FOREIGN DIRECT INVESTMENT, EXTERNAL DEBT AND REAL ESTATE INVESTMENT IN KENYA

Abstract

ABSTRACT Development of the real estate sector immensely contributes to the economic growth and development of the country through upgrading the living standards of the people by providing better infrastructural facilities, social amenities, telecommunication facilities and better housing. Kenya in recent years has experienced a surge in the growth of real estate in the suburbs of its major towns and cities. This has been brought about by the increasing pressure for modern housing units from the increasing number of the middle- income people and the general population at large. On the other hand increase of foreign direct investments in the real estate sector has been a contributing factor to the growth of the real estate sector in Kenya. However, other factors such as external debt, inflation, and institutional weaknesses such as corruption have been pulling this sector down. The main objective of this study was to examine the effect of macroeconomic aggregates on real estate investment in Kenya. The specific objectives were to: examine the effect of foreign direct investment inflows on real estate investment in Kenya, determine the effect of external debt on real estate investment in Kenya, establish the existence of long-term relationship between foreign direct investment inflows and external debt on real estate investment in Kenya and the moderating effect of urbanization on the relationship between Foreign Direct Investment inflows, external debt and real estate investment in Kenya. The study adopted analytical research design and a stochastic model using quarterly time series secondary data for 11 years from 2007-2017 sourced from Kenya National Bureau of Statistics economic surveys, World Bank and United Nations Conference on Trade and Development website. Augmented Dickey Fuller test for unit root revealed the presence of unit root that was corrected by first difference. Clemente-Montañés-Reyes Unit-Root test for 2 structural breaks revealed presence of structural breaks in (2010q3, 2011q3), ( 2010q4,2013q2), (2013q3, 2015q3) for real estate, FDI and external debt respectively. Vector Inflation factor test for Multicollinearity coefficient was 1.62<10 and Durbin Watson test for serial correlation coefficient was 1.912<2.5indicating the absence of Multicollinearity and serial correlation. Descriptive statistics of analysis showed absence of outliers in all the variables. Correlation analysis on the other hand revealed a positive and moderate relationship between FDI and Real estate (0.5394) and moderate negative relationship between external debt and real estate (-0.5105). Regression results indicated a positive significant effect of FDI on real estate investment (0.8813076, p< 0.0500)and negative effect of external debt on real estate investment in Kenya (- 0.155869,p< 0.0500). Johansen test for cointegration showed that there were three cointegrating equations as indicated by (4.1035*) trace statistic which is greater than (3.76) at 5% critical valueshowing the presence of long run relatioship. Vector error correction model (VECM) and the error correction term coefficients were (-.477807, p< 0.0500), (-0.604642, p< 0.0500) and (-.792045, p< 0.0500) respectively for the real estate investment , FDI and External debt respectively suggesting that there is a long term relationship running from Real estate investment, foreign direct investment and external debt. The results also showed that there was statistically significant negative moderating effect of urbanization on the relationship between FDI and external debt on real estate investment in Kenya (-0.043, p < 0.0500). The study recommends that; the government should encourage FDI through incentives, reduce external borrowing by protecting infant industries and promote real estate development in rural areas.