures for real estate include limited liability companies (LLCs), limited liability partnerships (LLPs) and real estate investment trusts (REITs).
An LLC is a company limited by shares with legal personality to own property distinct from its owners, the shareholders. This could be a private or public LLC organised in accordance with the provisions of the Companies Act.
On being registered, an LLP becomes a body corporate with perpetual succession with legal personality separate from that of its partners.
REITs are real estate companies or corporations which own, develop or manage different types of properties. RElTs are investment instruments that source funds to build or acquire real estate assets which they sell or rent to generate income.
Income REITs (I-REITS) are where investors pool their resources into a trust with the aim of investing in income-generating real estate such as residential, commercial and any other profitable real estate segment. Development REITs (D-REITs) involve pooling assets together to procure qualified land for improvement and development ventures which may incorporate residential and other commercial projects.
There is only one I-REIT listed on the Nairobi Securities Exchange. This is because the REIT legislation is recent and is yet to be understood by investors in this market.
Preferred Investment Vehicles
For a long time, LLCs have been the preferred investment vehicles. However, with the enactment of the LLP Act, LLPs have been gaining popularity for the following reasons:
The minimum number of members is one and the maximum 50. A private LLC should have at least one director.
The minimum number of members is one, with no maximum. A public LLC must have at least two directors, of which one must be a natural person.
Memoranda and articles of association are required before a company can be registered.
Section 26 of the LLP Act provides that a limited liability partnership is required to have at least two partners. Section 27 provides that it must have at least one manager who is resident in Kenya. It is not required for an LLP to create memoranda or articles of association. However, partners are required to execute an LLP Agreement to set out the agreement between the members.
REITs in Kenya are structured as trusts rather than companies. The properties are held in the name of a corporate trustee who is the custodian of the REIT's assets but managed by a corporate REIT manager. The primary sponsor of a REIT is usually allowed majority ownership of up to 75%. Other investors’ stake should be a minimum of 25%.
There are no minimum capital requirements for private LLCs or LLPs.
Public limited companies are required to have an authorised minimum capital of KES6.75 million.
The minimum value of starting assets of an I-REIT should not be less than KES300 million. For D-REITs, it is KES100 million.
A public LLC is required to have a company secretary; a private LLC is only required to have a company secretary if it has share capital of over KES5 million.
An LLC is required to hold an annual general meeting within six months of the day following its accounting reference date each year, and thereafter, within three months of the end of its financial period.
A public LLC is required to have a minimum of four board meetings per year.
LLCs listed on the Nairobi Securities Exchange are required to comply with the code of corporate governance for listed companies.
Private LLCs are expected, as a matter of best practice, to comply with the code of conduct for private organisations.
If the company has share capital, it must file an annual return like any other limited liability company. If it has no share capital, it must file an annual return stating the address of the registered office.
If the register of members is not kept at the registered office, the address of the place where it is kept must be stated.
The particulars of the directors and the secretary are required to be kept in the register of directors and secretaries. Particulars of the total amount of the company’s indebtedness in respect of all charges are required to be registered.
An LLP must:
Under the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013 a REIT must have:
A REIT is required to keep proper books, records and accounts in respect of the fund and scheme in accordance with the law.
The manager is required to prepare and present semi-annual and annual reports for the REIT to the trustee and thereafter submit the reports to the CMA.
The trustee is required:
The annual cost of filing the secretarial and tax returns for an entity is nominal, but the professional fees payable by the entity will depend on the accountancy or legal firm it chooses to use.
The two ways by which real estate can be occupied for a short term are by way of a lease and a licence. A lease entitles the lessee to exclusive use and quiet enjoyment of the property, while a licence is permission to use the premises. A licence does not grant exclusive use of premises.
The various types of leases under the LA are:
Rents and terms of leases are freely negotiable. There are, however, terms that are implied in the lease as provided in the LA. These include:
The length of a lease term is not regulated and parties are free to negotiate it. Typically, landlords would want commercial leases to be for not less than five years to avoid controlled tenancies.
Section 66 (1e) of the LA requires the tenant to keep all buildings comprised in the lease in a reasonable state of repair.
Frequency of rent payments is not statutorily regulated. Typically, rent is payable either monthly or quarterly.
Some leases have rent escalation clauses, hence there may be variation in the rent payable.
It is common for rent to escalate every two years.
Rent escalation is based on either a percentage increase provided for in the lease, or the market rent payable at the time of the increase. Where the increase in the rent is to be calculated based on market rates, then the mechanism of determination of such rent, including the method of appointing a valuer, should be provided for in the lease.
VAT is payable on rent at a rate of 16%.
At the start of the lease, the tenant pays the following:
Where the underlying title is leasehold, the proprietor of the property let is required to pay land rent to the relevant authority and to obtain a land rent clearance certificate; and legal fees are also payable to the advocate who prepares the lease.
Maintenance and repair of areas used by several tenants are paid for by the tenants through apportioned service charge contributions.
Meters are assigned to the tenants for the leased premises and the tenants are responsible for paying the bills.
There will also be a meter for utilities in the common areas, with the bills being paid by all the tenants though service charge contributions.
Furniture and fittings owned by the tenant are insured by the tenant. The landlord insures the real estate structure.
Restrictions can be imposed by landlords on how tenants use real estate, since a lease sets out the tenant’s covenants. Some covenants require a tenant to obtain the landlord’s consent before carrying out certain activities. An example would be alterations to the premises and assignment or subletting.
The LA also lists activities for which the tenant will require the consent of the landlord. These include transferring or assigning the lease, subletting, parting with possession of the leased premises, change of use, improvement of the premises and charging.
Section 67 (2e) of the LA disallows the tenant from altering or improving any building, beyond what is permitted in the lease, without the consent of the landlord.
A lease would ordinarily provide the requirements and procedure for obtaining the landlord’s consent including the submission of drawings.
The LA applies to all leases whether residential, industrial, office, retail or hotels.
Leases for commercial premises are deemed to be controlled tenancies under the LTA.
A controlled tenancy is a tenancy of a shop, hotel or catering establishment which has not been established in writing, or has been established in writing but is for a period not exceeding five years, or contains provision for termination other than for breach within five years of commencement.
A controlled tenancy cannot be terminated or its terms varied without the consent of the tenant. The landlord can only vary the terms of the tenancy by an order of the tribunal established under the LTA where the tenant can contest the variation.
The Rent Restriction Act contains provisions for restricting the increase of rent, the right to possession and the exaction of premiums and fixing standard rents in relation to dwelling houses. It applies to all dwelling houses except those which have a standard rent exceeding KES2,500 per month.
The Public Health Act prohibits letting premises previously occupied by any person suffering from an infectious disease without having the same efficiently disinfected to the satisfaction of a medical officer of health, as testified by a certificate signed by the officer.
Section 73 of the LA gives the lessor the right to forfeit the lease if the lessee is adjudicated bankrupt or, in the case of a company, if it goes into liquidation.
The security provided by the tenant is a rent deposit which is forfeited in case of default. If the tenant is a company, its directors would be required to issue directors' guarantees to the landlord securing performance of the tenant’s obligations.
The tenant does not have a right to continue to occupy the premises after the expiry of the lease. However, if the landlord allows the tenant to remain in possession of the premises after expiry of the tenancy, this will constitute a periodic tenancy.
For a landlord to ensure that the tenant vacates the premises on the date initially agreed, they will need to serve the tenant with notice equivalent to the period after which rent is payable.
A tenant who is in exclusive possession by virtue of a lease, is permitted to assign their leasehold interest for a specific period of time. This has to be in compliance with the terms of the lease entered into between the landlord and the tenant.
Section 63 of the LA allows tenants to sublet their interest for a term that is the same as or shorter than the remainder of the term of the head lease. The LA further provides that a sublease cannot operate as an assignment of the head lease to the sub lessee unless the circumstances surrounding the sublease indicate that it’s an assignment or a contrary intention of the sublease actually being an assignment is expressly stated in the sublease. This essentially means that for an assignment to be effective, it has to be explicitly stated as such in the sublease.
In the event that a sublease expires at the same time or after the expiry of the head lease, then the term of the sublease shall be reduced to expire one day earlier than the term of the head lease without prejudice to the remedies that the sublessee has in respect to that reduction.
Furthermore, if the term of the head lease is extended beyond the term for which the sublease was created, then the sublease shall expire at the end of the original term of the head lease.
Section 67 of the LA provides that a lessor will not unreasonably withhold consent from a lessee to assign the lease or to enter into a sublease. The lessor is required to inform the lessee in writing, within reasonable time, of their acceptance or refusal to grant consent.
Some of the typical conditions that may be imposed by the lessor before granting consent to the lessee include:
Section 73 of the LA empowers the landlord to forfeit the lease if the lessee commits any breach of its obligations, as earlier discussed, is adjudicated bankrupt or, in the case of a company, if it goes into liquidation. However, controlled tenancies can only be terminated in accordance with the provisions of the LTA, as discussed in 6.14 Specific Regulations.
There are two categories of leases in Kenya. These are short-term leases which are for a term of less than two years and long-term leases which are for a term of over two years. A short-term lease is not a registrable interest in land. Long-term leases of over 21 years are deemed to be titles and are therefore required to be registered at the relevant land registries. Registration of such leases confers interest. Upon registration, the registered lease is noted in the register relating to the main title from which the lease was issued.
Long-term leases which are for a term of less than 21 years are mainly of a commercial nature and it is not mandatory for them to be registered.
Section 3(3) of the Law of Contract Act requires a contract for the disposition of an interest in land to be in writing, signed by all the parties thereto with the signature of each party attested to by a witness who was present when the contract was signed by such party.
All registered documents relating to disposition of interest in land in Kenya must be recorded in the relevant land registry. Before registration can be undertaken, the following fees and taxes are payable:
Forced eviction is not allowed in Kenya. However, when a tenant is in breach of the terms of a lease, the landlord is required to serve the tenant with notice to rectify the breach as stipulated in the lease.
In the case of a controlled tenancy, the tenant has the power to refer the matter to the Business Premises Rent Tribunal, whereupon the notice shall be of no effect until a determination on the matter has been reached by the tribunal.
If the tenant does not refer the matter to the tribunal, or if nothing is done to rectify the shortcoming, the landlord can terminate the lease agreement and demand that the tenant vacates the premises.
Where a tenant declines to vacate the premises, the landlord would have to obtain an eviction order from the tribunal established under the LTA (where the tenancy is controlled) or a court order (where the tenancy is not controlled).
It would take between six months and two years to conclude eviction proceedings.
Long-term leases conferring title can be terminated by the government if the lessee does not comply with the conditions contained therein.
The government can also cause a lease to be terminated if the property on which the premises are leased is required for public purposes, as discussed in 2 Sale and Purchase.
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As discussed in 6.7 Payment of VAT, VAT is payable by the purchaser on the purchase price at a rate of 16%.
The first schedule of the VAT Act exempts sale, renting, leasing, hiring or letting of land or residential premises from payment of VAT.
There is an ongoing court case in respect of payment of VAT on the sale of commercial premises. The case (David Mwangi Ndegwa v Kenya Revenue Authority) seeks to challenge the requirement to pay VAT on the sale of commercial premises based on the common law definition of land. Land is defined as the soil and the developments thereon. The argument is therefore that since sale of land is exempt from payment of VAT, commercial premises which are comprised in the definition of land, are also exempt from such tax. The matter is pending determination at the Court of Appeal.
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Rates are paid in Kenya pursuant to the Rating Act. Rates are levied by county governments in relation to properties in urban areas and cities in order to meet all liabilities that need to be discharged out of the general rate fund.
The following properties are exempt from payment of rates under the Valuation for Rating Act:
Withholding tax is payable by foreign investors. This is dependent on the category of income. For instance, the withholding tax rate applicable to management and professional fees is 20%. Dividends earned from a REIT will be subject to withholding tax of 5% for East African residents and 10% for non-residents.
Under the Income Tax Act, tax at a rate of 10% of the gross rental income is payable in respect of annual rent from a residential property which is in excess of KES144,000 but less than KES10 million.
CGT is charged at a rate of 5% of the net gain. It is paid by the transferor.
The following are exempt from CGT:
Depreciation deductions do not apply to buildings. Such deductions do, however, apply to furniture and fittings in a building.
Under Section 20(1) of the Income Tax Act, REITs are exempt from tax for corporation tax purposes but are subject to payment of withholding tax on interest income and dividends.
Exemption is not automatic; the REIT must apply for an exemption under the Income Tax Act Registered Unit Trust/Collective Investment Scheme (Rules 2003) and must show that:
If the above cannot be proven, REITs will be subject to corporation tax and required to pay tax on all income they receive before distributing dividends.
Stamp duty is not applicable to transfers of real estate into a REIT. This is in accordance with Legal Notice No 73 of 2008, which provides that any instrument that is executed in respect of the transfer of property on setting up a listed property investment vehicle shall be exempt from the provisions of the Stamp Duty Act.
The Finance Act, 2017, amending the First Schedule of the VAT Act, 2013, provides for exemption from VAT for transfers of assets into REITs.
It is not possible to reflect on the possible real estate trends to watch out for in Kenya in 2020, without looking at the economy and the factors that have affected it. The year 2019 saw a decline in the rate of growth in the real estate sector, with similar deceleration occurring across various sectors of the economy, in comparison to the performance of these sectors in similar periods in 2018.
Despite various authorities giving an optimistic outlook at the start of 2019, the economy did not meet expectations of a better performance than in 2018. The year 2019 proved the existence of other long-standing challenges to the economy and surprised many by continuing the downward trend in growth that was seen in 2018, a year characterised by a repeat presidential election that was viewed as a major cause of disruption to business.
The Kenya National Bureau of Statistics (KNBS) in its gross domestic product quarterly reports for 2019 indicated that there was a decrease in the GDP in each quarter as compared to similar periods in 2018. The KNBS further reported an overall increase in both the consumer price index and in inflation rates. The World Bank in its Kenya Economic Update of April 2019 noted early on in the year that drought and ongoing subdued private sector investment was likely to drag down economic growth in the short term. In a recent economic outlook, the African Development Bank (AfDB) also noted that GDP was down from 6.5% in 2018 to 5.9% in 2019, which the AfDB attributed mainly to unfavourable weather and reduced government investment.
Stunted growth in the real estate sector was one of the outcomes of this decline in economic growth. The credit crunch experienced in 2019 was particularly detrimental to the real estate industry, which is significantly dependent on the availability of financing for both individuals and bodies corporate. The credit crunch which has prevailed for the past few years further strained the belts of both financiers and consumers and was particularly aggravated by the continuance of the interest rate capping introduced by the amendment to Kenya’s Banking Act in 2016. The past year saw financial institutions continue to lend cautiously, due to the impact of the interest rate cap, which was only repealed in November 2019. Access to credit facilities from banks and other financial institutions remained relatively limited, especially for individuals and micro, small and medium enterprises, affecting the number of mortgages taken up in the last year. The intervention by the president, who dissented to the Finance Bill of 2019, which proposed the continuance of the interest rate cap, saw the repeal of the law that gave rise to the cap. The president stated that the interest rate cap had given rise to undesirable economic consequences and alluded to better cash flow in the economy, where lenders had the freedom to determine their profit margins.
In the real estate realm, the hard financial times were particularly seen to affect developers of commercial, retail and high-end residential properties, who were the hardest hit due to low demand and over-supply in the market. For example, a significant number of commercial and retail developments completed in the last few years have remained largely unoccupied for the initial years following completion, despite heavy investment in the marketing of these developments. The headlines in 2019 were also heavily ridden by reports of auctions by banks of residential homes where the owners were unable to service their loans. Significant commercial real estate assets were not spared either, with banks resorting to auctions of office blocks and malls.
In fact, questions were raised as to whether Kenya was facing a real estate bubble given the empty residential and commercial spaces that could be seen in counties that were previously vibrant in the property market.
As such, the year 2020 began with the spill-over effect of the decelerated economic growth of 2019 which also affected the real estate sector. However, despite the hard times faced by private owners and developers of land, opportunities for investment in 2020 are still there, provided that investors establish the right areas in which to invest prior to committing to a specific type of real estate investment. For instance, the Kenyan government’s Third Medium Term Plan (MTP) of the Vision 2030, for the period 2018–2022 is likely to cause waves in the real estate market in the coming years. The plan places an expectation on investors to shift their focus and align their investment portfolio in order to benefit from this MTP.
The MTP has been themed “Transforming Lives: Advancing Socio-Economic Development through ‘the Big Four’” and is popularly known as the “Big Four Agenda". The Big Four are: increasing the manufacturing share of gross domestic product (GDP); providing affordable housing; enhancing food and nutrition security; and achieving universal health coverage. The Big Four Agenda aims to strengthen the business environment, to attract both domestic and international investment for inclusive growth and development. A brief insight into the potential impact of the Big Four Agenda follows.
Highlights and Lowlights of the Real Estate Sector in 2019 and the Ripple Effect for Trends in Real Estate in 2020
Availability of credit for real estate investment
Access to credit remained a challenge in 2019 largely due to the interest rate cap which prevailed for most of the year. Lenders continued to shy away from lending to borrowers they assessed to be medium-to-high risk, thereby locking out the majority of potential mortgagors. The depressed state of the market also led to a rise in properties being put up for auction, as financiers sought to recover loans in default. Despite lenders being secured in this manner, auctioneers in turn reported difficulties in finding liquid buyers who could offer the reserve price, as compared to previous years where sales by auction were often concluded through bidding wars. Partly due to these and other similar challenges, increased restructuring of financial institutions occurred, with the merger of significant players in the banking industry being witnessed or proposed.
However, at the end of 2019, the interest rate cap that was introduced in the lending market in Kenya in 2016 was repealed. The move to repeal the legislation that created the cap was motivated by the need to encourage lending by banks and other financial institutions. Lenders are now at liberty to determine the level of interest that they shall impose on their loans to customers. As such, in 2020 and going forward, the mortgage market is expected to see a steep rise in the short run as lenders seek to recover from the effects of the four-year capping of interest rates. With more flexible lending, more innovative projects that may have been held in abeyance for lack of proper funding are likely to continue.
Development of residential housing, specifically apartment blocks and high-end townhouses, played a big role in the construction portfolio in the last year. Middle-income to high net worth individuals are the main targets of these units and are the focus of many property developers. In the near future, however, property developers need to make informed decisions on their target market because the focus on this group of consumers has gradually led to an oversupply of such units while there is low demand for the same. In 2020, property developers may opt to shift their focus to providing affordable housing, which is in high demand and constantly low supply, as discussed later in this article.
Kenya also continues to see a rise in gated communities and private cities. This is because these types of developments have, arguably, better urban planning, a more reliable supply of utilities and are more aesthetically pleasing. Despite some of these private cities being situated on the outskirts of urban centres, due to the greater availability of land and lower population pressure, consumers have been attracted by the promise of affordable standalone houses and communities structured in high detail. Consumers have continued to buy into the idea of such developments. The private cities, in particular, offer the full bouquet of land uses within one location and also offer options in terms of the cost of housing – with both low and high-density areas within the private city.
The live-work-play model has continued to be the choice of developers and consumers have also adapted to the changing face of the market in favour of this type of development.
For residential developments and residential units within mixed-use developments, property developers continue to offer “off-plan” purchases which double up as financing for their projects, while purchasers benefit from discounted property prices. We see this as a trend that will continue in 2020 and going forward. Middle-income earners are becoming increasingly aware of the benefits of living on the outskirts of the city for the fresh air and all the good that comes with it, and then commuting to work. Areas such as Redhill and Vipingo have experienced and continue to experience a significant growth in this concept.
We also see the concept of mixed use as one that will continue to catch on for holiday resorts. Whereas holiday resorts under the mixed-use model, such as Vipingo Ridge, used to target the high-end income earners, the target market is now extending to middle-income earners. For instance, Vipingo Awali estate, being part of Vipingo Lifestyle City, also targets middle-income earners with units going for less than KES4 million, which is a reasonable price in a holiday resort. With the repeal of the cap on interest rates, more available financing will result in more borrowing and is likely to open up the market for holiday resorts.
Retail – malls, cafes, supermarkets
A few years ago there was an influx of malls in Kenya, especially in the urban areas. Retail outlets of both local and international brands were set up at a rapid pace, attracting investment in malls and similar shopping centres.
However, the conversion of property for retail purposes has in the past two years suffered a blow for various reasons. The unprecedented competition from online retailers who do not take up bricks-and-mortar stores continues to be a challenge to mall owners who are tasked with employing innovative methods to retain tenants in their establishments and attract clients to their malls. In practice, some of the changes that mall owners have begun to come to terms with are part of the trend towards short-term licences for some occupiers of the mall rather than the standard leases that would secure rent for them for more than five years at a time. In addition, the influx of malls within a relatively short period of time and in close proximity to each other also resulted in many units within malls being vacant.
As such, for 2020, we do not foresee that the construction of malls will be a trend for developers, especially in what are already mall-saturated areas, such as Nairobi and Mombasa counties.
Tourism and hospitality
Kenya remains one of the top tourist destinations in the world, with factors such as the favourable equatorial climate, wildlife and cultural diversity being major tourist attractions. In 2019, Kenya is reported to have received over two million international tourists. Local and East African tourists are also a key support to the sector and provide income for hotel operators during the off-peak season.
Due to the vibrancy of the tourism industry, there is high demand for both high-end and affordable accommodation options. Hotels and lodges take up a significant share of real estate assets in the country.
International names have also made their way onto the market, with brands such as Kempinski, Sheraton, Accor, Hilton and Best Western entering into and increasing their investment in the Kenyan hospitality industry.
Conventional hotels are facing stiff competition from short-stay apartments with private property owners having increased ability to offer their premises for rental through online applications such as Airbnb. In most cases, corporate hoteliers have higher costs in running their facilities and therefore have higher accommodation rates, leading to imbalanced competition for similar clientele.
As such, there is room for growth in the hospitality industry and this could be a lucrative trend in 2020 and going forward, especially for individuals looking for “home-away-from-home” accommodation with all the amenities of a hotel.
The first project of its kind in Kenya – a “halal resort” in Watamu, known as Sands of Darakasi – is under construction. It appears that there is room for growth in Kenya in respect of halal resorts or holiday homes, with Kenya having a significant population that can be tapped for such projects.
Technology – data centres, technology hubs, etc
Kenya has plans to set up a technological hub approximately 60km from the capital. This hub is a project of the Kenyan government, has been dubbed “Konza City”, and is intended to cover 5,000 acres, although this project has been stalled for a while now.
Other land uses related to technology include data centres where development is mostly in the early stages and there is potential and demand for similar enterprises.
The concept of rent-to-own properties, at what is termed “zero interest”, is one that was started a little over two years ago. It has caught on in Kenya and continues to attract a good pool of middle-income earners. The concept is hinged on instalment payments, which tend to be high in the first two years (being the construction period). Once the building is completed, for the next four years purchasers who have already taken possession of the apartment continue to live in the apartment and pay reduced-instalment payments. This real estate investment continues to attract a lot of interest in 2020.
The Real Estate Sector and the Big Four Agenda as a 2020 Trend
As mentioned previously, in the latter part of the past decade, Kenya’s president announced four key pillars dubbed the “Big Four Agenda” which the government intends to focus on for the remainder of the president’s tenure and which the current government hopes will support the remaining phases of Kenya’s Vision 2030. To restate, the pillars of the Big Four Agenda are: food security; affordable housing; enhancing manufacturing; and affordable healthcare.
During the launch of the Big Four Agenda, the government stated its plan to leverage private-sector investments through Public Private Partnerships (PPPs) with the promise of attracting and engaging the private sector on the implementation of projects under the Big Four initiatives and other priority programmes and projects. Since the launch of the Big Four Agenda, the private sector has sought to plug into these initiatives, with several incentives being put in place via each subsequent Finance Act.
In support of the Big Four Agenda, several foreign governments have so far begun or promised funding for projects in the country linked to this and are also encouraging their nationals to invest in Kenyan industries and projects.
The real estate sector has not been left out in benefiting from the Big Four Agenda. Land and other resources from the sector are required in one form or another for the realisation of the aims of these national development plans. The identification of land for the purposes of these plans has already begun, with public land being allocated and the repatriation of private land being required in some instances.
Here, the key features of the Kenyan real estate sector are highlighted, with the contribution of the Big Four Agenda in mind.
Food security is presently a global concern, largely due to the detrimental effects of climate change. The Kenyan economy continues to rely heavily on its agricultural sector for food security as well as for international trade and foreign exchange reserves. Both the government and the private sector continue to invest in agriculture but with efforts being made towards better and more sustainable practices. One example of this is a rise in the development of greenhouses on a large-scale basis.
Furthermore, investors continue to enter the market, profiting from their ability to leverage small-scale farmers across the country to work together. Various investors have come in to provide the logistical muscle and know-how to reach end-users not only in the local market, but also in the international market. This has rejuvenated the agricultural sector in Kenya, led to an increase in farming across the different scales and has encouraged food production by farmers, whether their land is farmer-owned or leased land.
The increase in ease of access to the full supply chain from farmers to end-users has also necessitated the development of more warehousing that is suitable for players in the agricultural sector. This has seen the development of large-scale go-downs with modern facilities, most of which are situated within industrial parks developed adjacent to the cities and largely bordering Nairobi. It is likely that demand for warehouses will be felt across the various counties, specifically near towns with a large capacity for agricultural produce, as counties seek to enhance food security. Enhanced food storage is further boosted by sustainable food processing due to better preservation.
Industrial areas in Kenya are mostly within or adjacent to the central business districts. There has been increasing pressure, however, to designate industrial zones in areas outside towns.
To enhance manufacturing as part of the Big Four Agenda, the pillar encompasses a “Buy Kenya” policy. The aim is to support locally manufactured goods, thereby creating employment within the country. To promote this, the government has pledged to take several actions. These include making it easier to do business in Kenya and requiring local content in certain production areas. Legislation has already been enacted or drafted in line with these pledges. This includes legislation for tax-friendly manufacturing zones within the country, eg, the legal framework that has been put in place for special economic zones.
Following Kenya’s latest census in 2019, the population has been estimated at over 47 million people, signifying an increase of nine million people on the previous census undertaken a decade earlier. The increased numbers have especially put pressure on urban areas of the country with the population of Nairobi increasing by over a million people. The result of this is an ever-increasing demand for housing in the highly populated parts of the country.
In recent years, there has been a lot of investment by private developers in the construction of housing for sale. There has been a mixed bag of fortunes for developers in terms of realising a decent return on their investment. Part of the issue has been the inability of consumers to obtain financing to acquire real estate assets – an issue covered earlier in this article. Another aspect of the issue is that consumers, especially in the middle and upper-income brackets, have been spoilt for choice due to the high supply of new housing developments, which has continued to increase.
In light of the above, property developers should note that the demand in the market has now changed. For this reason, in order to thrive in this new market, they may need to prioritise the social need for housing (which supports the government’s objective of securing affordable shelter), rather than the profits they would like to make per sale.
This shift in approach means that developers may need to adapt to lower profit margins per unit in exchange for more sales, since it is reported that the affordable housing segment has a deficit of 150,000 units each year with only about 50,000 units being constructed annually.
This development is a shift from the trend in Kenya’s property market for the past five years, which mostly focused on the upcoming middle and upper-class market.
Some developers are already actively undertaking affordable housing projects and new houses are expected to be handed over in December 2020.
The fourth arm of the Big Four Agenda is the realisation of universal health coverage. As the government focuses on the development of public hospitals and dispensaries across the country, there has also been an increase in private sector investment in healthcare. Investors in the healthcare sector have sought to increase their capacity to handle the volume of patients either through the creation of satellite clinics or the expansion of existing hospital sites. There has also been interest from foreign investors to set up medical facilities in Kenya, especially on the part of countries that Kenyans have in the past frequented for medical services. Other novel developments for the Kenyan market in the last few years have been the establishment of medical research labs as well as cold warehousing for medical supplies.
Overall, the economy's performance in the past year has been sub-par, but there is hope that, with the introduction and implementation of policy and legislation aimed at creating higher levels of growth in the economy, investors will have a better chance of realising a return on their investments in the future, specifically in the real estate sector.
Players in the real estate sector are optimistic about growth in 2020 and in the decade as a whole. The sector has potential for growth, with the expansion of urban areas in the counties offering additional opportunities to property developers and other investors in the Kenyan real estate market. In addition, the government of Kenya, both at a national and county level, is keen to pursue various partnerships – including public private partnerships – which should support development and financing for the real estate sector, especially affordable housing and infrastructure.
Proper market research is critical to ensure that investors reap the desired benefits from the real estate sector in Kenya, and investors should be prepared to undertake a market or feasibility analysis before investing in any of the possible trends for 2020, or generally, in Kenya.
With the COVID-19 pandemic affecting countries around the world, this is also likely to have a negative impact generally on any investment in Kenya.