Effect of macroeconomic variables on financial performance of real estate sector in Kenya

Abstract

Real estate has become a major investment globally. Growth in Real estate industry in terms of sales and prices have been used to predict the real estate demand and general economic performance. In Kenya, the real estate sector contributes approximately 9% of GDP despite the declining performance with average uptake from 23.3% in 2017 to 20.9% in 2018. The decline could be attributed to capping of interest rates leading to banks reducing funding to the sector, rise in the sector non- performing loans (NPLs) by 48.0% within the same period, increase in cost of construction, increased competition amidst falling demand caused as may be caused by several other macroeconomic factors. This have equally led to loss of jobs, migration of investors and declined sector performance in general. The relationship between macroeconomic variable and general performance of real estate have attracted considerable scholarly analysis and inconsistent results have been reported across the globe. The effect of macroeconomic factors on financial performance of real estate in Kenya market have not been adequately addressed. Therefore, this study evaluated the effect of macro-economic factors on financial performance of real estate sector in Kenya. Specific objectives were to analyse the effect of interest rate, inflation rate and exchange rate, on financial performance. The research research was anchored on the theory of classical interest rate classical inflation rate and balance of payments theory of exchange. This study used a correlation research design .The population for this study was real estate sector in Kenya. The study utilized secondary data collected from Central Bank of Kenya depository KNBS Economic Survey Reports from 2010 to2020.Datawasanalysed using both descriptive and inferential statistics. The study found that inflation rates showed a declining trend with mean rate of 7.02 , insignificant negative weak correlation and a partial effect of 0.191 insignificant positive change on financial performance; a declining trend interest rate with a mean rate 10.1, negative weak correlation and a insignificant partial effect 0.734 negative change on financial performance; and an upward trend in exchange rate with a mean of 86.30; significant strong positive correlation and significant partial effect 0.926 positive variation on financial performance of real estate in Kenya. The study concluded that exchange rate has significant effect on financial performance of real estate in the Kenyan market, while inflation rate and interest rate has no significant effect on financial performance of real estate in the Kenyan market.