Drivers for Capital Structures of Real Estate Firms in Kenya

Abstract

This study sought to examine the factors that influence the capital structures of Real Estate Firms in Kenya. The study was guided by the following specific objectives: to assess the factors which influence the capital structures of Real Estate Firms in Kenya; and to examine the effect of capital structure on Real Estate Firms in Kenya.To undertake the study, a descriptive research design was used. This type of design involves an extensive well-focused literature review and identification of the existing knowledge gap.  The method was preferred as it permits gathering of data from the respondents in natural settings. In this case, was possible for the researcher to administer the data collection tools to the respondents in their workstations, which was relatively easy and enhanced the response rate. The population of study was the Real Estate Firms registered with the Kenya Property Developers Association, whose number stood at seventy (70) as at June 30^th 2008. The respondent in each of the companies was the Head of the Finance function or the appointed representative. It would have been desirable to undertake a census of all the Real Estate Firms in Kenya, but owing to their big numbers and spread all over the country, which would have serious cost implications, a sample of thirty-five of the Real Estate Firms was considered for the study, using stratified random sampling. Primary data was collected from the respondents using a semi-structured questionnaire. The questionnaire was pre-tested on five randomly selected respondents to necessitate adjustments in order to make it more suitable and minimize bias in responses. The procedure that was used in collecting data was through distribution of the questionnaires that is, dropping and picking questionnaires from respondents at their most convenient time that was agreeable to both parties. For purposes of the current study, the data was analyzed by employing descriptive statistics such as percentages, mean scores and standard deviations. Statistical Package for Social Sciences (SPSS) was used as an aid in the analysis. The researcher preferred SPSS because of its ability to cover a wide range of the most common statistical and graphical data analysis. Computation of frequencies in tables was used in data presentation. The information was presented and discussed as per the objectives and research questions of the study. The key findings of the study were as follows:-Majority of the Real Estate Firms in Kenya (80%) had a capital structure of 100% equity while the other 20% had a debt equity ratio of 50:50. The findings further show that the following factors, listed in their order of strength, influenced capital structures of Real Estate Firms:- Asset structure of the Firm; Growth rate of the Firm; Operating Risk of the Firm; Profitability of the Firm; Age of the Firm; Industry type; Size of the Firm; and Ownership control. Impact of Taxation has the least influence. Other factors that influence the capital structure of Real Estate firms include:- Government and other regulations from regulatory authorities; Prevailing market and economic conditions; Cost of capital; Cash flow stability; Expected returns of the organizations versus investment opportunities; and External factors such as inflation rates. The findings further indicate that the Real Estate Firms in Kenya were least affected by Bankruptcy costs (Legal and Administrative costs); followed by favorable tax treatment of interest payments (Interest is tax deductible expense). A firm that pays taxes receives a partially offsetting interest (tax-shield) in form of lower taxes paid. To some extent, the firms were affected by agency costs arising as a result of the relationship between shareholders and managers and those between debt holders and shareholders. Other effects included the following: High liquidity; Flexibility in decision making; Favorable returns on monetary investments; and Financial independence.

Key words: Capital structures, Real Estate firms