Integrated Macroeconomic Variables and Financial Growth of the Real Estate Sector in Kenya
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Date
2024-05
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Kenyatta University
Abstract
The real estate sector has been growing over the years because of major infrastructural developments and high population growth in Kenya. However, the sector has been facing some challenges that have been affecting its growth. A rise in the number of distressed properties owned by defaulting borrowers, a rise in the cost of construction inputs and overall sluggish growth in the industry are among the issues that have been facing the sector. These challenges might be attributed to macroeconomic factors outside the direct control of property developers, affecting the real estate industry as a whole. This research aimed to assess how macroeconomic factors influence Kenya’s real estate financial success. The research primarily focused on determining inflation, interest rates, exchange rates’ impact and economic growth on Kenya’s real estate sector. The theories that were relevant to the study included the demand-pull inflation theory, the classical/neo classical theory for interest rates, the classical growth theory and purchasing power parity. The causal research design was used in the study. Three main Kenyan real estate developers in Kenya; Cytonn Investments, Hass Consult, and Knight Frank made up the target population. In light of the small target population, a census approach was used to obtain the sample size and the research employed secondary data. As a result, secondary data from the property developers’ yearly market reports from 2016 to 2022 was gathered. Data from the annual market reports between 2016 and 2022 was evaluated using descriptive statistics. Pearson’s correlation and panel data analysis methods were also employed. Diagnostics tests that were carried out on the data collected included multicollinearity, normality, heteroscedasticity, autocorrelation and stationarity tests. To perform the data analysis, STATA software was used. The analysis results were then presented in the form of graphs and tables. All the relevant ethical factors were considered. An examination into inflation, interest rates, exchange rates and economic growth factors revealed a coefficient of determination (R-squared) value at 0.8057 for the Kenyan real estate sector; signifying that these four influencers collectively explain around 81% of the financial progress within the real estate sector. The study also found that inflation had positive and significant effect on financial growth, interest rate had positive and significant effect on financial growth, exchange rate had negative but insignificant effect on financial growth, economic growth had positive and significant effect on financial growth. The study thus recommends that financial institutions, policy makers, and developers should implement measures to mitigate the adverse effects of macroeconomic variables on the real estate sector. Also, it is important for investors to incorporate hedging strategies that shield their portfolios from high inflation and interest rates. Moreover, developers should consider exploring sourcing construction materials locally or from countries with more favorable exchange rates, to hedge against potential currency volatilities.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of Degree of Master of Business Administration (Finance), Kenyatta University, May 2024.