What’s Proposed in Finance Bill 2025

Kenya’s Finance Bill 2025 is introducing several tax and regulatory changes that could significantly affect developers, homeowners, investors, and the affordable housing sector. Key proposals include:

• Reintroduction of 16% VAT on certain construction materials previously exempt, particularly those used in affordable housing. (BuyRentKenya)
• A new 0.3% annual property tax on the market value of urban residential properties. (BuyRentKenya)
• Removal of investment incentives, such as the reduced corporate tax rate for large developers and full investment deductions in special zones or less developed areas. (ke.andersen.com)
• Limiting how long developers or businesses can carry forward tax losses, restricting them to five years. (KPMG Assets)
• Shortening VAT refund windows, tightening offsets, and increasing audit timelines, especially for refunds on bad debts. (EY)

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Key Impacts for Real Estate Stakeholders

Rising Construction Input Costs

Applying 16% VAT to previously exempt construction materials—cement, steel, roofing, interior fittings—will increase costs for developers. For affordable housing projects, which rely heavily on keeping input costs low, this could lead to:

• Project delays or scaling down of unit numbers.
• Marginal increases in home prices to cover cost overruns.
• Pressure for better procurement efficiencies, local sourcing, or revisiting project budgets.

As noted in the Sectoral Economic Impact analysis, the proposal risks undermining the affordability of homes built for low- and middle-income Kenyans. (ke.andersen.com)

Ownership Costs & Rental Implications

A new national property tax of 0.3% adds recurrent cost for homeowners. In cities like Nairobi, Mombasa, or Kisumu, this means:

• Higher cost of ownership. Homeowners may face increased annual bills.
• Landlords might pass on some of the cost in higher rents.
• Renters or buyers in mid-income brackets may feel squeezed, especially if other costs (interest rate, utilities, maintenance) also rise.

Investment Incentives Removed

Previously, developers building a large number of units (often 400+ annually) could benefit from reduced corporate tax rates. Also, projects in Special Economic Zones (SEZs) or underdeveloped areas often qualified for investment deductions (including upfront full deductions). The proposed repeal means:

• Developers will pay higher corporate taxes for large-scale housing projects.
• Investors may see reduced returns or decide not to invest in less developed counties, due to loss of tax relief.
• The incentive to decentralize housing development (away from Nairobi, for example) may weaken.

Tax Loss Rules & Cash Flow Strains

Limiting carry-forward of losses to 5 years has big implications:

• Real estate developers often incur losses in early years (land acquisition, servicing, infrastructure, finishing). If these cannot be offset beyond 5 years, tax burden increases.
• Long-term projects, including those under public-private partnerships (PPPs), may become less viable.
• Smaller developers or those without deep capital reserves could face cash flow difficulties.

VAT Refunds, Offsets, & Compliance Risks

Changes in VAT refund windows and stricter audits will affect cash flows:

• Delays in refunds or tighter conditions could tie up capital that developers need for ongoing construction.
• Reduced ability to offset input VAT or carry forward excess VAT may raise working capital needs.
• Increased audit risk and compliance burdens, especially on smaller or mid-sized firms.

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Additional Verified Proposals and Sectoral Responses

From tax experts’ analyses:

• The Bill aims to delete certain VAT exemptions in sectors including housing, energy, and healthcare, meaning many goods or services that were zero-rated or exempt will move to standard VAT status. (Bowmans Law)
• The Export and Investment Promotion Levy (EIPL) on imported building material is being reconsidered. There is discussion around reducing it, given that high levies hurt construction cost competitiveness. (The Eastleigh Voice News)
• On refunds: VAT on bad debts would see a shortened claim period (from 3 to 2 years), and deduction or offset rules are being tightened. (KPMG Assets)

Broader Economic & Policy Implications

Affordable Housing Goals at Risk

The government has made affordable housing a priority, but these tax changes may undermine those goals unless counterbalanced carefully. If input costs and ownership costs rise, the gap grows between what intents programs like AHP can provide and what people can afford.

Investor Sentiment & Real Estate Flows

• Local developers and foreign investors will likely reassess the risk-return calculus. Projects in less mature markets (counties, rural areas) may lose appeal if incentives fade.
• Financing costs, equity returns, and project valuations may adjust, possibly reducing appetite for large housing projects without clear tax benefits.

Fiscal Revenue Goals vs Sector Health

These proposals are part of the government’s broader plan to increase the tax base, raise revenues, and manage public debt. Analysts from KPMG and Grant Thornton point out the need to balance:

• Revenue generation, with
• Maintaining incentives for construction, housing supply, and investment.

If too many reliefs are removed or taxes raised too sharply, real estate activity could slow, reducing construction sector growth and employment. (KPMG Assets)

Possible Sectoral Adjustments

Some developers are reportedly negotiating for phased implementation, transitional arrangements, or carve-outs. For example:

• Retaining some VAT exemptions until a certain date (e.g. June 2026) to give time for project pipelines already committed. (Grant Thornton Kenya)
• Special treatment for affordable housing projects, or those with social/strategic criteria.

What Developers, Buyers & Homeowners Should Watch

1. Project Feasibility Studies – All developers should recompute project costs factoring in VAT on inputs, national property tax, and higher corporate tax rates.
   
2. Pricing Adjustments – Buyers may face increased home prices or rents. Developers may need to adjust deposit structures or financing schemes.
   
3. Eligibility & Incentives – Monitor status of special zones, whether SEZ-based deductions are maintained or repealed, and whether affordable housing retains favorable status.
   
4. Timing & Transitional Provisions – Transitional windows (if any) will matter. Those with projects already in motion may benefit from grandfathering or delayed application of changes.
   
5. Negotiations & Lobbying – Real estate associations, developer groups, county governments may push amendments to protect sector growth or maintain reasonable incentives.
   
6. Regulatory Compliance & Reporting Costs – Tighter audits, stricter VAT rules, shortened refund windows mean developers need good accounting, cash flow planning, and compliance adherence.

Summary: The Balance Between Tax Policy & Real Estate Growth

The Finance Bill 2025 could reshape the real estate landscape:

• It raises costs for many stakeholders—developers, homeowners, landlords—through VAT, property taxes, corporate tax changes.
• It removes or reduces incentives that have encouraged investment, especially in affordable housing and less developed parts of Kenya.
• However, part of the rationale is fiscal consolidation, increasing revenue, and equity in tax burdens.

Success will depend on how well the government implements transitional arrangements, supports affordable housing, and avoids disincentives that could slow housing supply or increase the housing affordability gap.

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By: Montel Kamau

Serrari Financial Analyst

11th September, 2025