Analysis of asset financing and return on investment in commercial real estate investment firms in Kenya

Abstract

Real estate commercial environment has guided financial organizations and property developers to examine various financing options given the imperative role that financial markets and developers play in the performance of the real estate sector. The objective of this study was to analyse asset financing and return on investment in commercial real estate investment firms in Kenya. The following aspects formed the particular objectives of the study; to establish the effect of loan uptake on return on investment in commercial real estate investment firms in Kenya, to assess the effect of interest on loan on return on investment in commercial real estate investment firms in Kenya and to analyze the effect of financial solvency on return on investment in commercial real estate investment firms in Kenya. The study was anchored on Simulation Theory, The Pecking Order Theory, Ratio Analysis Theory and Profit Maximization Theory. The population of interest in the study was made up of registered property developers with Kenya Property Developers Association. The research employed secondary sources to collect data. Information that was relied on included the data from published and audited annual reports of the target group. This study employed a correlational research design and utilized panel data for the period 2017-2021. Data was collected from audited reports which are deemed reliable and valid and was tested for stationarity by Levin, Lin, Chu unit root test. The data was tested for normality, heteroscedasticity and multicollinearity condition satisfaction. Data was analysed using ordinary least squares approach and the regression was multivariate panel data in nature at 0.05 level of significance. Data analysis was done with the help of Eviews and presented in tables. The research findings were that loan uptake has a negative significant effect (β = -0.0738, p = 0.0034) on return on investment in commercial real estate, interest on loan positively significantly affects return on investment (β = 0.0309, p = 0.0499) and financial solvency positively significantly affects return on investment (β = 0.5434, p = 0.0132) in commercial real estate investment firms in Kenya. Interest on loan accounts for return on investment of 3.09% and financial solvency accounts for return on investment of 54.3%. The research concludes that the three variables under study had some influence on the return on investment of the commercial real estate as part of explaining their development. This research study recommends that there needs to be awareness created on need to use other financing options that are cheaper in the long run. This study contributes to the body of knowledge by providing the link between asset financing and return on investment in commercial real estate investment firms in Kenya.