New taxes set to grow Uganda housing crisis

Uganda’s real estate developers have warned that the new proposed taxes on their industry risk inflicting damage if they get the green light from Parliament.

The government is in dire need of an additional Shs5.64 trillion to fund its Shs58.3 trillion budget for the 2024/2025 fiscal year, but the manner in which it intends to close that financing gap is causing consternation. 

The national treasury wants to impose a five percent levy on any gains on non-business assets, such as private company shares, land in cities or municipalities, rental property, and disposal gains that are not from someone’s primary residence. 

The government does not, however, target gains from involuntary non-business asset disposal, like those obtained through auctions, court orders, mortgages, divorce settlements, or spousal separation agreements. This tax is regarded as the final tax and is levied independently of all other taxes imposed by the Income Tax (Amendment) Bill, 2024. 

If this tax is not paid within 15 days following the sale or transfer of a non-business asset, the taxpayer will be penalised with interest. It is designed so that, within 15 days of the disposal date, the person selling a non-business asset must notify the Commissioner General in writing of the sale’s specifics.

Real estate developers, however, argue that if it is added to the current tax laws pertaining to stamp duty, property transfer taxes, and rental income tax, it would tremendously shrink returns from businesses already struggling.

The tax regime
When transferring ownership of a property from one party to another, the buyer is required by the property transfer tax to pay the taxman one percent of the property’s value. Property owners must also pay the taxman 20 percent of their gross rental income in order to comply with rental income tax regulations.

Additionally, a stamp duty of one percent of the property’s value and 0.5 percent of the buyer’s annual rent is applied to property sales agreements. In the event of a lease, the sublease tenant is responsible for paying this tax. 

“Every year, there is always a new tax on real estate. There should be some stability in the sector because uncertainty is growing, and when this arises, owners of properties and developers push that cost to the consumer. When the cost of land goes up, the cost of housing then goes up as well,” said Ms Shirley Kongai, the president of the Association of Real Estate Agents Uganda (AREA-U).

Real estate data shows that the value of its products is already up, and for the past five years or so, the majority of Ugandans have been unable to afford to buy or rent a home within their disposable incomes, as a result.

Economists contend that the reason for the sharp increase in the price of real estate, including land and houses, is that many people have been driven to invest exclusively in real estate. This is as a result of the lack of experience with investing in assets that would appreciate the value of their investments like treasury bonds.

Challenges galore
They observe that over time, as a result of the ever-increasing demand for properties. Consequently, the value and prices of the properties have risen to levels that most Ugandans cannot afford. 

“When you have a tax on the transfer of assets when I am not doing a trading activity, it will go beyond the principle of taxation because there are so many people who are merely keeping their retirement money in the form of real estate assets,” Mr Mark Ruhinda, a tax lawyer, said on our sister television, said NTV on April 3, adding: “For instance, when they sell their homes and use the proceeds to buy another, the government will take a portion; yet it’s what they will use to get a new home. That’s overreaching, to me. I don’t think it’s a good tax in that sense.”

The real estate sector is already grappling with financing. Banks don’t want to lend to it because of the associated loan defaults and low occupancy rates. If the green light is given, interest rates of  above 20 percent beckon. To compound matter, data from the National Statistics House illuminates high input costs used in civil engineering and works. 

The yearly construction inflation inputs in civil engineering or works to February 2024 increased by 1.1 percent, according to figures from the Uganda Bureau of Statistics (Ubos), from 0.4 percent in the year to January 2024.

“The cost of construction, land, and, of course, taxes, plus the infrastructure we need to compute with properties like roads, water, and electric power, is already high. The cost of capital is also high. All these have made it hard for developers to even set up affordable houses,” said Ms Kongai. 

“Our land tenure system is already impacting prices. For instance, in most parts of Kampala, you have to compensate the owner with 40 percent of the value of the property. This escalates the price of properties because the price of land is already expensive. The real estate developers calculate the amount of money they will stay with and at times speculate on prices,” she added.

Double taxation
The new proposed taxes, particularly the one meant to be levied on disposal of non-business assets, are crafted in such a way that they will be a final tax, which many tax experts are referring to as “double taxation.”

For instance, they contend that despite the fact that real estate developers already pay an annual corporate tax, which is a 30 percent levy on top of the tax on the gross income from their trading activities, the five percent proposed tax won’t be eligible for tax credits, and this will be hard to deal with. This type of amendment Bill was proposed in 2023 and sought to impose withholding tax; however, in its revised form, it does seek the final tax, which is a taxable amount that cannot be offset in any way.

Real estate researchers believe that this tax’s design prevents people from accumulating assets or even from moving into the middle class because it would likely result in higher prices for land, homes, commercial buildings and many more. They now attribute this “mayhem” to the absence of a thorough regulatory framework that the industry can rely on to save it when it comes to imposing limits or levies that are perceived to only undermine it. 

“The law is going after non-traders, and the national Treasury shouldn’t be taxing non-trading activities. If I am not earning income in the sense of trading, then I shouldn’t be taxed; that’s one of the principles of taxation,” Mr Ruhinda observed.

Along with other issues plaguing the real estate industry, this tax is believed to make Uganda’s housing crisis worse. The other issues include bank reluctance to lend money, the land tenure system, the high cost of construction, as well as the increasing urbanisation that is pushing more people into towns and likely contributing to the growth of slums.

Stalled progress
Research outfit Centre for Affordable Housing Finance in Africa (CAHF) observes that the cost of houses in most parts of the country is expensive. The most affordable new home, it adds, is too costly for the average teacher or police officer with the mortgage they could secure. As a result, some 10,000 people live in slums of Kampala.

On the one hand, housing investors contend that if they go above and beyond to build standard houses for the public, they will undoubtedly command a premium due to the high establishment costs involved. 

Habitat for Humanity data shows that 2.4 million Ugandans lack housing units, of which nearly 1.4 million are in rural areas. And an estimated 900,000 units in the country are substandard and in need of replacing or upgrading.

A contributing factor to the ongoing scarcity of good quality housing is the current building practices—approximately 90 percent of homes are self-built, typically piecemeal over many years, leaving many cities full of incomplete structures. The high cost of borrowing to the sector has also deterred large housing projects. 

This is in addition to the dearth of land titles that control supply and raise costs. Developers must have this documentation before they can begin construction; otherwise, they run the risk of losing their entire investment.

Ambiguous titles make it more difficult for people to borrow money because banks will typically decline to make a loan against a property they own on a susceptible document.

Although mortgages are considered a good alternative, real estate analysts point out that they have drawbacks, such as interest rates that range from 17 to 20 percent. Some banks have even shortened the repayment period to five years. Rules cap the minimum repayment period to at least for 10 years. Little wonder, CAHF data shows that there as many as 7,000 mortgages are outstanding.

Creditworthiness 
The few uptake of mortgages—let alone their successful servicing—speaks to the fact that Ugandans lack properties that banks typically accept as collateral.

Some industry participants, such as the National Housing Construction Company, point out that the banks’ lack of cheap money to lend out is another reason for their overstretching.

“The lands sub-sector in the budget is not allocated funds for development and incentives and yet it’s the one that houses the people. You need to incentivise the developer through banks on relatively low interest rates like the way the government borrows to make roads at very small interest rates. Here, many cheaper housing units will be affordable for the population,” said Mr Kenneth Kaijuka, the chief executive officer of National Housing and Construction Company Uganda (NHCC).

The real costs involved can only be realised when taking into account the cost of the property, he contends, but, on average, people who look at their prices assume they are not built for what many people can afford.

Comparing it piece by piece, Mr Kaijuka stated that the cost of land for an ideal real estate property, such as a house, is approximately 10 percent; value-added tax is 18 percent; infrastructure costs, such as building a road or installing electric power racks, are 30 percent; and bank financing accounts for 20 percent of the property value. 

“It’s not that developers are inflating property prices. The costs involved are so many and many countries have helped their real estate sectors like providing land to it, incentivising financing which has helped their sectors develop tremendously,” he noted.

Relative to the population growth rate of three percent per year, NHCC data indicates that approximately 300,000 units should be established annually; however, only 80,000 units are actually constructed.

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