Product Diversification Strategies and Performance of Real Estate Firms in Coast Region, Kenya

Abstract

Financial institutions lend money to real estate companies so they can finance their investments. Recent research has shown that real estate companies struggle to make money to the point that they are unable to repay their loans. One important tactic that real estate companies employ to stay competitive and increase their profitability is diversification. Performance-wise, the sectors of residential, commercial office, retail, mixed-use developments, and serviced apartments recorded average rental yields of 4.7%, 7.0%, 7.5%, 7.1%, and 4.0%, respectively. This resulted in an average rental yield for the real estate market of 6.1%, which is 0.9% points lower than the 7.0% recorded in 2019. The general objective of the study was to establish product diversification strategies and performance among real estate companies in coast region, Kenya. The specific objectives of the study included: To examine the effect of concentric product diversification strategy, horizontal product diversification strategy, vertical product diversification strategy and conglomerate product diversification strategy on performance. The study was based on the modern portfolio theory. The study adopted an explanatory research design. The study was done in coast region specifically Kilifi, Mombasa and Kwale counties. The target population was 319 real estate firms at the coast region, Kenya. A sample of 177 respondents was selected using cluster sampling technique. The study used primary data that was collected with an aid of a 5-scale Linkert structured questionnaire. Data collection started by acquiring an introduction letter from Moi University. A pilot study was carried out on 18 real estate firms in Nairobi County and the instrument was certified to be both valid and reliable. The questionnaires were administered through drop and pick method. The collected questionnaires were processed and analysed. Descriptive and inferential statistics were generated. Descriptive results were presented using the mean and standard deviation. The descriptive results showed that concentric diversification strategy; horizontal diversification strategy, vertical diversification strategy and conglomerate diversification affected performance of real estate firms. The coefficient of determination, R-square in the model summary showed that diversification accounted for 49.7% of variance in performance of the studied companies Correlation results indicated that concentric diversification strategy (r=.630, p=.000), vertical diversification strategy (r=.701, p=.000), horizontal diversification strategy (r=693, p=.000 and conglomeration diversification strategy (r=.565, p= .000) had a significant correlation with real estate performance. Multiple Regression results was conducted and found that concentric desertification strategy (β =0.415, p=0.000), horizontal product diversification strategy (β =0.178, p=.003), and vertical product diversification strategy (β =.152, p=.004) had positive and significant effect on real estate performance. The study concluded that concentric diversification significantly affects real estate company performance, hence, the null hypothesis was rejected; horizontal diversification significantly affects real estate company performance, hence, the null hypothesis was rejected; vertical product diversification has a substantial impact on real estate firm performance; hence, the null hypothesis was rejected and conglomerate diversification had an insignificant impact on business performance, hence, the null hypothesis was not rejected. The study recommended for; Real estate managers to diversify their product offerings by exploring various investment structures and policy makers to ensure that major, established firms compete favourably with small real estate enterprises, the report advises government officials and policy makers to develop new regulations and create a level playing field in the real estate market. By considering Transaction Cost Economics, the research findings show the relevance of transaction cost theory in investigating how diversification affects transaction costs. The study recommends for studies on more diversification strategies to determine how they affect company performance in other industries