Macroeconomic Determinants and Financial Performance of Real Estate Sector In Kenya
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Date
2024-03
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Kenyatta University
Abstract
The financial success of the real estate sector has played a significant role in global economies, including Kenya, where it is used as an indicator for predicting real estate demand and overall economic performance. In Kenya, the real estate industry makes up over 9% of the country's GDP, although seeing a decline in financial performance. The average uptake of real estate properties decreased from 23.3% in 2020 to 20.9% in 2021. The decline in the sector can be attributed to adverse economic conditions related to financing, a significant increase of 48.0% in nonperforming loans (NPLs) within the same timeframe, a rise in construction costs, intensified competition, and a decrease in demand due to various macroeconomic factors. This phenomenon has resulted in the loss of employment opportunities, the relocation of investors, and deterioration in overall sector performance. The association between macroeconomic aspects and the overall success of the real estate industry has garnered significant attention from scholars, leading to varying findings across different regions worldwide. Insufficient attention has been given to the examination of the impact of macroeconomic drivers on the financial wellbeing of the real estate industry in the Kenyan market. Hence, this research aimed to assess the impact of macroeconomic determinants on the financial wellbeing of the Kenyan real estate industry. The primary aim of this research was to ascertain the bearing of exchange rates, interest rates, inflation rates, and GDP on the financial performance of the real estate industry. The research was underpinned on the theoretical frameworks of real estate cycle theory, loanable fund theory, classical theory of inflation, and balance of payments theory of exchange. The research design utilized in this research was a causal-effect design. The research focused on the population of the Kenyan real estate business. The research utilized secondary data sourced from the repository of the CBK and the Economic Survey Reports published by the KNBS for the period spanning from 2013 to 2022. The data was subjected to analysis using a VAR time series regression model. This approach enabled the computation of descriptive statistics (means and standard deviations), and inferential statistics for conducting correlational analysis and VAR time series analysis. The data that was analyzed was displayed in the form of tables and graphs. Prior to doing the actual analysis, the researcher performed diagnostic tests like normality test, multicollinearity test, heteroscedasticity test, optimum lag selection, stationarity and autocorrelation for time series regression. Ultimately, strict adherence to ethical principles was ensured. The study suggested that foreign exchange, interest rate, inflation, and GDP, when analyzed individually, each had a statistically significant bearing on the financial health of the property industry. As a result, these hypotheses were rejected. The research determined that foreign exchange rates, interest rates, inflation, and GDP do have an impact on the financial performance of the property industry. The report recommended that the property industry should assess the existing risks and identify the currencies involved with the assistance of a foreign exchange specialist. This serves as a foundation for several tactics that may be employed, including pre-purchasing the currency, using dollar-cost averaging, utilizing forward contracts, employing limit orders, and exploring other temporal alternatives. Equally, the research advises making safer investments for investors wishing to lower the risks associated with interest rates, investing in bonds and certificates with short maturities since they are the safest option. Additionally, the research advises implementing a contractionary monetary strategy and also, real estate firms have more cash so they may raise capital, enhance technology, and grow.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfilment for the Award of Degree of Master of Business Administration (Finance Option)of Kenyatta University, March 2024.
Supervisor
Vincent Shiundu Mutswenje