Nigeria’s housing sector, which growth ought to be a major driver of the nation’s socio-economic development, is losing its potency as a result of unfavourable tax policies, among others.
Understandably, this has become a source of grave concern to the nation’s real estate professionals, who believe the policies of government in this segment, particularly on taxation, are not in lockstep with official pronouncements about reducing the nation’s huge housing deficit through deliberate policy and financial interventions.
In 2017, Vice President Yemi Osinbajo came to a conclusion that Nigeria’s housing deficit was unacceptably high, stating that the government alone would be unable to provide all the housing needs of its citizens.
Specifically, the vice president stated that “As at 1991 when the National Housing Policy was promulgated, Nigeria was said to have a housing deficit of seven million units. For close to a decade now, the figure has been put at 17 million, thus putting to question the reliability of these statistics.
“However, what is obvious is that the deficit in housing requirement is unacceptably high. Despite the various policies and strategies adopted by the Federal Government aimed at combating the housing problems of the citizenry, not much has been accomplished.
“Sadly too, this also applies to the states and local governments. This phenomenon has given rise to unprecedented urbanisation resulting from high rural-urban migration which has created large demand for affordable housing accommodation and has given rise to slum population in the urban areas and inadequate infrastructural facilities in the rural areas.”
Osinbajo said, “The National Housing Programme of the present administration demonstrates a clear commitment and decisive intervention by the Federal Government to make significant and lasting changes to the sector, through the construction of houses in all the states of the federation, under the supervision of the Federal Ministry of Power, Works and Housing (now Ministry of Works and Housing) on a continuous basis.”
This promise is yet to be fulfilled and just as real estate professionals were beginning to bemoan the debilitating housing gap, the government, a few weeks ago, slammed the housing sector with the contentious stamp duty requirement that was ordered by the Federal Inland Revenue Service (FIRS), obviously blindsiding the Ministry of Works and Housing in the process. Since the new tax was announced, efforts have been made, unsuccessful though, to get the minister to reassure the real estate community that the stamp duty regime of the FIRS would improve the nation’s housing stock.
How taxation should work
Real estate professionals have reached a conclusion that the FIRS’ stamp duty would be counterproductive and would add to the pile of such multiple taxes the government imposes on property transactions.
According to a real estate professional, Oladotun Olatunji, “The story today is that Nigeria has 17 million housing deficit, some say 20 million, and everybody is saying one minute I want people to invest more in property, we want more houses to be built and stuff like that. What is supposed to happen is for the government to create the enabling environment that would help bridge the housing gap.
“Taxation is something that is regressive and progressive. For example, if someone is smoking or drinking too much alcohol and you want to prevent excess smoking and drinking of alcohol you will introduce excise duty or increase tax to make it regressive. When you want to encourage something and you want more of it, you will introduce progressive taxes that give discount and make it less likely to discourage people to invest.
“So now in one breath, the government is telling people to invest in property and are now turning round to say that anyone that is a landlord that has invested in property and is now renting out to the common man should be charged stamp duty. That is a regressive tax; it doesn’t meet with government policy or alleged government political policy. When they were campaigning, they promised to build houses, till today you have not built houses, and you go ahead to tax the few houses that somebody has built, which you didn’t put one kobo into -the man put his own borehole, his own generator, and his own security.
“He built everything himself and you now turn round and say you want to collect tax on it. Remember that in the money he used to build it, he has already paid tax, VAT, and everything else and now you are turning round to say that you want to charge stamp duty on it, regardless of it being 0.5% or 1% or 2%, it’s wrong.
“I can understand if you say you want to charge anything above N1 million but to say that whether it’s N2,000 or N7,000 or N400,000 per annum is unacceptable.”
He said, as things stand, real estate investors may just decide to seek other investment portfolios. “Now, if I take my money and put in fix deposit in the bank and I don’t do anything, nobody’s going to charge me stamp duty. So, you are indirectly telling people that when you have excess money, don’t invest in real estate. That’s what you are saying. You have already chased us from the stock market, and the best bet now is that I take my money, buy dollar and put under my mattress and I’m better off. “And the third option is that I forget about property development and do nothing. So, forget about asking whether it is 2% or 3%.”
He said the federal government’s action would stop the rental of properties in Nigeria and would kill the market, saying “We already have VAT, we have income tax, we have cooperate tax, even lorries that drive on the road are taxed, every transporter is part of a union, and suppliers’ association. There is no tax that will be introduced in Nigeria that people will not complain. “When we introduce taxes in Nigeria, these taxes must be equitable which means that when you introduce a federal tax it must apply all over the country. When you come out with a stamp duty tax on rentals, indirectly what you are saying in effect is that three states are going to provide over 95% of all the tax, so it’s not an equitable tax to introduce because Yobe State and Zamfara State will not pay and how much is rent in these states? Even a poor man in Lagos State pays N400,000 in rent, so stamp duty is not an equitable tax, it is a tax that, from day one, we know the government wants to use to collect money that it would share to the 36 states and the FCT. It is not a good tax.”
What can work
Real estate investors believe that the stamp duty proposed by the FIRS would have challenges with compliance since the nation has largely informal property market.
A property investor and broker in Abuja, Malam Mukthar Mohammed said, “In the informal sector, the cost of collection of tax is high, the rate of compliance is low. When you have a generally low compliance rate in the economy, your question would be, do I go for an industry with high level of compliance higher than the general level of compliance or do I go for lower than general compliance?
“So, this is an industry that is going to have low compliance and this kind of situation always existed where people refused to comply with tax payment and “now, what makes you think that they’d pay stamp duty?”
He explained that stamp duty would be collected by a state government on a property transaction if it is between individuals but that the federal government would come in if the transaction is between corporate entities, adding that the federal duty had limitations on account of the lease, which is subject to registration in the state.
“A lease can never be registered at the federal level, so they should think about the entire thing strategically. They can try and impose it, they can scream and shout that they have all the power, but it only shows that they don’t know what they are doing.
“The only solution for Nigeria for better housing is to drive a long-term rental strategy, which means that you have a cooperate company that is going to build one thousand houses and they will now rent out to people as cooperate landlord that will not give you eviction notice, and he will beg you to stay.”
He said, “Internationally, property development is a clear cut thing, it’s not that somebody would just wake up and decide to build whatever they like. What happens is that the local council or government will come and say that a particular district has been zoned, we are creating new towns. So they will zone the entire area and say this is where the school will be, the cemetery, the stadium, the high road is here, the mechanic village, light industrial area, the port is here, everything they’ve zoned everything.
“They will have the water treatment plant, the power plant, the exit and including all the roads and all infrastructures needed for construction of houses. After that, a property developer like me will set up the company and call the trade union and say you come and take 5%, NUC take 5%, I will call pension firm come take 5%, then I will call insurance company come take a per cent, then I will call a cooperative to take a per cent as well, then I will call the bank, the bank will also take something, then I call two or three developers to take. So that way, nobody owns maximum more than 20%. Then another developer will take the same thing and I too will take a share in his own. So, instead of having 100%, I will have 20% here, 20% here, 20% in five projects. So my concentration risk is reduced, then people like me can get involved in large scale projects because all of us will cooperate for electricity, for road, for water, for schools and for everything.
“Now, if we don’t do that, the current situation in Nigeria is that you will find me in the village, I will meet one area boy, buy generator, and dig a borehole. Do you think I will build one thousand houses or 50 houses? So from a pyramid point of view, the government has to come together. For instance, Ogun State government will zone an area, make a ring road, they will sit down with Lagos State, Oyo State, and all of them will agree on what they want to do. And all of them will develop on it and, as I said, the poor man may not afford to buy, but you must allow that poor man make a rental agreement that gives him peace of mind for the next five to 10 years and, as the landlord, I am not begging people to come and rent my property because I know he’s committed, so poor people don’t have to buy it.
“So, that is the way out for Nigeria, for us to provide long term housing for everybody. These people who are in this stamp duty business are penalising people that have long-term rent instead of people with short-term rent. That means that as a government policy, they have now decided that they want everybody to do short-term rent and that’s indirectly what they want. So, the point I am making is that they don’t know what they are talking about.”