Effect Of Financial Leverage On Profitability Of Real Estate Firms In Nairobi County

Abstract

Globally, a critical factor in real estate development and investment is funding and it is a fact that development in real estate sector requires huge outlay of financial resources hence access to cheap and adequate funding is necessary. The study was underpinned by three theories including resource dependency theory, real estate simulation theory and MM theory. Descriptive research design was adopted to examine the association between the exogenous and endogenous variables. The study targeted 80 Real Estate companies licensed by Nairobi County Government. The sample size was 24 real estate firms in Nairobi county Kenya selected using simple random sampling. The secondary data was extracted from annual financial reports of the selected Real Estate Firms in Nairobi Kenya for the period from 2014 to 2018 a period of five years. The study tested assumptions of classical least squares regression including Normality, multicolliniarity, serial correlation and heteroscedasticity. The study established that there was an inverse and major causal effect link existing between use of mortgages and profitability (β1= -.1963, p-value = 0.000< α = 0.05). In addition, the study established an inverse causal effect association existing between share capital on profitability (β2= -.001907, p-value = 0.519 > α = 0.05). The study also established a direct and significant causal link existing between retained earning and profitability (β3= 0.007572, p-value = 0.000 < α = 0.05). In addition, there was a direct major causal effect link subsisting between firms size and profitability (β4= 0.1843, p-value = 0.000 < α = 0.05). Finally, the study revealed a direct causal effect association between liquidity and profitability (β5= -0.01673, p-value = 0.155 > α = 0.05). The study thus concludes that the effect of financial leverage on profitability of real estate firms was significant. Specifically, the study concluded that effect of mortgages on profitability was negative and major. There was inverse association between share capital and profitability. The study also concluded that there was direct and significant causal link existing between retained earning and profitability. In addition, the study concluded that there was a direct major causal effect link subsisting among firm’s size and profitability. Finally, the study concluded that there was a direct causal effect association between liquidity and profitability. The study recommends that management of real estate should consider looking for firms that offer favorable rates on mortgages. The research also suggest that the management of firms should consider up scaling the share capital. The study also suggests that management of real estate firms to consider retained earnings critically as a source of capital for financing activities. The study also recommends to management of real estate firms to consider expanding their asset base. Finally, study suggest that top management of real estate firms to consider having adequate working capital to support their capital.