Capital Structure Decisions In Commercial Property Investments In Rwanda

The commercial real estate sector is one of the fastest developing sectors in Rwanda, evidenced by an explosion in the development of high-rise properties especially within the CBD of Kigali city. A peculiar feature of commercial real estate investment is the requirement for huge initial capital outlay with a maturity commensurate through the economic life of the investment holding period. Thus, it is often impractical or finically imprudent for investors to finance such acquisitions or developments solely from their personal savings. This necessitates the use of external funding to finance the cost of developing or purchasing commercial properties. This paper provides an empirical examination of the factors which underpin commercial real estate investors’ decisions to combine debt, equity and other financing options the way they do. It focuses on Rwanda, where 10 commercial properties in the city of Kigali were examined. The analysis revealed that the majority of investors prefer combining debt and equity in their capital structure, with the types of equity capital mainly used being partnerships and personal savings, whereas the debt financing option mainly used is bank loans secured by the subject property. The main difference in the capital structure lies in the proportionate fractions of debt and equity that makes up the capital stack. This difference appears in two ways, where an investor might choose a high debt-to-equity ratio or a low debt-to-equity ratio, high debt to equity ratio being the most commonly chosen. The differences were then analyzed to understand the reasons for the observed capital structures. From this understanding we were able to determine empirically the factors that influence investors’ capital structure decisions of commercial properties in Rwanda. The key determinants were interest rates, risk diversification, portfolio considerations and the tax deductibility. The implications of the adopted capital structure on investment performance and risk were also examined.