An Analysis of the Decision·making Criteria for Investing in Commercial Real Estate in Kenya

Abstract

Real estate ownership has been conceded since time immemorial as a basic necessity for man. Its ownership gives a person some degree of security in a psychological as well as in a financial sense. The fact that real estate is tangible and useable means that it bestows special status to the owner. Also in a situation where inflation is daily eroding the value of money, the investor is attracted to real estate owing to its ability to keep abreast of inflation. In Kenya, like most other countries, real estate is a substantial investment asset class with some institutions having property portfolios that account for as much as 70% of their total investment holding by value. However, a look at the commercial real estate investments in Kenya reveals the following: -A shrinking occupation demand; -Disparities between expected and actual incomes; -Declining rental values; -Difficulties in meeting debt servicing obligations and; -Difficulties in completing construction projects within the specified cost and time frames In spite of these problems, new, large and very expensive buildings are still mushrooming not only in the City of Nairobi, but also in other urban centres in X111 the country. Therefore, there appears to be unexplained reasons that compel investors to continue investing in commercial real estate. It is against this background that the study was undertaken to investigate the motivating factors or the basis of decision-making while investing in these properties. The study identified and ranked the factors that influence the Kenyan investor to commit his capital in commercial real estate. The identified significant factors are: expected income, payback period, cost of finance, demand for commercial space, expected rate of return, size of land, cost of land, cost of construction, psychological satisfaction expected from the investment, adequacy of services and infrastructure, level of security, distance from the city centre, economic climate, security and regularity of income, security of capital and supply of commercial space. This information is a pointer to the problems currently being experienced in commercial real estate investments. While expected income is a significant factor in influencing the decision to invest, it ought not be the main motivating factor as it does not take into account the inherent costs that are involved in an investment. By undertaking investments in commercial buildings, it is rightfully perceived that the investors are interested in long-term wealth. This being the case, the focus should be the returns. The expected rate of return would, therefore, be a more logical main motivating factor in the decision to invest in commercial real estate. Also, the lack of systematic and formal decision making rules and XIV procedures was observed. Investment in commercial real estate is a problem of decision-making in the presence of uncertainty and risk. While some may argue that uncertainty can never be resolved completely as nobody will have complete knowledge of the future, it can be managed through handling decision-making appropriately and adequately as proposed in the study. The study is organized into eight chapters. Chapter One covers the general introductory sections of the study. Chapters Two and Three consist of a review of literature related to investments in general and in particular investments in real estate. The information in these chapters form the theoretical framework on which efforts to propose steps to be followed in undertaking commercial real estate investments are founded. An overview of the real estate market in Kenya is covered in Chapter Four. Chapter Five gives the research methodology detailing the research design, the population, sample and sampling techniques. Chapter Six identifies and ranks the factors that influence the decision to invest in commercial buildings. This is done following investigations into the criteria for decisions to invest in commercial real estate in the city of Nairobi. In the same chapter, the influence the buildings' characteristics have on the identified significant factors in the decision to invest in commercial real estate is established. xv Chapter Seven determines the influence of the significant factors with respect to their contribution to the decision to invest in these properties. Chapter Eight evaluates the findings of the case studies and derives the conclusions and recommendations of the study.