The Effect of Macroeconomic Factors on the Financial Performance of the Real Estate Sector in Kenya

Abstract

The macroeconomic variables, both real and financial have a significant effect, positive as well as negative, on the performance of the commercial sector of the economy. The real estate sector in Kenya contributes approximately 9% of GDP, according to a Real Estate Report by Cytonn Investments. However, the sector has experienced increased competition both in residential and commercial properties with prices edging up by only 1.14% in the last three months of the year 2015 according to the housing price index released by the Kenya Bankers’ Association. This is an indication that the real estate industry has not been performing well as expected. The research objective was to establish the effect of macroeconomic factors on the financial performance of the real estate sector in Kenya. This study used a descriptive research design. The population for this study comprised 455 registered real estate firms in Kenya. The study utilized secondary data where it was collected from documentation from previous studies, property reports and magazines, journals, data from Housing Finance Corporation, Central Bank of Kenya, Kenya National Bureau of Statistics and Hass Consult Limited. The study covered a 20-year period from year 1997 and 2016. Data was entered into SPSS for generation of frequency tables, charts, correlations and regressions which helps in the analysis. The regression model was a multivariate model. Analysis of variance (ANOVA) was used to test the significance of the model at 95% confidence interval. The study concluded that inflation not only lessens the level of business investment, but also the efficiency with which dynamic factors are put to use. The study also concludes that high lending rates has a negative effect on the financial performance of the real estate sector. The study concludes that un-standardized exchange rates has a negative effect on the performance of the property business and that a unit increase in real GDP will lead to an increase in economic growth which stimulates investment in real estate sector thus the gross domestic product affects the performance of the real estate business in a positive way. The study recommends use of fiscal policies by the Government to control interest rates, inflation rate and exchange rates. This will stimulate investment in the real estate business in Kenya.