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East City aparthotel option offers tax perks to investors

East City aparthotel option offers tax perks to investors

31 January 2021

In a bid to lure buyers, developers of the R70-million mixed-use property development The Harri in the Cape Town CBD are selling the last of its 48 studios and lofts to South Africans wanting to put their tax liability to good use by investing in a Section 12J tax investment scheme.

Partnered with Anuva Investments Limited, a registered venture-capital company and financial-services provider, The Harri’s Section 12J Flyt Select Fund allows local buyers at the highest marginal tax rate of 45 % to deduct from their tax liability the full amount of a new unit in the Harrington Street development in Cape Town’s East City Precinct. Only 12 of the 48 units remain unsold, priced between R1,399,995 for a studio apartment and R2,699,995 for a loft.

“Government’s intention of stimulating economic activity and creating jobs by designing the Section 12J mechanism has been a win-win not only for local buyers, but also for us as developers,” says Jeffrey Kleu of property-development company Sepia and Silk. “We’ve been able to keep a workforce of 250 people and 10 local businesses employed and contracted, while still offering a prime opportunity for buyers in an expensive area.”

Despite the hard national lockdown enforced by the Government at the end of March last year to combat the coronavirus pandemic, The Harri continued to sell units off-plan, says Kleu. “We sold to investors wanting to buy to rent, parents buying an apartment for their student kids, or just a holiday flat.”


An artist's impression of The Harri

THE RISE OF THE APARTHOTEL

The development, which is optimally located in the heart of Cape Town’s design district, offers a blend of apartment living with open-plan, furnished co-living and co-working spaces, and includes fireplace lounges, a TV room and access to Netflix, three dedicated Zoom video-chat rooms, a rooftop terrace, and amenities like WiFi, a concierge, a housekeeping service and 24-hour security.

The Harri joins a slew of other CBD mixed-use developments that have gone the aparthotel route, including The Onyx, WINKS, The Pepperclub and the Radisson Blu Hotel & Residence. Aparthotel’s under construction include 84 Harrington Street.

According to Sandra Gordon, research economist of the CCID’s prestigious property report, State of Cape Town Central City Report, the rise of aparthotels is “an existing trend which is being accelerated by Covid-19 and repeated lockdowns.

“Properties, and thereby developers, have had to become more flexible in order to survive these uncertain times. An aparthotel is appealing in that a buyer can treat it as a personal residence or an investment, with an existing pool of units to which they can add their unit should they wish to. The property owner is thus able to tap into both the residential market and the visitor economy, thus broadening the potential market for their investment.”


An artist's impression of one of The Harri's communal areas.

TAX BENEFITS

Section 12J investments were first introduced in 2009 by the South African Revenue Service (SARS) on instruction from National Treasury. Further amendments to Section 12J of the Income Tax Act 1962 were made in 2015, sparking increased interest.

The tax incentive allows property buyers to write off their investment amount against their tax liabilities in the year in which they buy, provided that the investment is with a qualifying small-to-medium sized enterprise (SMME). SMMEs are considered crucial for economic growth and job creation. Qualifying SMME sectors include hospitality, renewable energy and manufacturing.

“We’ve set aside a pool of units at The Harri to form a part of our new aparthotel offering which will start operating from the moment we launch in May this year,” says Kleu. An aparthotel combines the best of five-star hotel amenities with luxurious self-contained apartment living. An aparthotel qualifies as a 12J investment as it meets three criteria: it’s furnished, it has a food offering (in its restaurant), and it’s let out to short-term renting guests.

A buyer’s apartment is rented out to short-term staying guests, and the income generated is put towards servicing the buyer’s bond. The buyer covers any shortfalls or retains any surplus.

And right now it’s a buyers’ market, Kleu notes. “Since we launched, interest rates have dropped from 10,25% to 7%,” he says. “This plays directly into the hands of the buyer because they’ll be paying substantially less on bond instalments, or it enables them to buy a much better apartment at a higher price point.”

Harrington Street has been at the heart of much of the recent revival of the East City, which was previously a gritty industrial-commercial area. Major developments here include the upgrading of the Cape Town City Hall at a cost of R27 million and The Old Granary at R31 million, the purchase of the Nicro head office on Harrington Street by a European company, Groupe SOS, for R30 million, and the opening of a R75-million five-star boutique hotel on Church Square.

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Tags: aparthotels The Harri East City CBD property development Jeff Kleu