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Monday Aug 04, 2014

Property tax incentive turned Cape CBD around

One of the main considerations spurring development in the Cape Town CBD is the urban development zone (UDZ) tax incentive, which provides major incentives to develop new properties and redevelop existing buildings.

According to Rob Kane, chairman of the Cape Town Central City Improvement District, the UDZ tax incentive is an excellent initiative.

Introduced by the National Treasury in 2003, the purpose of the tax incentive is to promote urban development and regeneration through an accelerated depreciation allowance for new builds or the refurbishment of existing buildings. Commercial and residential developers qualify in the zone corridors.

'If an investor buys a rundown building in the UDZ corridor for R5 million and spends R20m bringing it up to date by repairing the structure, upgrading outside parking, implementing a thorough and sustainable energy-saving upgrade, as well as all the technological bells and whistles that a modern building needs to be competitive in a thriving city to conduct retail business, then that investor can deduct 20 percent a year of the R20m refurbishment and upgrade costs over five years once the building is in use,' says Kane.

'This means that the owner can write off R4m to tax every year for five years. Only the initial R5m property purchase cost does not qualify for the UDZ tax incentive.'

The incentive also applies to residential property, which in turn could be supplied to the lucrative rental market, so this could enable more affordable housing options to be developed, particularly on existing land in and around the central city.

More affordable housing in the central city would bring with it more people and more economic growth. When paired with an inclusive view towards how Cape Town's property market should develop, the UDZ can potentially play a huge role in making the central city's housing market more integrated and diverse, says Kane.

'The UDZ incentive maintains that refurbishments must preserve a substantial part of the building's existing structural or exterior framework. Therefore, to qualify for this accelerated refurbishment tax write-off, building extensions and additions must be merely incidental to building refurbishments.

'The UDZ tax break also applies to new builds such as the Portside tower at the bottom of Bree Street. Built at a cost of R1.6 billion, the owners will be able to write off 20 percent of the building costs in year one and 8 percent a year in the remaining 10 years for income tax purposes.'

He says the SA Revenue Service (Sars) has been innovative by offering this tax write-off against t he developer and buyer's combined tax bill, ensuring that the full write-off can be achieved.

'We believe many people have forgotten, or may not be aware, that the UDZ incentive exists, or that Sars has extended its use until March 2020. It was instituted when the country was in desperate need of investment and redevelopment, but because we've been through a challenging economic period in line with the global environment, investor confidence has been slow on the uptake of the UDZ incentive overall,' says Kane.

With the constant improvement of services and environment in the central city, coupled with a drive to create business and job opportunities, investor confidence has helped to spur development in the CBD.

'Each new development adds strength to the central city, and boosts investor confidence. This area has become a good bet for investors, but there is still a lot of room for more investors to take advantage of this offer, particularly right now in the residential sector as there have been no new developments in this area in years and yet demand is now high. All potential investors need to do is to acquaint themselves with the scheme and the UDZ-demarcated areas. It's a win-win situation for investors and the government. Through capital investment by the private sector, the government is able to realise its goal of revitalising commercial and residential buildings in business districts that were previously at risk of decentralisation.'

Stevie Coetzee and Michael Butler of PricewaterhouseCoopers (PwC) confirm that in recent years the accounting firm has helped a number of property owners in the Cape Town urban development zone to comply with the tax requirements to enable them to claim this favourable tax incentive. They say that key factors to be considered in determining the relevant incentive write- off amount and period are the nature of the costs incurred ( s uch a s a new bui l d i ng, improvements to an existing building or low-cost residential units), whether the owners are incurring the costs themselves or whether the building is bought from a developer, and the use of the building by the owner (for instance, for trade or personal use).

They also say that the UDZ scheme is an excellent example of how the National Treasury has used tax incentives to influence behaviour and to help reverse the urban decay in the CBD to ensure it did not go the way of the old Joburg CBD.

The latest investment report published by the Central City Improvement District (CCID) - the State of Cape Town Central City Report: 2013, A Year in Review - estimates the current value of property in the CBD at around R24 billion.

As a result of developers using the UDZ, Kane suggests that the face of Cape Town's central business district is set to change substantially in the next three to six years, with much of the development focused in the Foreshore area, bringing it in line with the rest of the central city's growth trajectory.

'The central city is experiencing an unparalleled level of economic development and investment, as well as a thriving new residential and entertainment lifestyle element that simply wasn't here a few years ago,' says Kane.

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