Effect of New Rules on Real Estate Market

Beaufort Ridge

Beaufort Properties new development in Ridge

Due to the government’s debt load and the related depreciation in the cedi, the Bank of Ghana (BoG) has imposed new foreign exchange controls to halt the cedi’s depreciation and the government has raised taxes to generate more revenue to meet their obligations.

Conversations with friends involved in the real estate market recounted how these new rules are affecting their business.

In January, the government raised the VAT levy from 12.5 percent to 15 percent.  This charge also involves a National Health Insurance Levy of 2.5 percent.  The NHI levy did not change.  Thus, the levy went from 15 percent to 17.5 percent.  More important than the rate increase was how the VAT’s scope widened to include the following businesses:

  • Banks
  • Insurance
  • Estate developers (real estate developers)
  • Companies involved in the manufacture or supply of pharmaceuticals
  • Gyms and spas
  • Domestic airlines
  • Transport and haulage

What’s striking is that all of these business activities were previously not taxed. (VAT has long been applied to the retail and restaurant businesses.)  You could say that Ghana used to have a low tax burden.  Even if that was true, the new VAT rules are a bit of a shock to consumers.

New Foreign Currency Rules

Many people have multiple types of accounts at their local banks.  Typically, you will have an “on-shore” checking and savings account for cedis much like you would have in the US.  You may also have an on-shore foreign currency account which allows you to receive foreign currency within Ghana.  You may also have an “off-shore” foreign currency account(s) which allows you to receive and send foreign currency from abroad.  Each of these accounts will be denominated in the currency of your choice: dollars, pounds, euros, CFA.

In February, the BoG imposed new rules to halt the cedi’s depreciation.  These include:

  • Except for travel purposes, withdrawals out of foreign currency accounts over the counter will be paid in cedis at the existing exchange rate.
  • Banks can no longer issue checks on these foreign currency and foreign exchange accounts
  • Banks cannot provide foreign currency denominated loans or facilities to customers who are not foreign exchange earners
  • Prohibits offshore foreign deals by resident companies, including exporters in the country.  I think this means that Ghanaian companies/exporters cannot do transactions outside of the country — seemingly beyond Ghana’s boundaries
  • Except for the first $10,000, individuals cannot transfer money outside the country without proper documentation. (I thought this rule was already in effect; perhaps oversight has been tightened.)
  • All products and services must be posted and transacted in cedis.  Many developers regularly flout these laws by advertising prices in dollars.

Rental Market

Unfortunately, rent does not qualify to be sent out of the country — even with documentation.  In other words, say you are a British Ghanaian living in the UK and also own a house in Ghana.  You hope to rent out the house for $4,000 per month.  You sign a lease with a tenant and receive $48,000 rental income.  Those funds cannot be sent out of the country.  These restrictions should help halt the selling of cedis and demand for foreign currency.  But if you’re a foreign owner, then how do you take your money out?

Becoming More Tenant Friendly

In Ghana, there are many laws but few are actually enforced.  For instance, the Rent Act states that landlords can only take 6 months of rent in advance.  Many landlords seem to ignore this rule and demand rent 1-3 years in advance.  Frequently, once you pay your rent it can be very difficult to have your landlord pay for repairs and maintenance.  After all, you have lost all financial leverage over your landlord with your advanced rent payment.  Anecdotally, I have heard that the government wants to encourage tenants required to pay years of rent in advance to report their landlords to the government.

Sale Market

The Value Added Tax of 17.5 percent is applied to sale of residential and commercial real estate – “immovable property” – by estate developers.  This means that Beaufort Properties’ 3 BR apartment offered for $377,000 is now $442,975 inclusive of VAT.  Yikes! I believe real estate transactions in the US do not involve a sales tax.

Summary

All these new rules introduce greater uncertainty into the Ghanaian market.  Over the last few months, insurance companies and banks have contested the new VAT rules and/or sought greater clarification.  Business owners prefer a stable regulatory and tax environment.  These new rules create uncertainty and have impacted margins because not all vendors can pass the additional taxes onto their customers.

As a tenant, I think these new rules make the Ghana real estate market more attractive.  Anecdotally, I’ve heard that landlords are reducing their rent expectations and become more accommodating to prospective tenants.  Foreign tenants seem to have more negotiating power and are demanding landlords to provide shorter lease terms, e.g. 6 months instead of 1 year in advance.

For prospective real estate investors, I think you have to question the rental yields that developers are promising.  (Rental yields are around 10-11 percent.)  As more apartments enter the market (supply increases), landlords may not be able to achieve the rental rates they have grown accustomed to these past 6-8 years.  More importantly, are you comfortable leaving your money in cedis in Ghana?

Cedi has depreciated 21 percent since the start of 2014

Cedi has depreciated 21 percent since the start of 2014. It is Africa’s worst performing currency

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