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Real Estate Transformation: Impact of Land Based Taxation

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CEM REPORT | The transformation of the Real Estate Sector was the central focus of stakeholders that assembled at the Real Estate Stakeholders Meeting put together by the Lagos Business School Alumni Association, (LBSAA) which took place 25th August at the Sheraton Hotels Ikeja.

The stakeholders meeting, themed “Real Estate as a tool for Economic Transformation”, was anchored by Dr MKO Balogun, MD/CEO Global Properties and Facilities Limited who is also an Alumnus of the Lagos Business School

For Mrs Uzo Oshogwe, MD/CEO Afriland Properties Plc, the enabling environment that government should provide to support the growth of the sector is very much in deficit


Uzo Oshogwe, MD/CEO Afriland Properties Plc

According to her presentation that resonated from personal and practical experiences, the current practice of land based taxation, is impacting the Real Estate Sector negatively whereas if properly organized and structured transparently, it is supposed to impact it positively and enable it to thrive.

Central to her presentation was the polarity that surround taxes in the real estate sector that developers grapple with on site and off site. While this does not affect the real estate alone, its impact is more constricting in the home provision sector of the economy.

“The government and everybody need to pay more attention to real estate. It is time to give oil a rest and begin to look at other areas such as real estate.

“Main focus is how the government can build an enabling environment for investors and citizens like ourselves to make the money from what we have in abundance. Real estate is one of the areas we can invest in.

“Land based taxation and how it can actually help the real estate to grow in Nigeria need some attention. Real estate can actually be a tool for economic transformation”; Uzo said

The current level of contribution to the nation’s Gross Domestic Product by the real estate sector is still far behind in single digit while some other countries are having contribution in double digits by their real estate sectors.

According to data from the Nigerian Bureau of Statistics, real estate growth has been between 5% and 7% and have not exceeded that, whereas, according to Uzo, real estate in Egypt is contributing 15% to the country’s GDP. In Spain, it is 17%, while in Germany      18%, UK is 20% and US is 20% also.

“Tax is a major factor determining the level of Real Estate in Nigeria. Those of us in this hall know how much has gone into taxes. From legal fees to other land based taxes. In Lagos for instance, they are quite a number. Just get to site, and you will receiving different visits from different agencies.” Uzo said

Uzo expatiated how this impacts the development of properties and the sector at large; “Think of it that you have already developed a model for your investment and you have probably been expecting like 25% IRR. Someone will just show up to demand certification for drainage, another one will come for sewage certification, another for something else and they keep coming.

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“By the time the operational cost has become so high, the initial IRR of about 25%, will have to come down to about 10% or 5%, it becomes more profitable to simply put your money in bonds and save yourself some stress.

“That reduces the number of those that are building leading to the low performance and reduced contributions to the GDP. The bottom line is that there is no drive to actually invest money in the real estate.”

The increase in operational cost is partly responsible for the cost of properties Nigeria since the developer will have to pass down to the final buyer or occupant the additional cost from multiple taxes.

“The tax system is polarized that for a property you will have to deal with the local authority at the beginning and then you deal with the State at some point and Federal at some other point. All comes to the final cost of the property which is passed down to occupants.” Uzo Oshogwe lamented

It is obligatory for businesses to pay tax and so the real estate sector cannot be exempted and stakeholders are not condemning payment of taxes either. However, the mode of collection and what the taxes are used for are the critical issues

“In developed countries, you pay taxes and you see what the taxes are doing. There are processes that ensure that the right amount is paid.

“What are the capacities of these agencies collecting the taxes in Nigeria? Many of taxes paid cannot be accounted for. Many of them are collected without receipt. We are talking about accountability and capacity of agencies to collect taxes”; Uzo said

According to Uzo Oshogwe, the solution to this discrepancy and polarization in tax collection lies in development and deployment of technology rather than somebody just issuing you a letter to pay tax. Technology streamline processes, ensure even compliance and guarantee accountability to a good extent.

Following advancement in real estate in recent years, suitable technology are now available in other climes which can be adapted and adopted or outrighly developed in tune with our terrain and level of activities in the sector.

As it currently stand, some people are paying taxes while others are not having been able to find their way to invade it. What happens to them that are not paying? But if technology is deployed the way it should, there would be appropriate penalty for defaulters.

A core challenge in deploying technology in Nigeria is the resistance or sabotage as is playing out in the power sector. Streamlining collection of land based taxes will definitely weed out illegal agencies and dishonest individuals that benefit illegally. This constitute obstruction to smooth application of technology and require the commitment of government authority to scale through

Uzo concluded thus; “the truth is that if the return on investment in real estate doesn’t make sense, nobody will want to do real estate the way it should be done.

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