Effect of Residential Real Estate Portfolio Diversification on Management of Risks by Real Estate Developers in Nairobi County

Abstract

In real estate, risk is the possibility that an investor will lose some or all of the initial investment. Recent trends in real estate development processes have exposed real estate developers to further and greater risks. The purpose of the study was to investigate the effect of real estate portfolio diversification on the management of risks in real estate developers in Nairobi County, Kenya. The specific objectives of the study were to determine the levels and types of residential real estate diversification, the risks associated with residential real estate investment portfolio and the optimal portfolio of residential properties that can mitigate against risks in real estate investments. Theories adopted in this study included modern portfolio theory, portfolio management theory and capital asset pricing. The research was carried out in county Nairobi. Nairobi County consists of 17 sub-counties. The study also employed qualitative approach to provide information on risks involved in levels of residential real estate diversification amongst real estate developers. The target population for the study comprised of 69 real estate developers in Nairobi registered with Kenya Property Developers Association (KPDA) in Kenya. The sample size was the same as the target population therefore a census methodology was adopted. This study relied on primary data and secondary data. Secondary data in this study was obtained as reported by the financial controllers. Primary data was collected using interviews conducted online through phone calls. Quantitative information was analyzed using statistical measures of arithmetic mean, variance and standard deviation of returns were used. The study revealed that the level of residential real estate diversification influence the management of risks. Intra-asset diversification of residential portfolios benefits the firms in risk mitigation. Further, the rise in demand by institutions and accommodation has enhanced optimal portfolio of residential properties. A regression test was conducted to test the relationship between portfolio size and income and revealed that there is a significant relationship between total portfolio size and the income thereof (p value = 0.000. The relationship between portfolio size and risk was negative. The optimal portfolio size was 2000 units of apartments and mansionettes. A portfolio size which is higher than 2000 didn’t not significantly lead to a reduction in risk. Portfolio sizes that were lower than 2000 constituted a high risk and hence were not optimal. ANOVA table had a statistical p-value of 0.000 which implies that we reject the null hypothesis. Therefore, real estate portfolio diversification have a significant effect on the management of risks among real estate developers in Nairobi County, Kenya. The study revealed that the level of residential real estate diversification influence the management of risks. A broadly diversified portfolio is generated by owners, so that the particular risk involved with one resource is offset by the unique risk involved with yet another asset. By incorporating some fixed-income strategies, you are further hedging portfolio against market uncertainties. Companies adopt optimal portfolio residential properties that can mitigate against the risk in real estate investments which include intra-asset diversification of residential portfolios and meeting locational and structural demands consideration in the market. The study therefore recommends that real estate developer firms should adopt the various risk mitigation strategies that are useful to an organization to minimize the effects of risks on the

investment returns. This will involve variety of diversification strategies of assets’ classes and products.