Urban Development Zone Tax Incentive
In October, the cities of Johannesburg and Cape Town announced an
'Urban Development Zone' tax incentive for investment in residential dwellings in specified urban zones. The incentive takes the form of a tax allowance covering an accelerated depreciation of investment made in either refurbishment of existing property or the creation of new developments within the inner city, over a period of five, or seventeen years, respectively. So, if a landlord or investor decides to refurbish a residential building within the zone and it costs, say R5m, he or she can write off one million rands per year for five years - the whole cost of the refurbishment over the five year period.
The focus of the incentive is on areas where low income households live, so that better quality, affordable housing is developed in good locations for poor people. While there has been progress in regenerating these areas, private investors and financiers have been slow in coming to the party.
The UDZ tax incentive is significant. Perhaps its most innovative feature is that the tax deduction can be claimed against any income, and not only income from the particular building in which the investment has been made. This means, for example, that a salaried individual who owns a flat or a building in the zone can depreciate their refurbishment costs against their regular income tax. This offers an enormous opportunity for the development of small scale ['mom & pop'] landlords, which in South Africa, also links to the creation of real empowerment opportunities for individuals who were previously disadvantaged during the apartheid regime. Paul Jackson, CEO of the Trust for Urban Housing Finance, a development finance organisation that provides short and medium term loans to the purchase and refurbishment of residential rental property in South Africa's inner city areas, told me about one of his clients: a woman who was formerly part of 'the Actstop Civic Association.' In her Actstop days, this woman mobilized inner city residents to resist eviction. Now she sits on the other side of the table as a landlord: she buys undervalued flats, available as sectionalized units in terms of the Sectional Titles Act, and rents them out.
These developments also offer an opportunity for lenders to develop loan products specifically targeted at the buy-to-let market for lower income investors. Although it targets residential dwellings, it is a different sort of market to the owner-occupier market, and banks will have to adjust their requirements and product features. It will be interesting to see if they think this widely as they develop mechanisms to respond to their housing commitments in the Financial Sector Charter.
