Influence of Investment Risk Hedging on Performance of Real Estate Firms in Meru County- Kenya

Abstract

The real estate investments outperform most asset classes for over a decade and thus attracting many investors. It is one of the sectors contributing greatly to the gross domestic product of many nations. However, risks such as market risk, liquidity risk, leverage risk and interest rate risk may largely affect the performance of real estate firms. These risks affect the real estate investments globally, but Kenya experiences high uncertainty of returns due to market volatility and economic fluctuations. This study aimed to assess the influence of Investment risk hedging on the performance of real estate firms in Meru County. The objectives were to examine the influence of Market risk, interest rate risk, leverage risk and liquidity risk hedging on the performance of the real estate firms. The study adopted three theories, that is; Modern Portfolio Theory, the Market Interest Rates Theory and the Classical Theory of Interest Rates. The descriptive survey design was utilized to collect data using questionnaires. The sample size of 131 officers was arrived at using Krejcie and Morgan. Stratified random sampling method was used to select number of participants in each stratum identified by Krejcie and Morgan formula. The senior managers, financial officers, operations officers, risk officers and sales officers were the units of observation who gave the information required. To test the instruments’ reliability and validity 14 questionnaires were pretested at 3 real estate firms in Tharaka Nithi County using random sampling method to select the participants. SPSS version 23 and Excel were used to examine the data. This study made use of descriptive statistics including frequencies and percentages tables and figures to present the study findings. In addition, inferential statistics such as Regression, and ANOVA were used to present the results. The results indicated that market risk had a significant influence on revenues growth but low influence on ROE, ROA and NOI. Most firms failed to apply financial innovations such as currency swaps and futures to hedge against risk. Interest rate risk hedging had a statistically significant influence on ROE. Hedging strategies such as swaps were very uncommon. Liquidity risk hedging had the highest positive influence NOI and ROE and less influence on ROA. Leverage risk hedging had a significant high positive influence on ROA and revenue growth but and very low influence on ROE. The researcher developed a risk hedging appraisal tool and proposed special, homemade derivatives (Straw belly swaps, and Vanilla futures) for hedging financial risks in real estate in Merucounty, Kenya and developing countries. The study recommended training of real estate firms about financial innovations such as currency swaps and futures to hedge against risk. Maintenance of a well-balanced capital structure as well as diversification was also recommended. A further study on the effectiveness of hedging strategies such as straw belly swaps, and Vanilla futures,on real estate firm’s performance was recommended. It contributed to the existing body of knowledge, the theory and in the practice of Investment risk hedging