MICROECONOMIC DETERMINANTS AND FINANCIAL PERFORMANCE OF REAL ESTATE SECTOR IN KENYA
Abstract
This research assessed the impact of macroeconomic determinants on the financial wellbeing of the Kenyan real estate industry. The research ascertained the bearing of exchange rates, interest rates, inflation rates, and GDP on the financial performance of the real estate industry. The research design utilized in this research was a causal-effect design. The research focused on the population of the Kenyan real estate business. The research utilized secondary data sourced from the repository of the CBK and the Economic Survey Reports published by the KNBS for the period spanning from 2013 to 2022. The data was subjected to analysis using a VAR time series regression model. This approach enabled the computation of descriptive statistics (means and standard deviations), and inferential statistics for conducting correlational analysis and VAR time series analysis. The data that was analyzed was displayed in the form of tables and graphs. Prior to doing the actual analysis, the researcher performed diagnostic tests like normality test, multicollinearity test, heteroscedasticity test, optimum lag selection, stationarity and autocorrelation for time series regression. Ultimately, strict adherence to ethical principles was ensured. The study suggested that foreign exchange, interest rate, inflation, and GDP, when analyzed individually, each had a statistically significant bearing on the financial health of the property industry. As a result, these hypotheses were rejected. The research determined that foreign exchange rates, interest rates, inflation, and GDP do have an impact on the financial performance of the property industry. The report recommended that the property industry should assess the existing risks and identify the currencies involved with the assistance of a foreign exchange specialist. This serves as a foundation for several tactics that may be employed, including pre-purchasing the currency, using dollar-cost averaging, utilizing forward contracts, employing limit orders, and exploring other temporal alternatives. Equally, the research advises making safer investments for investors wishing to lower the risks associated with interest rates, investing in bonds and certificates with short maturities since they are the safest option. Additionally, the research advises implementing a contractionary monetary strategy and also, real estate firms have more cash so they may raise capital, enhance technology, and grow.
Key Words: Real Estate, Macroeconomic Drivers, Foreign Exchange, Interest Rates, Inflation Rates, GDP
CITATION: Mburu, C., & Mutswenje, V. S. (2024). Microeconomic determinants and financial performance of real estate sector in Kenya. The Strategic Journal of Business & Change Management, 11 (3), 55 – 72. http://dx.doi.org/10.61426/sjbcm.v11i3.3006
Full Text:
PDFReferences
Abdulai, R. T., Obeng-Odoom, F., Ochieng, E., & Maliene, V. (Eds.). (2019). Real estate, construction and economic development in emerging market economies. Routledge.
Aguiar, T., & Broner, E. (2016). “Determining Underlying Macroeconomic Fundamentals During Emerging Market Crises: Are Conditions as Bad as They Seem?”. Journal of Monetary Economics, 53.4 (2006): 699-724.
Ariemba, J. Kiweu, M., & Riro, G. (2015) The influence of macro-economic factors on mortgage market growth in Kenya. MSE Project, the University of Nairobi.
Batra, G. (2013). Job Reallocation, the Export Market, and Firm Performance: Microeconomic Evidence. World Bank Policy and Research; Business Environment Unit, 683-26; 10 (1).
Beauregard, R. (2007). More than sector theory: Homer hoyt's contributions to planning knowledge. Journal of Planning History, 6(3), 248-271.
Bertocco, G. (2013). On Keynes's Criticism of the Loanable Funds Theory. Review of Political Economy, 25(2), 309-326.
Bibow, J. (2013). Keynes on monetary policy, finance and uncertainty: Liquidity preference theory and the global financial crisis. Routledge.
Borowiccki, K. J. (2013). The determinants of House Prices and Construction: An empirical Investigation of the Swiss Housing Economy. International Real Estate Review, 12(3), 193-220.
Brown, G. W. (2001). Managing foreign exchange risk with derivatives. Journal of Financial Economics, 60(2-3), 401-448.
Brueggeman, W., & Fisher, J. (2015). Real Estate Finance and Investments (5th ed.). New York: McGraw Hill.
Bryman, A., & Bell, E. (2015). Business Research Method. (2nd ed.) Oxford: Oxford University Press.
Cummings, J. (2010). The McGraw-Hill 36-hour course: Real estate investing. New York: McGraw-Hill. Cytonn Investments, (2016).
De Carvalho, F. J. C. (2015). Liquidity preference and monetary economies. Routledge. Demewez, N., & Olof, H. (2015). The effect of interest rates on housing prices in Sweden. The case of one and two dwelling buildings.
Desaro, A. I. (2012). The effect of macroeconomic factors on financial performance of commercial banks in Kenya. MSC Project, University of Nairobi.
Erik, M. & Marko, S. (2011). A Concise Guide to Market Research: The Process, Data, and Methods Using IBM SPSS statistics, New York: Springer Heidlegerg Dordrecht.
Farbmacher, H., & Kögel, H. (2017). Testing under a special form of heteroscedasticity. Applied Economics Letters, 24(4), 264-268.
Fischer, S. (1993). The Role of Macroeconomic Factors in Growth, Journal of Monetary Economics, 32(3) 485-512.
Golob, K., Bastic, M. & Psunder, I. (2012). Analysis of the Impact Factors of the Real Estate Market: Case Slovenia. Engineering Economics, 23 (4): 257-367.
Hardwick, P., Khan, B., & Langmead, J. (1986). An introduction to modern Economics. Longman Group, Burnt Hill, Harlow, England. Hass Property Index, (2013).
Jack, J. K. A., Okyere, F., & Amoah, E. K. (2019). Effects of exchange rate volatility on real estate prices in developing economies, a case of Ghana. Advances in Social Sciences Research Journal, 6(11), 268-287.
Kabir, A. (2022). Monetary policy impact on private sector performance in Nigeria. Journal of Economics and Allied Research, 7(3), 1-12.
Kombo D. K., & Tromp, D. L. (2016). Proposal and Thesis Writing, An Introduction. Paulines publication. Nairobi, Kenya.
Kothari, C. R. (2014). Business Research Methods. 6th ed. Boston: Irwin/McGraw Hill.
Lee, C. (2011). Real estate cycles: they exist… and are predictable. Center for Real Estate Quarterly Journal, 5(2), 5.
Lindner, F. (2013). Does saving increase the supply of credit? A critique of loanable funds theory (No. 120). IMK Working Paper.
Ling, D. C., Wang, C., & Zhou, T. (2020). A first look at the impact of COVID-19 on commercial real estate prices: Asset-level evidence. The Review of Asset Pricing Studies, 10(4), 669-704.
Lynn, R. (2007). The Tectonic Forces of Global Real Estate: Implication for global investment and Portfolio Managers, in: Journal of Real estate portfolio Management, vol.13, no.1, pp 87-92.
Malpezzi, S., & Wachter, S. (2015). The role of speculation in Real Estate Cycle, Zell/Lurie Center Working Paper 401, Wharton School of Management, University of Pennylvania.
Mankiw, R. I (2010). “Money and Capital in Economic Development”Washington D.C Brooking Institution.
Masika, A. M. (2014). Factors Influencing Real Estate Property Prices. A Survey of Real Estates in Meru Municipality, Kenya. Kenya Methodist University, Meru.
Molyneux, P., & Thornton, J. (2012). Determinants of European bank profitability: A note. Journal of Banking and Finance 16 (2): 1173-1178.
Mueller, G. (2002). What will the next real estate cycle look like?. Journal of Real Estate Portfolio Management, 8(2), 115-125.
Mugambi, P. M, (2015). The Effect of Property Investment on Asset Growth of Pension Funds in Kenya, MBA Project, University of Nairobi.
Mugenda, O. M. & Mugenda, A. G. (2012). Research methods: quantitative and qualitative approaches. Nairobi: Acts Press.
Murigu, J. (2015). House prices, Interest Rates and Macroeconomic Fluctuations: International Evidence. University of Virginia and IMF working paper.
Muturi, W., & Oluoch, O. (2019). The effect of commercial bank lending interest rate on the performance of the residential property market in Kenya. European Scientific Journal, 15(25), 95-108.
Mwangi, F.K, (2013). The effect of macroeconomic variables on financial performance of aviation industry in Kenya. MSc Project, University of Nairobi.
Nduta, B. K. (2021). The Impact of Interest Rate Capping on Performance of Real Estate Investment Trusts in Kenya (Doctoral dissertation, United States International University-Africa).
Njambi, M. W. (2020). Effect of selected macro-economic determinants on performance of real estate sector (Doctoral dissertation, United States International University- Africa).
Njoroge, C. G., Muturi, W., & Oluoch, O. (2019). Exchange rate and performance of the residential property market in Kenya. International Journal of Finance & Banking Studies (2147-4486), 8(3), 88-100.
Nzalu, F.M. (2012). An Assessment of the Factors Affecting the Growth in Real Estate Investment in Kenya, MBA Project, University of Nairobi.
Odada, J. E., Obere, J. A., & Osiemo, D. A. (2021). Long-run relationship between inflation rate and real estate Investment in Kenya.
Odondo, A. (2021). Nexus between Inflation and Real Estate Growth in Kenya: A Disaggregated Approach. Journal of Economics and Development Studies, 9(1) 53- 65.
Ongore, V. O., & Kusa, G. B. (2013). Determinants of Financial Performance of Commercial Banks in Kenya. International Journal of Economics and Financial Issues. 3 (1): 237-252
Ooi, I., & Liow, R. (2014). Risk Adjusted Performance of Real Estate Stocks: Evidence from developing markets.
Pyhrr, S. A., & Born, W. L. (2005). Theory and practice of real estate cycle analysis (No. eres2005_291). European Real Estate Society (ERES).
Renigier-Biłozor M. (2014). Analysis of real estate markets with the use of the rough set theory, Journal of the Polish real estate scientific society. 19(3).
Robertson, D. H. (1934). Industrial fluctuation and the natural rate of interest. The Economic Journal, 44(176), 650-656.
Rodenholm, B., & Dominique, R. (2013). Macroeconomic effects on securitized real estate markets, a comparative study of Sweden and Switzerland.
Romer, C. (2012). Lessons from the Great Depression for Economic Recovery, presented at the Brookings Institution, Washington, D.C.
Sellin, P. (2011). Monetary Policy and the Stock Market: Theory and Empirical Evidence. Journal of Economic Surveys, 15(4), 491-541.
Shapiro, E. (1992). International Economics. Macmillan Press Ltd., London.
Stepanyan, V., Poghosyan, T., & Bibolov, A. (2010). House Price Determinants in Selected Countries of the Former Soviet Union. International Monetary fund.
Thalmann, P. (2014) Triggers for housing development, Ecole Polytechnique Federale de Lausanne, station 16 CH 1015.
Thornton, D. L. (2014). Monetary policy: Why money matters (and interest rates don’t). Journal of Macroeconomics, 40, 202-213.
Wicksell, S. D. (1930). Remarks on regression. The Annals of Mathematical Statistics, 1(1), 3-13
DOI: http://dx.doi.org/10.61426/sjbcm.v11i3.3006
Refbacks
- There are currently no refbacks.
This work is licensed under a Creative Commons Attribution 3.0 License.
PAST ISSUES:
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.