The Effect of Foreign Direct Investment Inflows on the Financial Performance of Real Estate Sector in Kenya

Abstract

Kenya has experienced a big boom in the real estate sector in the recent past to be ranked the fourth highest contributor to the economy. This is as a direct response to increased demand. The Kenya population is fast growing coupled with an increase in rural-urban migration. The middle class with demand for housing in the city is fast rising. Kenya is putting in place strategies to attract FDI into the country as it is believed to be a key contributor to economic prosperity. This study explored the impact of FDI inflows on financial performance of real estate sector in Kenya. The population for the study was all the 80 real estate firms that form the real estate composite index. The independent variable was FDI as measured by quarterly FDI inflows into the country. The control variables were interest rate as measured by CBK quarterly lending rate, inflation rates as measured by quarterly CPI and exchange rates as measured by quarterly exchange rate between ksh and usd. Financial performance was the dependent variable which the study sought to explain, it was measured by quarterly percent growth in composite index. Secondary data was collected for a period of 10 years (January 2007 to December 2017) on a quarterly basis. The study employed a descriptive cross-sectional research design and a multiple linear regression model was used to analyze the relationship between the variables. Statistical package for social sciences version 21 was used for data analysis purposes. The results of the study produced R-square value of 0.041 which means that about 4.1 percent of the changes in financial performance of real estate sector in Kenya can be explained by the four selected independent variables while 95.1 percent in the variation was associated with other factors not covered in this research. The study also found that the independent variables had a weak correlation with dividend payout ratio (R=0.203). ANOVA results show that the F statistic was insignificant at 5% level with a p=0.000. Therefore, the model was not fit to explain financial performance of the real estate sector in Kenya. The results further revealed that individually, FDI inflows, interest rates, exchange rates and inflation were statistically insignificant determinants of financial performance of real estate sector in Kenya. This study recommended that adequate measures should be put into place to improve and grow performance of real estate sector in Kenya.