Relationship between Property Diversification Attributes and Financial Performance of Real Estate Investment Trusts in Kenya

Abstract

Real Estate Investment Trusts (REITs), which are essentially regulated collective investment vehicles, allow investors to contribute funds in exchange for the acquisition of rights or interests in a trust that is divided into units with the goal of becoming beneficiaries of the trust and receiving income or profits from real estate. They might provide a way to supplement the delivery of various programs, like the affordable housing initiative that is still gaining ground in Kenya, due to their exclusivity and alternate source of finance. To this end, Nairobi Securities Exchange created the REITs market segment to attract the listing of REITs companies. However, as seen by the valuation of the share prices, the performance of the listed REITs has not been as favourable as anticipated. The insufficient subscriptions and unmet listing requirements show that other real estate developers' attempts to issue new income (I-REITs) and development (D-REITs) have failed. This begs the question of whether the REITs' surprising performance could be ascribed to outside variables, such as property diversification attributes – independent of the investing market. The purpose of this study was to investigate the relationship between REIT performance in Kenya and the diversification attributes of properties. Primary data was gathered from fund managers, stockbrokers, investment banks, and property developers. To ascertain the degree of independence and convergence of the constructs as they relate to the investigation, the paper used exploratory factor analysis (EFA), path analysis via analysis of moment structures regression. Principal component analysis was employed to establish if items extracted through EFA were related. The component matrix factor loadings for property diversification attributes were then extracted. Lastly, using Alpha at a 0.05 significance level, structural equation modelling was employed to assess the hypothesized associations. The findings show a highly significant association between property diversification attributes and Kenyan REIT performance. For REIT investors, geographic diversification of assets is also crucial since it lowers market risks. The paper therefore concludes that geographic and economic diversification of the underlying properties of REITs, as well as property type, are essential factors in REITs' performance and can increase investors' interest in REITs. In order to attract potential investors who might be interested in REITs properties with such diversification attributes, it is advised that REITs issuers make sure that their properties are diversified to include a variety of property types.