This document provides an introduction and background on the determinants of residential real estate prices in Kenya. It discusses several factors that can influence residential real estate prices, including interest rates, GDP, money supply, and inflation rate. The research problem is identified as determining the relative relationship and impact of these key factors on house prices in Kenya. The objective is to investigate the determinants of residential real estate prices. The study is expected to provide valuable insights for real estate investors, homeowners, financing institutions, and the government.

1. CHAPTER ONE - INTRODUCTION
1.1 Background of the Study
The real estate market plays a very important role in any economy. It is known to have a
dramatic multiplier effect and is a key economic indicator. The business dictionary defines
real estate as land and anything fixed, immovable, or permanently attached to it such as
appurtenances, buildings, fences, improvements, roads, shrubs and trees (but not growing
crops), sewers, structures, utility systems and walls. Title to real estate normally includes
title to air rights, and surface rights which can be bought, leased, sold, or transferred
together or separately. It includes improvements, natural resources and structures both
above and below.
The real estate market has experienced significant growth in the last decade. Theoretically,
the condition of a market is driven by forces of demand and supply. Demand refers to how
much (quantity) of a product or service is desired by buyers . When demand is high, prices
of a commodity go up. Higher prices on the other hand decrease the demand of a particular
good and service (Baumol & Bunder, 2011). Aggregate supply is the relationship between
the economy’s price level and the amount that the output firms are willing and able to
supply. Therefore Residential Real Estate prices are guided by the relationship between
supply and demand.
Many countries have in the past experienced house price fluctuations. This has been
associated with economic instability. In many countries, like the U.S., price fluctuations
have led to accelerated housing defaults with millions of residential properties having
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negative equity mortgages with outstanding loan balances being greater than the property
values (Burnside et al, 2011). House prices are a significant indicator of the real estate
market because prices are driven by the demand in the market. Demand on the other hand
is determined by a number of macro and micro economic factors in an economy. Thus to
fully understand the changes and developments in a real estate market, it is important to
fully understand the forces behind price fluctuations. Higher property prices also tend to
stimulate the economic activity through wealth effects, thereby encouraging investment and
consumption spending.
1.1.1 Residential Real Estate Prices
Real estate markets are heterogenous, with a series of geographical and sectoral submarkets
that lack a central trading market. Every property is usually unique and information on the
market transactions is often not available. The pricing process is usually negotiated and the
market is characterized by large transaction costs. The prices of an existing property should
theoretically be equal to discounted present value of the expected stream of future income
(rents), which depend on expected growth in income, anticipated real interest rates, taxes
and other structural factors. The price should equilibrate demand and supply in a well
functioning market. The fundamental equilibrium price is the price at which the stock of
existing real estate equals the replacement cost (Hilbers et al 2001). Therefore in theory a
growth in prices indicates growth in demand and hence a growth in the market. Several
factors drive the demand of the real estate market.
There are two ways to measure real estate demand and these involve an evaluation of real
estate investments and real estate prices. As demand for real estate increases, real estate
3
prices rise and therefore real estate investors will increase their in real estate to meet the
demand and therefore it can be said that real estate prices and real estate investments are
directly proportional to real estate demand.
The real estate market is a key contributor to the Socio- economic development of nations
through creation of employment in construction and other areas. It is also a key contributor

2. to the GDP. For many families, the house is their one major investment representing over
30% of their wealth. Thus house pricing is of utmost importance to them. House prices are
also of great interest to real estate developers, banks and policy makers in general.
1.1.2 Determinants of Residential Real Estate Prices
The size and scale of the real estate market makes it attractive and lucrative sector for many
investors. House prices are a good indicator of the size of a real estate market. Several
factors affect residential real estate prices and hence the growth of the market. These
include: interest rates, GDP, level of money supply, and Inflation rate (Mak, Choy, & Ho,
2012).
1.1.3 How the Factors affect Residential Real Estate Prices
Interest rates have a major impact on the real estate markets. Changes in interest rates can
greatly influence a person's ability to purchase a residential property. That is because as the
interest rates fall, the cost to obtain a mortgage to buy a home decreases, which creates a
higher demand for real estate, which pushes prices up. Conversely, as interest rates rise, the
cost to obtain a mortgage increases, thus lowering demand and prices of real estate. When
4
interest rates are low, buyers can afford more homes for their money because less of the
mortgage payment goes toward interest charges to the lender. This scenario could draw
more buyers into the market, which could lead to multiple bids on houses and an uptick in
overall prices. Because the influence of interest rates on an individual's ability to purchase
residential properties (by increasing or decreasing the cost of mortgage capital) is so
profound, many people incorrectly assume that the only deciding factor in real estate
valuation is the mortgage rate. However, mortgage rates are only one interest-related factor
influencing property values. Because interest rates also affect capital flows, the supply and
demand for capital and investors' required rates of return on investment, interest rates will
drive property prices in a variety of ways (Liow, Ibrahim & Huang, 2005).
Another key factor that affects the value of real estate is the overall health of the economy.
This is generally measured by economic indicators such as the GDP, employment data,
manufacturing activity, the prices of goods, etc. The GDP is the market value of all
officially recognized final goods and services produced within a country in a given period
of time. GDP per capita is often considered an indicator of a country’s standard of living.
Under economic theory, GDP per capita exactly equals the Gross Domestic Income per
capita. When the GDP is low it means that the people’s purchasing power is also low hence
the demand for real estate and consequently the house prices will decrease. Conversely,
when the GDP increases, the purchasing power also increases hence increasing the demand
of Real estate and house prices go up. Broadly speaking, when the economy is sluggish, so
is real estate. However, the cyclicality of the economy can have varying effects on different
types of real estate. For example, an investment in hotels would typically be more affected
5
by an economic downturn than one in office buildings. Hotels are a form of property that is
very sensitive to economic activity due to the type of lease structure inherent in the
business. Renting a hotel room can be thought of as a form of short-term lease that can be
easily avoided by hotel customers should the economy be doing poorly. On the other hand,
office tenants generally have longer-term leases that can't be changed in the middle of an
economic downturn (Case et al, 2005).
Money Supply is a broad measure of money in an economy. Increase in money supply
gives rise to greater inflation uncertainty and this has an adverse impact on the real estate
market. Excessive growth in money supply may lead to an inflationary environment and
might affect the investments because of higher discount rate (Liow, Ibrahim & Huang,
2005).

3. Inflation is often defined as a sustained increase in prices for a broad range of prices
(Gallagher, 2011). Inflation rates affect the purchasing power of money. Inflation is
measured by the changes in the Consumer price index (CPI) which measures the retail
prices of goods and services purchased by households (Liow, Ibrahim and Huang, 2005). It
is theoretically expected that the higher the inflation rate the higher the house prices.
1.1.4 Real Estate Market in Kenya
The Kenyan real estate market has been experiencing a boom in the past ten years and the
latest findings have shown that the trend will continue into the foreseeable future. In a
report published by Knight Frank and Citi Private Bank, it was found that luxury homes in
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Nairobi, Mombasa, Malindi, and Lamu were ranked among the top-notch residential
property markets in the world for attaining the highest rise in prices among properties
surveyed globally in 2011. Nairobi was reported to have had the highest growth rate with
25% price increase for top-notch residential properties, followed by Kenyan coastal
properties in Mombasa, Malindi and Lamu with 20% price growth. Properties in Miami,
Bali, Jakarta, London, Vancouver, Moscow, Toronto, Beijing and Cape Town were rated
on the price increase index with 19.1%, 15%, 14.3%, 12.1%, 10.4%, 9.8%, 8.1% and 2.4%
in that order (Knight Frank & Citi Private Bank, 2011).
In 2010, growth was higher than expected at 5.6 percent, and this rate is expected to be
maintained over the medium term. If growth accelerated to 6 percent, Kenya could reach
Middle Income Country status by 2019.This means Kenya is at the threshold of a major
demographic transition and is urbanizing rapidly. Each year, Kenya will continue to grow
by more than one million people, who will live longer, be better educated, and increasingly
live in cities. This social and economic transformation needs to be managed well to
catalyze its development impact (World Bank, 2011). This increase in urbanization will
affect the demand for housing significantly.
According to UN Habitat Statistics, E.A is the fastest urbanizing region in the world with
its urban population expected to double between 2007 and 2017 (UN Habitat, 2013).
Nairobi is one of the fastest growing cities in the world. Recent report by the Kenya
National Bureau of Statistics, shows that demand for real estate in the urban areas in the
last ten years, exceeded supply by more than five times.
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Another reason to anticipate significant growth in the real estate market in the year 2013 is
the dropping interest rates. Lower rates have spurred an uptake of mortgages which have in
turn fueled the impending housing market boom. In June 2013, the CBK lowered its rate to
8.5%. Statistics show however that despite lower interest rates, less that 200,000 Kenyans
have mortgage facilities. Only 6% of Kenyans own their own homes. Mortgage lending is
still accessible to only a minority. In 2012, only 1.1% of the top 60% income earners in
Kenya have a mortgage (Knight Frank, 2012). This means that there is still a huge deficit in
the housing market. Statistics indicate that the demand for housing, which has possibly led
to increase in house prices, has been on the rise at a faster rate than the number of houses
available or under construction (National Housing Corporation, 2009). The estimate
number of houses constructed annually is about 30,000 whereas the demand is estimate at
150,000 (National Housing Survey, 2013).
In Nairobi the demand for real estate is at an all time high. With improved infrastructure
like the Thika Superhighway, access to utilities, growth in information technology, the
performance of the sector continues to grow. A major innovation has been the multibillion
– dollar gated communities and mini cities coming up. These include the Kihingo Village,
Thika Greens Golf Estate, Fourway Junction, Tatu City, Konza City, Migaa Golf Estate,
Roslyn Heights, and EdenVille Estate among others. This has spurred the growth of the

4. sector tremendously. These communities are preferred as they are perceived to present a
sense of higher security and provide access to high end facilities like swimming pools and
8
gyms at a lessor cost than if homeowners were to construct their own. Hence property in
these communities has increased in value.
Another boost to the sector players is the introduction of Real Estate Investment Trusts
(REITS) by the Capital Markets Authority (CMA). This will enable real estate companies
be listed in the Nairobi Securities Exchange (NSE). It will also enable small investors to
have access to an otherwise prohibitive market (Julius, 2012).
1.2 ResearchProblem
As identified earlier the key determinants of residential real estate prices are interest rates,
GDP, level of money supply and inflation rate. The factors may have a negative or a
positive relationship with the house prices. The factors may also affect the market directly
or indirectly. For example interest rates affect house prices by raising the demand. Also, the
degree to which each factor impacts the house prices varies. Knowing the relative
relationship is of paramount importance in making investment decisions as well as policy
formulations in a bid to boost the market even further.
Studies have been conducted globally on house prices. Egert and Mihaljek (2007) studied
the determinants of house prices dynamics. Selim (2008) studied the determinants of house
prices in Turkey for both urban and rural areas. Mak et al, 2012 studied the specific
estimates of the determinants of real estate investments in China. Lieser & Groh (2011)
studied the determinants of commercial real estate investments. Posedel & Vizek (2009)
studied house price developments in six European countries. Alves et al (2011) conducted a
research to test other dimensions of asset pricing other than the hedonic modeling.
9
In the Kenyan setting, studies done on the real estate sector include Muthee (2012) who
sought to determine the relationship between economic growth and real estate prices in
Kenya. Jumbale 2012 sought to determine the relationship between house prices and real
estate financing in Kenya. Muli (2011) studied the relationship between property prices and
mortgage lending in Kenya. Julius (2012) studied the determinants of residential real estate
prices in Nairobi.
Though a similar research as this study had been conducted, Julius’ study was limited to
the city of Nairobi and studied the relationship of house prices with interest rates, level of
money supply, inflation rate, population and employment. Other studies have concentrated
on the relationship between house prices and one particular variable without the relative
comparison of other factors. This study sought to extend and fill the research gap by
widening the scope to the whole country of Kenya. It also included economic growth as a
variable.
1.3 ResearchObjective
To investigate the determinants of residential real estate prices in Kenya.
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1.4 Value of the Study
It is expected that this study will add to the body of knowledge in existence in the real
estate field which will be beneficial to academicians. It will also provide a basis for further
research in the field. Thus it will make a contribution to the literature on determinants of
residential real estate prices.
Investors seeking to join or expand in the real estate sector will be able to make informed
evaluation as to what is driving the changes in real estate prices and thus be able to make
sound decisions. Individuals seeking to own their own homes will also benefit in
understanding the market forces and make the best buy. Financing institutions will find this

5. study useful in regard to fluctuations in prices since this affects the long term evolution of
real estate financing. The government and regulatory bodies will benefit in knowing how
government policies on issues like taxation affect the sector and hence formulate
appropriate regulatory framework for enhancing the growth of the sector.
CHAPTER ONE:INTRODUCTION
1.1 Background of the Study
Real estate investment plays the crucial role of providing employment opportunities, offering
shelter to households, enhancing income distribution and poverty alleviation (Masika, 2010). Real
estate industry in Kenya continues to fail to fulfil this fundamental role due to a number of unique
factors that affect the sector. In the recent past, Kenya has witnessed an upsurge in real estate
investment owing to increased quest for Kenyans to own homes coupled by an increased demand
for residential homes due to increased rural urban migration, as well as demand for office space as
more small and medium enterprises come into being (Nzalu, 2010).
Wisniewski (2011) indicates that the processes occurring in real estate are subject to different
impulses, and these impulses are different depending on the financial and economic situation of a
given country. For example, different macro-economic factors vary over time and they influence
economic processes, practices and outputs in an economy. Lynn (2007) states that since macro-
economic factors often influence one another, and at times very correlated, when one factor
changes, ripple effect occurs and the economy is affected much more. To this end, measuring the
effect of macro-economic variables is usually a difficult endeavor.
This paper examines the effect of interest rates, GDP/income, inflation, diaspora remittances -
which affects the balance of payments and employment, economic growth hence affecting the
various markets in the economy including the real estate market 2

6. (Barkham, 2012). Notably, the fluctuating rates of interest do fluctuate the interest charged by
lending institutions on loans – cost of capital for investment. Also, the level of national
output/income affects various aspects of the economy including investments. Also, an increase
diaspora remittance represents an injection of capital for investment. On the other hand, an
employment rate represents a capital addition in the economy which may be spent or invested.
This study examines the effect of the selected macro-economic factors on real estate investments
in Kenya.
1.1.1 Macro-Economic Variables
Macro-economic variables refer to factors that are pertinent to the broad economy at the regional
or national level and affect a large population rather than a few select individuals. Macroeconomic
factors such as economic output, unemployment, inflation, savings and investment are key
indicators of economic performance and are closely monitored by governments, businesses and
consumers (Khalid et al., 2012).
Fischer (1993) posits that the interplay or relationship between various macroeconomic factors is
the subject of a great deal of study in the field of macroeconomics. While macroeconomics deals
with the economy as a whole, microeconomics is concerned with the study of individual agents
such as consumers and businesses and their economic decision-making.
The macro-economic factors are; real GDP, the unemployment rate, the inflation rate, the interest
rate, the level of the stock market, and the exchange rate (Khalid et al., 2012). The five common
macro-economic factors; rate of inflation – affects prices for inputs and outputs in the short run
and interest rates over the longer run in an economy, rates of 3

7. interest – affects cost of capital which is the interest expenses hence property values, rate of
unemployment – affects available income and hence disposable income for investments since this
is an important source of internal equity capital, rate of growth in GDP – affects the domestic
demand for national outputs, and rate of foreign exchange – affects the value of the currency
relative to international currency hence affecting property values where different currencies are
involved as well as the export demand for outputs.
1.1.2 Real Estate Investment
According to Cummings (2010), real estate investing involves the purchase, ownership,
management, rental and/or sale of real estate for profit. Investment in real estate is undertaken for
its ability to provide returns inform of capital, income and intangible benefits (Baum & Crosby
1988). However returns in commercial real estate are maximized when there is full occupancy,
prompt and total rent collection, full market rent, good physical condition of building; minimal
irrecoverable outgoings and low rate of tenant turn over.
Studies by Ziening & McIntosh (1999) and Tonto, Wheaton & Southard (1998) have shown that
the greater volatility in return in commercial real estate is not an appraisal problem but a structural
problem of the property markets and real estate property as an investment vehicle. The most
typical sources of investment properties include: market listing (through multiple listing service or
commercial information exchange), real estate agents, wholesale (such as banks real estate owned
department and public agencies), public auction (foreclosure sales ,estate sales ), and private sales.
4

8. As Lynn (2007) notes, the primary cause of investment failure for real estate is that the investor
goes into negative cash flow for a period of time that is not sustainable, often forcing them to
resell the property at a loss or go into insolvency. A similar practice known as flipping is another
reason for failure as the nature of the investment is often associated with short term profit with
less effort (Thalmann, 2006). Real estate markets in most countries are not as organized or
efficient as market for other more liquid investment instruments. The individual’s properties are
unique to themselves and not directly interchangeable, which presents a major challenge to an
investor seeking to evaluate prices and investment opportunities (Renigier-Biłozor, 2011).
For this reason, locating properties in which to invest can involve substantial work and
competition among investors and to purchase individual properties may be highly variable
depending on knowledge of availability. Information asymmetries are common place in real estate
markets. This however, increases transaction risks, but also provide many opportunities for
investors to obtain properties at bargain prices (Nzalu, 2012). Real estate investors typically use a
variety of appraisal techniques to determine the value of properties prior to purchase.
Real estate investment is measured through various approaches. One of the evident approaches is
through indices mainly used in stock exchange market. Indices are frequently used as a
benchmark against which to measure the performance of shares and fixed interest stock
(Barkham, 2012). They are applied in the property industry but in a limited scope as compared to
stock markets mainly because of difficulties associated with the free availability of data. Owing to
the subjectiveness of property valuations, property index should ideally include a large sample, be
independent of any of the institutional 5

9. investors, and should separate income, capital performance and total performance for each
category of property.
The market value can also be used to measure property performance in the market. The value
placed on a property is a major determinant of its performance. The value may be either market
value or fundamental value. The fundamental value is the value placed on the property by the
owner and is not necessarily market related (Thalmann, 2006). On the other hand, market value is
the value which the market at large places on the property.
Ideally, property indices are produced by industry players such as established investment firms or
government valuing agencies. In real estate sector, indices are produced by real estate investment
firms. For example, HassConsult Real Estate Ltd comes up with real estate valuation indices.
Specifically, the Hass composite Sales Index is a measure of asking property sales price, based on
a Mixed Adjusted Methodology. This study use the Hass Composite Sales Index which will be
retrieved from the Hass Property Index reports.
1.1.3 Effect of Macro-Economic Variables on Real Estate Investments
Like any other sector of investment, real estate is affected by diverse factors including;
fluctuations in exchange rate, interest rate, inflation rate, money supply, national output etc.
O’Sullivan & Sheffrin (2003) indicate that an exchange rate between two currencies is the rate at
which one currency will be exchanged for another. The Post Keynesian theory assumes that
currency prices are determined in the market for financial capital and that trade flows do not tend
toward balance. It is further assumed that income effects are more important in determining the
current account than are price effects. 6

10. GDP (Gross domestic Product) is defined by OECD as "an aggregate measure of production equal
to the sum of the gross values added of all resident institutional units engaged in production”
(OECD, 2002). In Keynes's theory of determination of equilibrium real GDP, employment, and
prices are affected the aggregate income and expenditure. According to Keynes, spending affects
GDP. To this end national income affects the level of investment.
According to Blanchard (2000), Inflation is the sustained increase in the general price level of
goods and services in an economy over a period of time. Through the cost-push theory of
inflation, raising wages can fuel inflation, which will further increase the price of property.
Money supply or money stock is the total amount of monetary assets available in an economy at a
specific time (Cummings, 2010). If Keynes’s theory is conceded, increases in money supply lead
to a decrease in the velocity of circulation and that real income, the flow of money to the factors
of production, increased, hence affecting the real estate market positively (Barkham, 2012).
Therefore, velocity could change in response to changes in money supply.
Barkham (2012) posits that diaspora remittances are the funds entering a country from foreign
markets as gifts or support of friends and members of one’s family. Through the theory of price,
the demand of property by investors in the diaspora can increase the prices of the property in the
market receiving the remittances. Huge remittances from abroad can cause a surge in money
supply hence price of goods.
As Lynn (2007) notes, the primary cause of investment failure for real estate is that the investor
goes into negative cash flow for a period of time that is not sustainable, often 7

11. forcing them to resell the property at a loss or go into insolvency. A similar practice known as
flipping is another reason for failure as the nature of the investment is often associated with short
term profit with less effort (Thalmann, 2006). Real estate markets in most countries are not as
organised or efficient as market for other more liquid investment instruments. The individual’s
properties are unique to themselves and not directly interchangeable, which presents a major
challenge to an investor seeking to evaluate prices and investment opportunities (Renigier-
Biłozor, 2011).
1.1.4 Real Estate Investments in Kenya
According to Muchoki (2013) most people in Kenya prefer to invest in real estate. Real estate
business in Kenya entails buying a house, and it is one of the safest ways to invest your money in
Kenya. This is mostly due to the fact that assets like a land and houses in Kenya have tended to
almost always appreciate. Also, real estate business in Kenya is fair well in the market because
with growing population in Kenya, the demand for houses is on the rise. A Kenyan with the
money to buy a house can prefer to buy a house and make use of the money used to pay rent for
investment somewhere else in Kenya.
Factors that Influence Real Estate real estate include demographic factors, rate of interest,
inflation rate, performance of the economy among others. Demographics are the data that
describes the composition of a population, such as age, race, gender, income, migration patterns
and population growth. These statistics are an often overlooked but are significant factors that
affect how real estate is priced and what types of properties are in demand. Major shifts in the
demographics of a nation can have a large impact on real estate trends for several decades. 8

12. According to Wallace (2013) population shifts and demographic changes in the population have
an impact on the real estate market in Kenya as an increase in population causes demand, which
further increases prices. In assessing the challenges affecting real estate development, Muchoki
(2013) identified that poor planning was one of the challenges. Poor planning is partly contributed
by lack of updated demographic reports.
When interest rates decline, the value of a bond goes up because its coupon rate becomes more
desirable, and when interest rates increase, the value of bonds decrease. Similarly, when the
interest rate decreases in the market, REITs' high yields become more attractive and their value
goes up. Real Estate Investment Trust - REIT' is a security that sells like a stock on the major
exchanges and invests in real estate directly, either through properties or mortgages. When
interest rates increase, the yield on an REIT becomes less attractive and it pushes their value
down. Otwoma (2013) identified that property prices displayed a high inverse relationship with
interest rates in the period December 2000 to May 2003 and November 2011 to June 2013 when
interest rates were high. This inverse relationship reverses in the period June 2003 to October
2011, a period when interest rates were relatively low and stable.
Another key factor that affects the value of real estate is the overall health of the economy. This is
generally measured by economic indicators such as the Gross Domestic Product, employment
data, manufacturing activity and the prices of goods, amongst others. In a research conducted by
Muthee (2012), the results indicate that there is a relationship between the variables (GDP growth,
inflation, and unemployment) revealing that a quarterly change in housing prices yields a
quarterly change in GDP. The data 9

13. collected and analysed indicates that property is a strong asset class which has been under
exploited in portfolios.
1.2 Research Problem
The growth of real estate investment inany context is highly affectedby a myriad of
economic factors. The growth in real estate could be measured as the collective total investments
(costs of investing in real estate) or the price index (the asking prices). In this sense, then different
factors can cause growth. For example, the housing bubble is associable with; excessive desire for
home ownership in an economy, buying for speculation rather than shelter, low interest rates,
viewing residential real estate as a safe harbor, and bad lending practices. To this extent, variables
that influence the above variables such as inflation, GDP, Money supply, including international
remittances are bound to affect the growth of real estate and other sectors in the economy.
As of 2012, the National Housing Corporation (NHC), the Vision 2030 estimates that the country
requires 200,000 new units of housing per year, but the industry could only avail 35,000 units
each year. A report from the Kenya National Bureau of Statistics (KNBS) shows that real estate
investment has greatly contributed the growth of Kenya’s Gross Domestic Product. Kenya
National Bureau of Statistics report (2012) shows that, in 2008, real estate contributed 107, 323,
000 shillings to the country's GDP. However, real estate prices in Kenya have been growing
almost every year.
Masika (2010) posits that demand for housing units continues to outstrip the supply. Makena
(2012) postulates that level of money supply can influence the level of real estate 10

14. investments as well as real estate property prices. According to Otwoma (2013) property prices
display a high inverse relationship with interest rates especially when interest rates are high. He
adds that this inverse relationship reverses when interest rates are relatively low and stable. In his
study, Muthee (2012) established a relationship between the variables (GDP growth, inflation, and
unemployment) and a quarterly change in housing prices yields.
In his study, Nzalu (2012) concluded that GDP, interest rates and inflation rates do greatly
determine the real estate investments in Kenya. Elsewhere, Renigier-Bilozor & Wisniewski
(2012) established total consumption expenditure, net income; unemployment and population
growths are influential factors to the real estate investment. Also Golob, Bastic & Psuder (2012)
affirmed the findings of Renigier-Bilozor & Wisniewski (2012).
It is notable that while different researchers do agree that GDP, interest rates, inflation,
unemployment, demographics, amongst others do affect the level of real estate investments, they
do not conclude on the direction of the relationship or the strength of the relationship.
Furthermore, findings from different authors are not consistent. The question of this study is; what
is the effect of macro-economic Variables on real estate investments in Kenya?
1.3 Objective of the Study
To determine the effect of macro-economic variables on real estate investment growth in Kenya
11

15. 1.4 Value of the Study
The study is of the following practical value: the study provides useful information to policy
makers, market players and finance academicians on the extent to which macro-economic factors
affect real estate development in the country. The outcome of this study provides insight to policy
makers and real estate players as to whether macro-economic factors can be used as a useful tool
in ensuring housing affordability in Kenya.
The study adds value to theoretical discussion by testing the relationship of macro-economic
factors and investment under an environment where demand outweighs supply. The findings of
the study are useful resource base to students pursuing Finance and to researchers exploring the
area of real estate. The study provides useful data for comparative study purposes in future
researches on this topic. 12

16. CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
This chapter provides literatures from past researchers and scholars on the effects of real estate
investment. The chapter examines the concepts and theories on the topic with major focus on
macro-economic variables; Exchange rate, inflation rate, money supply, real output – Real Gross
Domestic Product and diaspora remittances. By considering literatures from diverse past authors,
the chapter forms the theoretical and the conceptual framework of the study on the factors
affecting real estate investment.
2.2 Theoretical Review
Theoretical reviewrefers to the theoretical foundation of a study. A theoretical research has its
findings based on existingtheories and hypothesis; there is no practical application in the
research, while an empirical research has its findingsbased on the verification through
experiments,experiencesand observations.
CHAPTER ONE
1.0 INTRODUCTION
Real estate investment plays crucial role in providing employment opportunities, offering shelter
to households, enhancing income distribution and alleviating poverty. However, the real estate
industry in Kenya continues to fail to fulfil this fundamental role due to a number of unique
factors that affect investment in the sector. In the recent past, Kenya has witnessed an upsurge in
real estate investment. This has been driven by a number of factors notably the quest for
Kenyans to own homes, rural urban migration, increased diaspora remittances among others. As
a result, property prices in the urban areas have taken an upward trend. The expansion of
Mombasa road and the construction of Thika super highway have also contributed to the rise of
property prices in the adjacent areas. It’s therefore important to assess the factors that contribute
to investment growth so as to sustain its the growth in future.
Real estate is property consisting of land and the building on it along with its natural resources
such as crops minerals or water immovable property of its nature an interest vested thus an item
of real property building or housing in general. Real estate investing involves the purchase,
ownership, management, rental land or sale of real estate for profit. Kenyan real estate property
covers all property categories including single and multi-family residential dwellings,
commercial and agricultural land, office space, go-dawns and warehouses, retail outlets and
shopping complexes (Masika, 2010). Real estate is an asset form with limited liquidity relative
to other investment, it is also capital intensive (although capital may be gained through mortgage
leverage) and is highly cash flow dependent. If the factors affecting the growth in the investment
are not well understood and managed by an investor, real estate becomes a risky investment.
The primary cause of investment failure for real estate is that the investor goes into negative cash
flow for a period of time that is not sustainable, often forcing them to resell the property at a loss
or go into insolvency. A similar practice known as flipping is another reason for failure as the
nature of the investment is often associated with short term profit with less effort. Real estate
markets in most countries are not as organised or efficient as market for other more liquid
investment instruments. The individual’s properties are unique to themselves and not directly
interchangeable, which presents a major challenge to an investor seeking to evaluate prices and
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investment opportunities. For this reason, locating properties in which to invest can involve

17. substantial work and competition among investors and to purchase individual properties may be
highly variable depending on knowledge of availability. Information asymmetries are common
place in real estate markets. This however, increases transaction risks, but also provide many
opportunities for investors to obtain properties at bargain prices. Real estate investors typically
use a variety of appraisal techniques to determine the value of properties prior to purchase.
Investment in real estate is undertaken for its ability to provide returns inform of capital, income
and intangible benefits (Baum & Crosby 1988). However returns in commercial real estate are
maximised when there is full occupancy, prompt and total rent collection ,full market rent , good
physical condition of building, minimal irrecoverable outgoings and low rate of tenant turn over.
Studies by Ziening & McIntosh (1999) and Tonto, Wheaton & Southard (1998) have shown that
the greater volatility in return in commercial real estate is not an appraisal problem but a
structural problem of the property markets and real estate property as an investment vehicle. The
most typical sources of investment properties include: market listing (through multiple listing
service or commercial information exchange), real estate agents, wholesale (such as banks real
estate owned department and public agencies), public auction (foreclosure sales ,estate sales ),
and private sales.
1.2 Statement of The Problem
Real Estate comprises lands plus anything permanently fixed to it, including buildings and other
items attached to the structure. Examples of real estate include undeveloped land, houses, town
homes, office, building, retails store and factories (Brown and Matysiak, 2000). According to
Syagga (1987) the principal types of real estate property includes-: rural land use (which consists
of farmland, forestry and mineral land), urban land which consists of (commercial, industrial and
residential properties) and special type of property such as (petrol stations, recreational facilities,
hotels and restaurants, halls and places of assembly and institutional property). The real estate
market and industry covers land and improvements, their selling and rental prices, the economic
rent of land and returns on buildings and other improvements, and the construction industry. The
investment represents a significant portion of people’s wealth, and this is especially true for
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many real estate investors in Kenya. However commercial real estate in Kenya has been faced
with shrinking occupation demand and there exists disparities between expected and actual
income which may be either positive or negative (Murigu 2005). Real estate prices in Kenya has
doubled, even tripled in the past few years (Majtenyi, 2010) and the government wants to know
the cause. Demand for housing units continues to outstrip the supply (Masika, 2010). The size
and scale of the real estate market makes it an attractive and lucrative sector for many investors.
Nuri, E. & Frank Nothat,(2002) in a study found that the population of Kenya has steadily
increased, resulting in an urban population in Nairobi of a record of 3 million people, whereby
all these people need shelter, hence the real estate industry is tremendously doing well and
contributing to the economy’s growth. Real estate investments and prices are good measures for
reflecting expected real estate demand, and serve as good predictors of economic growth (Knight
Frank, 2011). A survey conducted by Hass Consultants in association with CFC Stanbic bank in
the year 2010 revealed that the Kenyan real estate sector has been vibrant for the past decade
between the years 2000 to 2010. For instance the report also indicated that capital gains from
Kenyan properties far outstrips gains from US and UK properties. This has eventually made the
Kenya real estate market to be the winner in the international property investment amidst the
indebtedness in the Western Countries (Mwithiga, 2010).
According to a report by the National Housing Corporation (NHC), the Vision 2030 estimates
that the country requires 200,000 new units of housing but only 35,000 units have been produced
to date. That means we have a deficit of 165,000 housing units. Similarly, a report from the
Kenya National Bureau of Statistics (KNBS) indicates that real estate investment has contributed
a lot to the growth of Kenya’s Gross Domestic Product. For instance data from Kenya National
Bureau of Statistics report (2012) shows that, in 2008, real estate contributed 107, 323, 000
shillings to the country's GDP. In the subsequent year, 2009, the value of GDP attributable to

18. real estate reduced slightly to 116,657,000 Kenyan Shillings. In addition the value of GDP
further rose in 2010 to 123,173,000 shillings and consequently the contribution to GDP from real
estate rose further in 2011 to 134, 746, 000 Kenyan shillings. Real estate and renting business
services play a crucial role in the Kenyan economy (statistical abstract 2011). For instance the
investment grew at 3.5% in 2007 and rose slightly to 3.7% in 2008.
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However, the growth declined sharply to 3.0% in 2009 due reduction in capital investment and
the poor performance of the economy as a result of the post-election violence that led to
destruction of property and in the 2007 General elections. The growth picked up in the
preceding years at 3.2% and 3.6% respectively in 2010 and 2011 respectively as investment
climate became conducive and by the of the end of the third quarter of 2012 the investment was
growing at 3.8% depicting an increasing trend. There has been a great appreciation of property
prices and volatility across the different property markets in Kenya since the year 2006.
According to Hass property consultants, in the first property index in Kenya, the prices for high
end residential properties has doubled between 2005 and 2009 (Hass property index, 2009). The
current rental yields that are the return on capital tied up in property is however much lower than
mortgage interest. The Hass consultant property index data for the first quarter in 2011 indicated
that rental yield are down to 5.62 per cent per from a high of 7.3 percent per year in 2007. The
Hass survey further revealed that property prices have risen to 55 per cent since the 2007 while
rental yields have appreciated with only 18 per cent. The main concern is that real estate
contribution to the economy of Kenya (as measured in relation to the economic growth) has
faced a declining trend for the past years. For instance in 2008, it contributed to 5.1% of total
GDP, and in 2009 it reduced to 4.9% of GDP. Subsequently it slightly fell to 4.8% in 2010 and
further declined to 4.5% in 2011. There is need therefore establish and assess the factors that
contribute to the growth of the investment so as to sustain the investment growth in future.
1.3 Research Questions
(i) What is the impact of GDP on the growth in Real Estate Investment ?
(ii) What is the contribution of interest rates to the growth in Real Estate Investment ?
(iii) To what extend do changes in inflation rate affect the growth in Real Estate Investment ?
(iv) What is the impact of population growth on Real Estate Investment ?
1.4 Objectives ofthe study
The general objective of the study is to determine the factors influencing investment in the real
estate in Kenya.
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1.4.1 Specific Objectives
The study specific objectives are;
(i) To examine the impact of GDP on the growth in real estate investment in Kenya.
(ii) To determine the contribution of interest rates on the growth in real estate investment in
Kenya.
(iii)To determine the extent to which inflation rates affect the growth in real estate investment.
(iv) To examine the impact of population growth on the growth in real estate investment.
1.5 Study Hypothesis
It is hypothesized that the GDP growth is the main contributing factor to the growth in real estate
investment in Kenya.
1.6 Significance of the study
The results and findings from this study will form a basis for policy formulations on ways of
controlling for the determinants of real estate so as to sustain the investment growth in future.
1.7 Scope of the study
The study investigated the factor affecting growth in real estate in Kenya with emphasis on the
assessment of the various contributions of factors such as GDP growth, inflation rates,
population growth rates and rate of interest. The study area involved private and public
developers in real estate property. Data for the study was on time series covering real estate
renting business. The study covered a period of twelve years between 1998 to 2012.

19. 1.8 Organization of the study
The study was organized into five chapters, chapters one to five. Chapter one discussed the
background of the research, statement of the problem, objectives of the research, study
hypothesis, research questions, significance of the study and scope of the study. The next
chapter, chapter two, was on literature review where related literature from various scholars was
reviewed and an overview based on the literature given. The third chapter was on research
methodology, which comprised sample design, research design, and the means of data collection
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