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 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 (approximately USD30,000), with the government guaranteeing uptake in three years.
Master-planned communities have emerged in Kenya through the creation of alternative cities, such as Tatu City, Infinity and Tilisi. These alternative cities are built with a focus on the principles "live, work and play"; they include industrial, commercial, retail and residential developments as well as schools, hospitals and recreational facilities.
Less Centralised Development
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 (the county government headquarters) in which to progress development.
Green Building Technology
In order to reduce operating costs and provide a safe environment for workers, developers have been employing green building technology, which has 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 is called a "sustaining technology".
The government of Kenya is committed to embracing modern technology in the delivery of services to its citizens. The e-citizen portal enables citizens to access various government services such as business, land and immigration. The State Department of Information, Communication and Technology (ICT) and Innovation under the Ministry of ICT 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 ICT.
In line with the above initiatives, the Ministry of Lands and Physical Planning (MoLP) has embarked on digitisation of land transactions across the country aimed at improving delivery of services. The 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 owned by various entities. Each of these blocks is secured and bound to the next one using cryptographic principles. Since it is a shared and immutable ledger, the information in it is open for everyone to see. Blockchain is a disruptive technology that can be used in real estate to eliminate 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 preserving the sanctity of title by preventing fraud and double ownership. LIMS enables people to undertake land transactions, such as conducting searches, paying land rent, undertaking valuations, and lodging documents for registration.
Decentralised finance ("DeFi") describes a financial system that is built on public blockchains which enables anyone with an internet connection and a smartphone to access financial services.
DeFi 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 using mobile money through the e-citizen portal, such as land rent, consents to transfer or charge, and registration fees.
Property technology (proptech) is a collective term that defines start-ups offering technologically innovative products or new business models for real estate markets. Proptech seeks to ensure change in the way property is built, used and managed in order to achieve more operational efficiency. 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 real estate firm, has expanded its reach in Kenya, thus providing a real-time platform for real estate solutions. The online platform enables the public, businesses and real estate developers to connect on one platform, eliminating middlemen who have sometimes duped unsuspecting property dealers. The firm offers solutions for both commercial and residential properties across major towns in Kenya by allowing sellers and buyers, and lessors and lessees, 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, disruptive technologies will make the real estate marketplace more meaningful, since users will be able to connect more easily and reduce cases of fraud in real estate transactions.
Digitisation of Land Transactions
The MoLP appointed a task force in August 2018 to prepare guidelines for digitisation of land transactions. This is aimed at ensuring efficient and effective service delivery that will lead to enhanced access to information, increased customer confidence, reduced business timelines and enhanced revenue collection.
The task force has since completed its report on the proposed implementation of the digitisation process. The recommendations of the report include the amendment of various land laws 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, and the Treasury for the purpose of integrating suitable payment solutions relating to land transactions.
Land Dispute Resolution through Alternative Dispute Resolution Mechanisms
The CoK encourages the use of alternative dispute resolution mechanisms. These are advantageous since 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 to the ELC Act to provide a limit on matters that are filed as ELC. This will reduce the backlog, leading to faster resolution of cases.
The two main property rights that can be acquired in Kenya are freehold and leasehold.
A person has freehold interest when they are the outright owners of a property for an unlimited period. Leasehold interest is a temporary right to occupy property subject to payment of a fee to the grantor.
The main laws that deal with transfer of property in Kenya are the LA and LRA. The LA is the substantive law, while the LRA contains procedural provisions on transfer of title.
SPA deals with sectional titles in Kenya.
The process of acquisition of property begins with the purchaser’s advocate conducting due diligence on the property.
The seller’s advocate prepares the agreement, which is executed by the parties upon approval by the purchaser’s advocate.
The seller’s advocate procures completion documents, as the purchaser’s advocate prepares the transfer for execution by the parties.
Once executed, the transfer is filed at the Lands Offices for valuation to enable the purchaser to pay stamp duty.
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 insure their titles. 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 upon registration is taken as prima facie evidence that the person named as proprietor is the absolute owner, subject to registered encumbrances, and the title is not 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 was acquired illegally, unprocedurally or through corruption.
Ways of investigating title include searches, pre-contract inquiries and requisitions.
There are two types of searches:
Pre-contract inquiries are preliminary questions relating to the physical condition and location of the property and matters not covered by the searches.
Requisitions take the form of forthright questions arising after a perusal and assessment of the title.
Some of the typical representations and warranties include warranties to the effect that:
These are not statutorily prescribed but are negotiable by the parties.
A misrepresentation by the seller entitles the buyer to terminate the transaction and claim damages, where the misrepresentation goes to the root of the transaction.
The most important areas of law for investors to consider when purchasing real estate in Kenya are:
A buyer is strictly liable for any contamination of the property that pre-dated the sale.
To avert this, it is important for buyers to conduct environmental due diligence before purchasing real estate.
Zoning is a system of land-use regulation in various urban areas which designates permitted uses of land based on mapped zones.
The three main zoning classifications are residential, commercial and industrial.
Due diligence involves review of the relevant county zoning by-law and communication between the seller and the relevant county regarding the degree of compliance with zoning laws.
Special conditions of the title would also indicate the permitted use of the property.
Development agreements between public authorities and developers are not statutorily prescribed.
Article 40(3) of the CoK allows the state to compulsorily acquire property where the property is required for a public benefit, followed by prompt compensation of those affected.
Section 107, LA provides the procedure for compulsory acquisition of land by the government as follows:
The Land (Assessment of Just Compensation) Rules 2017 set out the factors to be considered by NLC in assessing compensation. These include:
Real estate transactions are by law subject to taxation. The applicable taxes are stamp duty and capital gains tax.
Stamp duty is payable at a rate of 2% of the value 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 statutorily prescribed and vary from one registry to another.
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 in private companies within Kenya are subject to CGT, and incidental costs are allowable to reduce CGT.
The CoK restricts ownership of land by non-citizens to leasehold of not more than 99 years. A corporate body is only regarded as a citizen if it is wholly owned by Kenyan citizens.
Under LCA, LCB is not permitted to approve applications with respect to transactions involving agricultural land where the beneficiary is a foreigner.
Real estate lending requires the borrower to issue 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 projects, through public-private partnerships (PPP).
A borrower acquiring or developing real estate will create 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.
Stamp duty is payable at a rate of 0.1% of the loan amount 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 (ARO). Registration costs are 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 lender, even if the lender 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.
Where there is a valid security and the borrower defaults in loan repayments, the lender can exercise the statutory power of sale.
Before exercising this power, the lender is required to serve the borrower with one month's notice stating the default and the remedy required of the borrower. 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 property.
Once appointed, the auctioneer is required to serve the borrower with 45 days' notice within which the borrower may redeem the property by paying 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 security over real estate has no liability if it did not cause environmental pollution, since the creation of a security does not transfer interest in the property 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 providing that an administrator should not do anything that affects a secured creditor’s right to enforce its security.
The key consequences of the expiry of LIBOR in 2021 are as follows:
In order to manage the risk associated with the expiry of LIBOR, the Federal Reserve tasked the Alternative Reference Rate Committee (ARRC) with being responsible for the transition from LIBOR to a new benchmark rate called the Broad Treasury Financing Rate (BTFR). BTFR contains a broad set of US treasury market-based financing transactions.
BTFR will run in parallel with LIBOR for a while in order to help determine a fair compensatory credit spread between LIBOR and 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 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 based on the national laws that impose planning and zoning controls which apply to all sub-counties within a county.
Part XI of CGA requires county planning frameworks to integrate economic, physical, social, environmental and spatial planning.
PLUPA is responsible for the following:
The NCA Act established the NCA, which is mandated with overseeing the construction industry in Kenya. Every construction project is required to be registered with the NCA prior to commencement.
County governments are empowered to regulate the use and development of land in the interests of proper and orderly development. The applicable legislation is PLUPA and county by-laws.
Section 57 of PLUPA makes it an offence to carry out development within a county without obtaining development permission.
Under Section 58 of PLUPA, any person requiring development permission should make an application to the relevant county accompanied by such plans and particulars indicating the purposes of the development.
When considering a development application, the county may consult with various officers including the Director of Survey, NLC and the Chief Engineer (Roads).
The county may 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 environmental impact assessment licence can be issued.
Any person aggrieved by the decision of the county may appeal 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 require the developer to enter into agreements with government agencies for provision of certain services. These include agreements with county governments for provision of sewerage services; with Kenya Power and Lighting Company for provision of electricity; and with the road authorities for construction of access roads to the development.
If the county discovers that a development has been or is being carried out without development 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 takes effect once the notice period expires.
If a person is aggrieved by the notice they may, within the notice period, appeal to the relevant liaison committee.
Any person aggrieved by a decision of the liaison committee may appeal to the National Liaison Committee.
An appeal against a decision of the National Liaison Committee can be made to the High Court.
Main Investment Structures
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. This could be a private or public LLC.
Once 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.
Income REITs (I-REITS) are where investors pool their resources into a trust with the aim of investing in income-generating real estate segments. Development REITs (D-REITs) involve pooling assets together to procure qualified land for improvement and development ventures which may incorporate residential and commercial projects.
Preferred Investment Vehicles
For a long time, LLCs have been the preferred investment vehicles. However, with the enactment of the LLP Act, LLPs are gaining popularity because:
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 seven, with no maximum. A public LLC must have at least two directors and one must be a natural person.
Memoranda and articles of association are required before a company can be registered.
Under Section 26 of the LLP Act, an LLP is required to have at least two partners. Section 27 provides that it must have at least one manager who is resident in Kenya.
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 they are managed by a corporate 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 LLCs are required to have an authorised minimum capital of KES6.75 million.
The minimum value of starting assets of an I-REIT should be not 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 one if it has share capital of over KES5 million.
A public LLC is required to have a minimum of four board meetings per year.
A private LLC is required to hold an AGM within six months of the day following its accounting reference date, and thereafter, within three months of the end of its financial period.
LLCs listed on the Nairobi Securities Exchange are required to comply with the code of corporate governance for listed companies.
If the company has share capital, it must file annual returns like any other LLC. 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 where it is kept must be stated.
Particulars of the directors and the secretary are required to be kept in the register of directors and secretaries. Particulars of the company’s indebtedness 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.
The manager is required to prepare and present semi-annual and annual reports for the REIT to the trustee and CMA.
The trustee is required to:
The annual cost of filing returns for an entity is nominal, but the professional fees payable by the entity will depend on the accountancy or legal firm chosen.
The two ways by which real estate can be occupied for a short term are by way of leases and licences. A lease entitles the lessee to exclusive use and quiet enjoyment of the property, while a licence is merely permission to use the premises.
The various types of leases under the LA are:
Rents and terms of leases are freely negotiable. However, some terms implied in leases as provided in the LA are:
Although no regulatory enactments affecting lease terms had been made at the time of writing, the Tax Laws (Amendment) Act, 2020 was enacted in April 2020 amending various tax laws such as the Income Tax Act (ITA), the Value-Added Tax Act, the Excise Duty Act and the Miscellaneous Fees and Levies Act. Amendments to these statutes reduced taxes, thereby cushioning Kenyans from the economic impact of inflation.
Tax rates were, however, revised again through the Tax Laws (Amendment) No 2 Act, 2020 published in December 2020 and Kenyans reverted to pre-COVID-19 tax rates effective January 2021.
As at the date hereof, the Senate is debating the Pandemic Response and Management Bill, 2020 (PMB) which, if passed, will provide a framework for a co-ordinated approach in the management of activities during a pandemic. Section 29 of the PMB provides that where a pandemic has affected the financial capacity of a tenant to meet their obligations, the tenant shall give notice of this in writing to the landlord and the contracting parties shall agree on how the tenant shall meet their obligation after the pandemic.
A lease term is not regulated and the parties are free to negotiate it. Landlords would want commercial leases to be for not less than five years to avoid controlled tenancies.
Section 66(1e) of the LA requires tenants to keep all buildings covered by the lease in a reasonable state of repair save for the roof, all external and main walls and main drains, and the common parts and installations.
Frequency of rent payments is not statutorily regulated. Rent is payable either monthly or quarterly.
Rent abatements and force majeure are not statutorily prescribed. Leases do, however, contain force majeure clauses. Force majeure events are defined as conditions beyond the reasonable control of a party that prevent the party from fulfilling its obligations under an agreement. Parties can agree to suspend their obligations during the force majeure event. Parties can, however, exclude payment obligations from applicability of the force majeure clause.
Some leases have rent escalation clauses, hence there may be variation in the rent payable for each year.
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, should be provided for in the lease.
VAT is payable on rent at a rate of 16%.
At the start of a lease, the tenant pays:
Maintenance and repair of common areas are paid for by the tenants through apportioned service charges.
Meters are assigned to tenants for leased premises and 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.
Furniture and fittings owned by the tenant are insured by the tenant. The landlord insures the structure as a whole.
Restrictions can be imposed by landlords on how tenants use real estate. Some covenants in the lease require a tenant to obtain the landlord’s consent before carrying out certain activities.
The LA lists activities for which the tenant will require the landlord's consent. These include transferring or assigning the lease, subletting, improvement of the premises and charging the property to secure advances for the tenant.
Section 67(2e) of the LA disallows the tenant from altering or improving any building, beyond what is permitted in the lease, without consent of the landlord.
A lease would ordinarily provide the requirements and procedure for obtaining the landlord’s consent.
The LA applies to all leases whether residential, industrial or commercial.
Some 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 is not in writing, or which is in writing but is for a period not exceeding five years, or which contains provision for termination other than for breach within five years of commencement.
A controlled tenancy cannot be terminated or varied without consent of the tenant. The landlord can only vary terms of the tenancy by an order of the BBRT and the tenant can contest the variation.
Rent Restriction Act
The Rent Restriction Act contains provisions restricting the increase of rent, the right to possession and 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.
Public Health Act
The Public Health Act prohibits letting premises previously occupied by a person suffering from an infectious disease without having the same efficiently disinfected to the satisfaction of a medical officer of health.
At the time of writing, there is no specific legislation dealing with leases during the COVID-19 pandemic. However, as discussed under 6.3 Regulation of Rents or Lease Terms, the PMB, once promulgated, will apply to tenancies during pandemics.
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 is insolvent.
The security provided by the tenant is rent deposit which is forfeited in case of default. If the tenant is a company, its directors may be required to issue guarantees to the landlord securing performance of the tenant’s obligations.
The tenant does not have the 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 upon expiry of the term, they will need to serve the tenant with notice to vacate .
A tenant in possession by virtue of a lease is permitted to assign their leasehold interest for a specific period of time in compliance with the terms of the lease.
Section 63, 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 for an assignment to be effective, it has to be explicitly stated as such in the sublease.
Section 67, LA provides that a lessor will not unreasonably withhold consent to assign the lease or sublet. 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, LA empowers the landlord to forfeit the lease if the lessee:
However, controlled tenancies can only be terminated in accordance with the provisions of the LTA, as discussed in 6.14 Specific Regulations.
The two categories of leases in Kenya are short-term leases, for a term of less than two years, and long-term leases, for a term of over two years. Short-term leases are not registrable. Long-term leases for a term of less than 21 years are mainly commercial in nature and registration is not mandatory. Long-term leases of over 21 years are deemed to be titles and are therefore required to be registered at the lands registry.
Section 3(3) of the LoCA requires contracts for disposition of interests in land to be in writing, signed by the parties thereto with the signature of each party attested to by a witness 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 lands 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.
In the case of a controlled tenancy, the tenant has the power to refer the matter to the BPRT, whereupon the notice shall be of no effect until a determination has been reached by the BPRT.
If the tenant does not refer the matter to the BPRT and nothing is done to rectify the shortcoming, the landlord can terminate the lease 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 BPRT (for controlled tenancies) or a court order (for non-controlled tenancies).
It would take between six months and two years to conclude eviction proceedings.
Despite the harsh economic times occasioned by the COVID-19 pandemic, no measures have been put in place by the state (as at the date hereof) to cushion vulnerable citizens from eviction from their premises for non-payment of rent.
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 is required for public purposes, as discussed in 2 Sale and Purchase.
Market prices mainly determine the construction cost of a project based on a bill of quantities prepared by a quantity surveyor (QS) from the detailed architectural and engineering designs of a development.
The tendering process for a suitable contractor is usually competitive and begins by the project proponent sending out a request for proposals to various contractors.
Upon lapse of the timeline for submission of proposals, the project proponent evaluates the proposals submitted and awards the tender to the most competitive contractor based on technical and financial capability, as well as pricing.
There are two main options available for the design and construction of a project in Kenya.
Management of construction-related risks is governed by the parties’ contract.
The contractor will be required to issue a performance bond to the developer to guarantee against the contractor’s failure to meet its obligations. The performance bond is issued by a reputable insurance company or bank.
Construction contracts also provide for limitation of liability in certain instances, including force majeure events.
Provisions relating to indemnification, warranties and limitation of liability are not provided for in the statute and the parties can agree as appropriate.
Management of schedule-related risk on construction projects depends on the structure of the project and the agreed timelines.
Delay damages can be imposed on the contractor if certain timelines/milestones are not met.
Causation is however taken into account in determining such fines, as some delaying factors could be outside the contractor’s control, such as force majeure events and delays on the part of the developer in providing the required information/payments.
It is common for developers to request additional forms of security from the contractor. In this regard, letters of credit, parent guarantees, performance bonds, escrow accounts, or third-party sureties can be availed on request. Failure to provide the security could be deemed to be an event of default and may lead to termination of the contract.
In the event of non-payment, the contractor will exercise its right of lien over the property. This gives the contractor legal recourse to get paid for its work.
The contractor’s lien can cause substantial delays in implementation of the project. To avert this, developers would require delivery of an undertaking before commencement of the works to the effect that the contractor will not exercise its right of lien.
Upon completion of construction, the architect issues a certificate of practical completion confirming that all the works have been finalised. A certificate of practical occupation is then issued by the relevant county government (planning authority) confirming the structure to be suitable for human habitation.
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 should also be exempt from VAT. The matter is pending determination at the Court of Appeal.
Large real estate projects tend to mitigate tax liability in three ways.
Firstly, application for declaration of their developments as SEZs under the SEZ Act. The following tax advantages are accorded to operators within a special economic zone:
Secondly, since agricultural land attracts stamp duty at a rate of 2% of the consideration, real estate developers will acquire land as agricultural land and thereafter undertake change-of-use to allow for real estate development.
Thirdly, since VAT is payable on the purchase price of commercial premises, real estate developers would opt to acquire the premises prior to conducting a change-of-use to commercial use.
Rates are paid in Kenya pursuant to the Rating Act. Rates are levied by county governments in relation to properties in urban areas in order to meet all liabilities that need to be discharged out of the general rate fund.
The following properties are exempt from rates under the Valuation for Rating Act:
Withholding tax is payable by foreign investors and is dependent on the category of income. For instance, the withholding tax rate on management and professional fees is 20%. Dividends earned from a REIT are subject to withholding tax of 5% for East African residents and 10% for non-residents.
Under the ITA, tax at 10% of the gross rental income is payable in respect of annual rent from residential property which is in excess of KES144,000 but less than KES10 million.
CGT is charged at 5% of the net gain and 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 ITA, REITs are exempt from corporation tax but are subject to withholding tax on interest, income and dividends.
Exemption is not automatic; the REIT must apply for exemption under the ITA Registered Unit Trust/Collective Investment Scheme (Rules 2003) and must show that:
Stamp duty is not applicable to transfers of real estate to a REIT. This is in accordance with Legal Notice No 73 of 2008, which provides that any instrument executed in respect of the transfer of property on setting up a listed property investment vehicle is exempt from the provisions of the SDA.
The Finance Act, 2017, amending the First Schedule of the VAT Act, 2013, provides for exemption from VAT for transfers of assets into REITs.
When COVID-19 was declared a public health emergency in 2020, economic activity was brought to a near global standstill, as governments imposed restrictions on movement to contain the spread of the virus. This unexpected turn of events affected many sectors in Kenya, including the real estate industry, and it continues to be a factor in key industry decisions amid COVID-19’s ongoing grip on the world. Studies have shown that the Kenyan economy contracted in 2020 due to the global ripple effect.
For this reason, it is important to take account of the developments that occurred in 2020 before highlighting the trends and developments we expect to see in 2021.
The first quarter of 2020 saw the government of Kenya issue ministerial directives concerning social, health and safety requirements and impose curfews, travel restrictions and county lockdowns. This negatively impacted various property segments, in particular retail, commercial, travel, hospitality and leisure. As an example, the effect of these measures and the strenuous economic conditions led to a decline in the demand for office space, as tenants reassessed their office requirements in response to many employees working remotely over the pandemic period. Where existing tenants retained their office space, they sought to suspend rental payments to cushion themselves from the economic shock caused by the pandemic, leading landlords to consider flexible rental payment plans. Similarly, hotels across the country had to shut down as travel was affected for almost six months, costing the industry billions of Kenyan shillings. Hosts of short-term rentals such as Airbnb also had to turn to longer-term rental income due to a significant decline in users.
COVID-19 morphed into a financial crisis, leading to a decline in uptake of banking facilities caused by anxiety as well as uncertainty concerning the ability to service loans. Many companies took steps to minimise borrowing and overheads in the second quarter of 2020 by downsizing or foregoing their office space.
Prior to the COVID-19 period, services at the land registries were already affected by the disruptions caused by the ongoing transition to a digital platform. The onset of COVID-19 compounded this issue due to the physical closure of land registries within the country which crippled operations.
In terms of what lies ahead for an economy that relies on the hardest hit sectors for economic growth, we are inclined to the proposition that levels of disposable income are expected to decline therefore constraining investment in real estate. Looking at the changes happening due to the pandemic, occasioned by the first wave, the second wave and the current third wave of COVID-19 which has hit the country leading to revised containment measures announced by the president on 26 March 2021, and also considering the market’s reaction previously and presently, we now take you through what we anticipate will be the trends and developments in the year 2021, as well as ongoing developments.
The Impact of COVID-19 on Kenya’s Real Estate Sector and Emerging Trends for 2021
As stated earlier, the commercial property space in Kenya witnessed a significant decline in office space absorption due to the disruption caused by COVID-19. The work-from-home approach employed to curb the spread of the virus has led experts to project a further decline in demand beyond the first quarter of 2021, as remote working is increasingly becoming a mainstream way of life. Executives are expected to rethink their real estate strategies over time as the workplace is evolving to accommodate remote and hybrid workplace options.
Separately, the stringent health and safety requirements introduced as a result of COVID-19 have necessitated the provision of a safe and healthy environment for workers. Developers are now employing design strategies aimed at confronting the impact of infectious diseases to protect occupiers of buildings.
In June 2020, the Kenya National Bureau of Statistics (KNBS) released the results of a survey which indicated that in six out of every ten households, the breadwinner was unable to provide due to the COVID-19 pandemic.
Given the resultant impact on livelihoods due to pandemic-related lay-offs and redundancies, thousands of Kenyans struggled to pay rent, with some requesting landlords to reduce or waive the rent, and others moving to cheaper housing options or opting to relocate from urban spaces to rural towns to save on costs.
As a result of these relocations against the backdrop of falling incomes, satellite towns such as Ngong, Thika and Kitengela have experienced increased rentals and demand for property, with consumers looking to rent cheaper decent housing and seeking to purchase affordable land within a reasonable distance from Nairobi. We see the purchase of land and property in satellite towns as a trend in 2021. As such, offering serviced plots or quality houses in satellite towns is something investors can consider.
On the flip side, the rise in demand for cheaper or more affordable rental options has led to a high tenant turnover in high-end developments. We expect to see this trend continue, thus catalysing the potential for private developers in the affordable housing market.
Due to the COVID-19 pandemic, the world’s economy was shut down almost overnight, with the hospitality industry facing an unprecedented challenge as a result. Strategies to flatten the COVID-19 curve, such as community lockdowns, social distancing, stay-at-home orders, and travel and mobility restrictions, resulted in temporary closure of many hospitality businesses and significantly decreased demand in those that were allowed to resume operations.
With government support and campaigns for domestic tourism, we have seen renewed hope for the hospitality industry in Kenya. The Christmas season in 2020 offered hospitality stakeholders a means to offset the impact of the pandemic and resulted in a booking rate of more than 65% in almost all hotels, a first for many after a long and bleak year due to the pandemic. However, the current third wave of COVID-19 that has hit the country may derail progress as it may demotivate tourists from going ahead with their travel plans, even though the government has urged international tourists who have booked to travel to Kenya not to cancel as they are free to tour the country, provided they have a valid COVID-19 negative certificate and can hire private planes to their destinations within the country.
Having said that, investment in the tourism sector is not projected to trend in 2021 unless an investor seeks to invest in eco-tourism with facilities that will ensure minimal or no crowding. Beachfront properties and bush adventures continue to be the most popular tourist attractions for investment purposes.
Holiday homes are increasingly growing in popularity in Kenya, with Naivasha being much sought after as a holiday/second home destination for the upper and upper-middle classes. With the pandemic throwing mainstream tourism into disarray, holiday homes will become increasingly lucrative as a means for holiday-goers to escape the city while ensuring minimal contact with other tourists.
The retail sector in Kenya appears to be resilient to the effects of the COVID-19 pandemic. Although the sector has experienced a period of stunted occupancy due to over-supply, reports indicate that occupancy levels for retail centres averaged 70% to 80% with the more established malls recording higher occupancy levels of 90%. Knight Frank’s Kenya Market Update for the second half of 2020 further indicates that some supermarket chains expanded their local presence, establishing a stronger footprint in the retail market. A few supermarkets scaled down operations mainly due to liquidity problems but the spaces they occupied as anchor tenants have already been taken up by competitors.
We project that the aggressive expansion of retail chains will continue in 2021.
The 2020 third quarter report by Cytonn Investments, an investment and real estate company in Kenya, indicated that the land sub-segment recorded an overall annualised capital appreciation of 2.4% at the end of that quarter. This suggests that investors still consider land as a good investment in the long term.
Our view is that this sub-segment will improve, as the market seems more stable in 2021.
This sector has exhibited growth that defies COVID-19 and continues to be lucrative, especially in vegetables and tea. Agriculture plays a vital role in the economy and due to this, there is a sustained demand for farming land. While inflation has risen in the country, the agricultural sector has remained profitable. We see this continuing in 2021.
With hospitals being occupied beyond capacity with COVID-19 patients in 2020, as well as the first quarter of 2021, and their insurance cover plans being rejected, we see health as an important sector that can yield returns for investors. We have highlighted it here, as any investment in the health sector is likely to have a real estate angle, with real estate necessary for the construction of hospitals and facilities.
The economy in 2021 has a positive outlook as a result of pupils returning to school, even though there may be phased temporary closures every now and then. Indeed, with the closure of many private schools, this is definitely a sector that should attract investors, especially those that offer online or hybrid solutions, adequate spacing within classrooms and good green facilities in schools, all of which will require investment in real estate through the acquisition of properties in the relevant location.
Contract drafting and negotiation
The effects of the COVID-19 pandemic have led to a shift towards contract-drafting strategies that protect parties to leases (particularly tenants) from economic hardships brought about by the pandemic. There has been an unprecedented increase in lease modifications incorporating alternative clauses providing relief to parties, as guided by the disruptions caused by COVID-19.
The Kenya Mortgage Refinance Company (KMRC), the public-private partnership (PPP) firm formed by the government of Kenya, was established as a key institution to support the affordable housing pillar of the government’s Big 4 Agenda. It was incorporated on 19 April 2018 as a non-deposit taking financial institution with the single purpose of providing long-term funds to primary mortgage lenders (ie, banks, micro finance banks and saccos, which are savings and credit co-operatives) in order to increase the availability and affordability of mortgage loans to Kenyans.
KMRC was licensed by the Central Bank of Kenya in September 2020 to commence lending. Its licensing as the first mortgage refinance company in Kenya is expected to facilitate the growth of the affordable housing market. By making mortgages affordable for larger sectors of the population, and capping affordable housing loans at KES4 million in Nairobi and KES3 million with respect to the rest of the country, the affordable housing pillar of the Big 4 Agenda will be supported.
The government expects that KMRC will contribute to more home ownership through cheaper mortgages since it will source loans from big investors and multilateral lenders and act as a pool from which mortgage lenders in the country can draw at affordable rates.
Changes in the Dispute Resolution Landscape
On 1 July 2020 the Kenyan Chief Justice launched the E-Judicial system which features virtual court sessions and a paperless court case management system. Although litigants, practitioners and judicial officers are still interacting with the new system (and there have been some challenges), dispute resolution through virtual hearings is seen as a big step towards helping improve access to justice and speedy resolution of land disputes.
Nairobi Railway City
The government of Kenya through the State Department for Housing and Urban Development (SDHUD) under the Ministry of Transport, Infrastructure, Housing and Urban Development and Public Works affirmed its commitment to the construction of Nairobi Railway City when it invited interested and eligible candidates to tender for the development of the railway city and related amenities in July 2020.
The total area for the project is 172 hectares (425 acres) and is said to be the largest and most ambitious development to be undertaken in the Nairobi metropolitan region since independence. The features include a diverse urban programme comprising mixed-use commercial, offices, residential and public buildings with wide open space and plazas, and elaborate non-motorised/pedestrian walkways. The diverse urban programmes are expected to generate a 24-hour dynamic city.
The main aim of the project is expansion of the central business district and development of a railway station to link all city suburbs. The government hopes that Nairobi Railway City will transform Nairobi into a sustainable, integrated and iconic city reflecting a transformative vision for urban planning.
With regard to real estate, the project is intended to capture land value for sustainable urban regeneration of the project area and development. Furthermore, an integrated railway transportation network can aid in transit-oriented development, maximising residential, business and leisure space. Such infrastructure development could also open up remote areas for real estate development and strengthen housing values in those areas.
Changes in the Tax Regime
Effective 1 January 2021, the government enacted fundamental changes to the tax regime, some of which directly affect the real estate industry.
Residential Rental Income Tax (RRIT)
The upper threshold of RRIT has been increased from KES 10 million to KES15 million per annum. The lower threshold has also been increased from KES144,000 to KES288,000.
These wider tax bands will increase the number of landlords who fall within the ambit of the tax.
Home Ownership Savings Plan (HOSP) amendments
Depositors no longer enjoy a tax deduction on deposits placed with an approved HOSP institution. Previously, contributions of up to KES96,000 per annum to a registered HOSP were treated as an allowable deduction.
Furthermore, the income of a registered HOSP, which was previously exempt from income tax, is now taxable.
System Overhaul at the Lands Registry
The Lands Registry will be undergoing a system overhaul that is expected to improve efficiency in the long term but may occasion delays in land transactions in the short term.
The ongoing land title conversion
On 31 December 2020, the cabinet secretary for Lands and Physical Planning notified the public, by way of a Gazette Notice, of the commencement of conversion of current title numbers to new parcel numbers, starting with Nairobi. The aim is to collapse the land registration system under the previous land laws which were repealed in 2012, to ensure a centralised and simpler land registration process, and reduce susceptibility to fraud.
What the conversion process means for landowners
Titles issued under the previous regimes will be cancelled and replaced with titles under the current regime.
There will now be a centralised land registration process under one regime, in line with the constitution.
The conversion is an ongoing process which we expect will take place over the next few months or more. There will be further publications in the Kenya Gazette and two daily newspapers of conversion lists covering other parts of the country. We are not certain how expeditious the process will be or whether conveyancing proceedings will stall in anticipation of migration from the old to the new system.
While the conversion of titles is not an economic issue per se, it will affect the time it will take to finalise land transactions. In an already volatile real estate market, the longer it takes to finalise registration, for instance, the harder the economic implications, especially since the release of funds is invariably pegged on registration being completed.
Implementation of the National Land Information Management System (NLIMS)
The government’s policy is to digitalise all land transactions and do away with the current manual system. It is intended that all processes from allocation of land, issuance of titles, change of user, subdivision, transfer, charge etc will be undertaken on the new NLIMS. The Ministry recently indicated to stakeholders that it has finalised the scanning of land records within the Nairobi metropolitan area and that it expects to launch the NLIMS in the first quarter of 2021. It is difficult to assess whether the Ministry will meet this target as the system is yet to be launched. In addition, the Ministry explained to stakeholders that it will first undertake the land title conversion process, so that all properties are able to comply with the requirements of the NLIMS.
It is projected that digitalisation of land records for the remaining parts of the country will be concluded in 2022, before the end of the current president’s term. This is intended to improve efficiency in the long run.
Improved capacity at the land registries, including introduction of accredited private valuers
On 22 January 2021, the Ministry published a list comprising 247 accredited private property valuers approved to carry out valuation for stamp duty, in a move to enhance efficiency by decreasing turnaround times for conveyancing.
It is anticipated that the wide reach of private property valuers will boost government revenue, improve ease of doing business, decrease the turnaround time by up to 50% and improve Kenya’s international ranking in processing property deals, which is currently at 134 out of 190 countries.
Regulatory changes towards electronic signatures
On 18 March 2020, Parliament enacted the Business Laws (Amendment) Act 2020, with the aim of facilitating the ease of doing business in Kenya by providing for the use of advanced electronic signatures in place of the traditional signature. The new law came into effect at a time when the government was also fighting to contain the spread of COVID-19 through different media, including paper.
While electronic signatures are not a new concept in Kenyan law, the above law did away with the need for wet-ink signatures in virtually all legally binding documents, except for wills and negotiable instruments, such as cheques. Although this is a progressive regulatory change, electronic signatures are not yet available in Kenya as, by law, a valid advanced electronic signature can only be issued by a Certification Service Provider (CSP) duly licensed by the Communications Authority of Kenya pursuant to the Kenya Information and Communications (Electronic Certification and Domain Name Administration) Regulations 2020. At present, there are only two licensed CSPs in Kenya, which are yet to start issuing advanced electronic signatures.
The new Sectional Properties Act
The new Sectional Properties Act 2020 (the Act) came into force on 28 December 2020, effectively repealing the Sectional Properties Act 1987. The Act now conforms to the new land regime that came into force in May 2012. It also addresses the challenges associated with the repealed law which mainly relate to provisions perceived as strenuous and burdensome.
The Act now requires all long-term sub-leases issued before the commencement of the Act, intending to confer ownership of apartments, flats, maisonettes, townhouses or offices, to be reviewed within two years of the commencement date of the Act. The aim is to enable conversion to conform to the requirements of the Land Registration Act 2012 with regard to geo-referencing and issuance of certificates of title and certificates of lease, as applicable. This is expected to pave the way to a clear practical approach to how to efficiently register titles for apartments and sectoral units.
Impact of Upcoming General Elections/Political Environment
Kenya holds its general elections every five years and the next election is scheduled to take place on 9 August 2022. The upcoming elections and political environment may have a greater-than-usual impact on business and investment, especially with the effects of the pandemic still being felt in the country. Investors presently tend to be reluctant to invest in new opportunities and/or projects in the country as they have adopted a wait-and-see approach, largely attributable to the uncertainties of transitioning to a new government. This is likely to have a negative short-term effect on the real estate market.
From our review of the above, we see a positive to neutral outlook for the real estate industry in 2021, especially following the global roll-out of the vaccine which raises hope for the containment of COVID-19. However, investors should be mindful that most businesses may be restructuring and downsizing their operations to survive another year of uncertainty prior to the 2022 general elections in Kenya, thus affecting uptake.