Financing Options and Growth Rate of Real Estate Development Companies in Kenya

Abstract

Financing decisions have been a challenge to real estate developers in Kenya. This has been attributed by capital intensiveness of the projects. It is anticipated that real estate sector should develop at the same rate compared to the demand. In Nairobi County the annual demand is Two Hundred Thousand houses whereas the units supplied is Fifty Thousand on yearly basis thus outlining a deficit of One Hundred and Fifty units. Past studies shows that where a healthy financial market triumphs, investors have options for projects funding. This current study seeks to establish the effect of financing option on real estate growth in Kenya. The specific objectives were; to establish the effect of mortgage financing, retained earnings, private Equity, joint venture and moderating effect of firm size on relationship between financing options and growth rate of real estate development companies in Kenya. The study was anchored by the following theories namely: lien theory of mortgage financing, pecking order theory, transaction costs theory, resource dependency theory and housing cycle theory. The target population of this study comprised of all the seventy-two companies who are members of the Kenya Property Developers Association (KPDA). The sample size comprised of twenty three companies. This study used descriptive research design with a regression model with the regressor being real estate growth rate which was expressed in growth rates of housing units for each firm. Therefore, this study followed panel data analysis as individual firm data was collected for a time span of five years 2014 to 2018. Results showed that mortgage financing positively but immaterially affected growth rates of real estate development companies in Kenya. Further results showed that retained earnings as source of financing option reduced significantly growth rates of real estate development companies. Private equity was found to improve growth rates of real estate development companies positively. Joint venture too positively but inconsequentially influenced growth rates of real estate development companies in Kenya. Lastly, firm size was found to be a non-moderator but rather an explanatory variable and impaired growth rates in a significant manner. Private Equity had significant influence on growth rate hence it was highly recommended for consideration in housing development.