Effect Of Financing Sources On Performance Of Real Estate Sector In Nairobi County, Kenya

Abstract

Real estate sector has gained a lot of interest from investors with the perceived high returns. Kenyan government has on the other hand recently capped interest rates on loans. Considering that most investors relied on mortgage financing to invest in real estate sector, the investors have to consider other sources of financing. Venture capital financing on the other hand has left some investors shortchanged by the venture capitalists. This study sought to establish the impact of financing sources on real estate sector’s performance in Nairobi County, Kenya. The specific objectives were: to investigate the effect of mortgage financing on the performance of the real estate sector in Nairobi County, Kenya; to determine the effect of venture capital financing on the performance of the real estate sector in Nairobi County, Kenya and to determine the effect of equity financing on the performance of real estate sector in Nairobi County, Kenya. The study reviewed theories relevant to financing sources and performance namely; pecking order theory, trade off theory and agency theory. Descriptive research design was adopted. The study population was 64 real estate developers registered with Kenya Property Developers Association in Nairobi County, Kenya. The study conducted a census of all 64 real estate developers. The study used primary data. Questionnaires were utilized to collect data. Data was analyzed by multiple linear regressions and presented in form of frequency tables and charts and proper inferences made towards the same. The study found out that performance of real estate sector in Nairobi County, Kenya was significantly affected by mortgage financing which was statistically significant with a p value of 0.001.The relationship between venture capital financing and performance of real estate sector in Nairobi County, Kenya was positive, however, the relationship was statistically insignificant with a p value of 0.526.The study also found out that even though the relationship between equity financing and performance of real estate sector in Nairobi County, Kenya was positive, the relationship was statistically insignificant with a p value of 0.472. The study concluded that performance of real estate sector in Nairobi County, Kenya was significantly affected by mortgage financing which was statistically significant. The study also concluded that venture capital financing insignificantly influenced performance of real estate sector in Nairobi County, Kenya. The study further concluded that the relationship between equity financing and performance of real estate sector in Nairobi County, Kenya was statistically insignificant. The research recommends that in order for the investors to maximize returns on their real estate investments, they should adopt strategies such as increasing mortgage financing up to an optimal point since it has the highest returns as compared to other financing sources. The research further recommends that to reduce risks associated with venture capital financing, investors should undertake some mitigation steps like assessing and evaluating potential investment targets regarding risk and return. Similarly, the research recommends that real estate companies should consider raising equity through private placements as opposed to public placements.