Financing Options and Growth Rate of Real Estate Development Companies in Kenya

Abstract

Financing decisions have been a challenge to real estate developers in Kenya. This is because, real estate investments are perceived to be capital intensive in nature. It is expected that real estate sector should develop in line with population increases which characterises most emerging economies. However, the provision of housing units per year is below the demand. In Nairobi region the demand for housing is 200,000 units per year while the actual production is estimated to be 50,000 units annually thus outlining a shortage of 150,000 units. Past studies indicate that where a robust financial market prevails, investors are able to access funds for investment projects. This current study seeks to establish the effect of financing option on real estate growth in Kenya.  The specific objectives were; to determine the effect of mortgage financing on growth rate of real estate development companies in Kenya, to find out the effect of retained earnings on growth rate of real estate development companies in Kenya, to establish the effect of private equity on growth rate of real estate development companies in Kenya, to determine the effect of joint venture on growth rate of real estate development companies in Kenya and  assess the moderating effect of firm size on relationship between financing options and growth rate of real estate development companies in Kenya. This study was be anchored by the following theories namely: lien theory of mortgages, pecking order theory, transaction costs theory, resource dependency theory and housing cycle theory. The target population of this study comprised of all the seventy-two companies who are members of the Kenya Property Developers Association (KPDA). The sample size comprised of twenty three companies which was thirty percent of the sample frame. The sample size was selected using simple random sampling design. This study used descriptive research design with a regression model with the regressor being real estate growth rate which was expressed in growth rates of housing units for each firm. Therefore, this study followed panel data analysis as individual firm data was collected for a time span of five years 2014 to 2018. Results showed that mortgage financing positively but insignificantly affected growth rates of real estate development companies in Kenya. Further results showed that retained earnings as source of financing option impaired significantly growth rates of real estate development companies. Private equity was found to improve growth rates of real estate development companies significantly.  Joint venture too positively but insignificantly influenced growth rates of real estate development companies in Kenya. Lastly, firm size was found to be a non-moderator but rather an explanatory variable and impaired growth rates in a significant manner. This study recommended that real estate development companies should increase use of private equity in financing housing projects as this increases growth rates of the entities.