Potential investors in property are being offered a significant incentive to purchase properties in specific urban areas, termed urban development zones (UDZs), in cities around South Africa.

Investors who buy commercial or residential property from a developer within a UDZ and thereafter let it at market rates can write off a portion of the purchase price against income provided certain conditions are met.

The tax incentive was introduced by the government in order to stimulate regeneration in urban areas that were otherwise decaying. It applies to the erection of improvement of buildings or portions of buildings as well as to the purchase of such buildings from developers.

Investors can take advantage of this ‘UDZ allowance’ to maximise their returns if they comply with the requirements of the legislation, the most onerous of these requirements being that the buyers must use the building solely for the purposes of their trade. This ‘trade’ may be interpreted as including letting the property at market prices.

In the case of a building or part of a building purchased from a developer, 55% of the purchase price may be claimed in terms of the allowance if the building is new, and 30% in the case of a building improved by the developer.

The UDZ allowance is allowed over a five-year period.