The effect of real estate investments on the financial performance of pension funds in Kenya
Pension funds are ideal candidates for real estate investments. The features of real estate that make it a favorable investment for pension funds include its diversification potential, a good risk-return profile, and the ability to hedge against inflation. This does not hold for the other conventional asset classes. The study sought to establish the effect of real estate investments on the financial performance of pension funds in Kenya. The research design adopted was a descriptive survey of the pension funds registered by the Retirement Benefits Authority in Kenya. The study adopted a census of all the pension funds that have made real estate investments, totaling to forty-eight as at December 2015. To analyze the data, a multiple regression model was used. It was concluded that real estate investment positively and strongly affects return on investment for the pension funds. Offshore investments also strongly and positively affected the performance of the pension funds as increased investments in international markets increases the returns of the pension funds although the proportion of investment by the funds was small. Fixed income and government securities strongly and positively affected performance of the pension funds. The increase in investment in this class results to increase in return on investment. Equities negatively influence the performance of the pension funds since they are viewed as highly risky and tended to perform purely during the period under study. Cash and fixed deposits negatively affected return on investment since these instruments are the most liquid investments for pension funds but also have the lowest returns given their relatively low risk and are susceptible to inflation. It was recommended that pension funds should consider increased investment in the real estate industry since the sector gives higher returns on investment although the returns tend to be long term. The investments in real estate are less volatile, offer stable cash flows, and serve well for portfolio diversification purposes which would be beneficial to the pension funds and this would increase the earnings of the retirees and their beneficiaries. The study further recommended that the pension funds should consider investments in additional investment schemes such as equities, offshore investment, fixed income and government bonds. These would further boost the earnings of the pension funds which increases their growth and profitability.
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