The Effect of Foreign Direct Investment Inflows on Residential Real Estate Prices in Kenya

Abstract

Residential real estate is considered significant as it is both an investment and a consumption good. In Kenya, residential real estate has experienced tremendous growth over the last decade due to the mismatch in supply and demand, as noted by various real estate agencies. In 2017, the World Bank estimated the demand for housing in Kenya to be two million units against an annual supply of less than 50,000 units therefore explaining the continued rise in prices. Foreign direct investment on the other hand is considered a resilient and major source of finance developing countries. Further, the real estate industry has experienced entry by foreign investors through mergers and acquisitions as well as Greenfield investments. The study sought to establish the effect of foreign direct investment on residential real estate prices in Kenya. In addition to foreign direct investment, the study used interest rates, inflation and GDP growth rates as control variables for the study. A descriptive research design was used with the study period of ten years (2008-2017) and data analysed using SPSS. Data on house prices was collected over the last ten years and a housing price index developed using the hedonic regression method. The study concluded that changes in foreign direct investment, interest rates, inflation and GDP collectively account for 75% of the changes in housing prices as represented by the coefficient of determination R2 = 0.751. Foreign direct investment accounted for the largest effect followed by inflation rate, interest rate and finally GDP growth. Foreign direct investment, GDP and inflation were established to have a negative effect on housing prices while interest rate was established to have a positive impact on housing prices. Foreign direct investment was also the only variable that was established to have a significant impact on housing prices at a level of confidence of 95%. The study recommended that lending institutions, particularly commercial banks and the Central Bank should be engaged to ensure interest rates remain affordable and stable to encourage both home developers and buyers to take up credit for investment in residential real estate. Further, the government ought to encourage FDI so as to lower the cost of housing for its population through tax incentives.