Effect of Selected Macroeconomic Volatility on Financial Performance of the Real Estate Sector in Kenya

Abstract

The Kenyan real estate sector has experienced accelerated growth since the turn of the millennium. However, in the last 5 years (2017 to 2021), the performance of the real estate sector in Kenya has slowed down. This can be explained by several factors and macroeconomic volatility is hypothesized to be one of these factors. The real estate sector has faced increasing prices of goods and services due to rising inflation, unpredictability of interest rates and fluctuation in exchange currencies. Such unfavorable macroeconomic factors may cause great problems in real estate sector financial performance in Kenya. The objective of this research was determining the effect of selected macroeconomic volatility on Kenya’s performance of the real estate sector. The study was based on capital asset pricing model and supported by arbitrage pricing theory as well as modern portfolio theory. The independent variables were interest rate volatility, inflation rate volatility, exchange rate volatility and economic growth volatility. The dependent variable that the research endeavored to describe was the financial performance of the Kenyan real estate industry. The data was obtained on a quarterly basis for a ten-year duration (Jan. 2012 to Dec. 2021). A descriptive research technique was applied in the research, with a multivariate regression model utilized in examining the link between the research variables. The research conclusion resulted in 0.761 R-square figure, signifying the selected independent variables could account for 76.1% in the Kenya financial performance variation in the real estate sector, while the other 23.9 percent was as a result of other factors not explored in this research. The F statistic was significant at a 5% extent possessing a p=0.000. This indicates that the model was effective in explaining how Kenya's real estate market performed. Further, the conclusions demonstrated that higher inflation rate volatility and economic growth volatility yields a substantial rise in performance in the real estate sector while interest rate volatility and exchange rate volatility did not possess significant effect on real estate sector financial performance. The research recommends that there is need to manage inflation rate volatility and economic growth volatility since they have a major impact on real estate sector performance. The research further acclaims the necessity for future researchers to conduct a study for a longer period of time to capture the effects of economic cycles like recessions and booms.