Investment and commercial real estate driving growth in Kuwait's real estate sector; Kuwait's residential segment rising in value

In the years following the global financial crisis, Kuwait’s real estate sector is in a position of renewed strength. The residential segment, traditionally the most robust in the market, has shown signs of growth since 2012, with public and private sector players developing new offerings that cater to rising demand for housing. High per capita income levels and purchasing power have also driven growth in the retail market. In particular, demand for high-end goods has led to the development of a wide variety of retail outlets, including malls and luxury stores, across the country.

State Support

Public sector institutions, such as the Public Authority for Housing Welfare (PAHW), Kuwait Credit Bank (KCB) and the Kuwait Investment Authority (KIA), have all played a central role in providing funding for major developments and shaping market dynamics. Moreover, a growing band of private sector developers are gradually emerging as some of the top real estate players in the GCC.

Beyond providing market liquidity, the government is focused on reforming key elements of the real estate sector to remove restrictions and controls over supply and demand to further catalyse growth. Recent initiatives have included amending project finance laws related to public-private partnerships (PPP) for implementing and managing government projects. However, there are still several bureaucratic hurdles that are likely to limit growth over the longer term – many of which were put in place to restore markets following the crash in 2008. As such, tapping into private sector resources will require further reform.

Land Distribution

Real estate in Kuwait is organised into three broad categories: residential, investment and commercial. Residential property trading has historically been the main driver of sector growth; however, in recent years investment trading has grown to account for almost half of all transactions. As the government owns or governs the vast majority of land in Kuwait, it also controls its allocation between the broad real estate categories described above.

Kuwait Finance House (KFH) estimates that just 2.5% of Kuwait’s land, or around 447 sq km, is currently allocated for housing, investment or commercial activities. This acts as a major supply-side constraint for the sector. Further pressure has been added as the population continues to grow and existing parcels of land are developed. KFH also notes that the process of redistributing land between the three categories can be especially cumbersome, with a negative economic impact for commercial and industrial enterprises seeking space to establish production and distribution facilities. Moreover, the lack of new space for development inhibits the creation of a robust secondary market, as families and individuals hold on to property instead of trading housing stock.

Performance

According to KFH, the value of all real estate trades in 2014 increased by 22% year-on-year (y-o-y) to KD4.86bn ($16.74bn), up from KD3.96bn ($13.64bn) in 2013, when the sector posted 18.8% yo-y growth. This made 2014 the best-performing year since 2007. Investor concerns over declining oil prices have helped to drive sector growth, particularly in the investment real estate segment. With the market capitalisation of the Kuwait Stock Exchange (KSE) declining by 4.5% in 2014, real estate has offered a compelling alternative for investment.

Public investment in developing residential and commercial real estate projects was another growth driver, with the rise in transactions also reflected in the revenues and profitability of private companies operating in the sector. According to research by KIPCO Asset Management Company, listed real estate companies in Kuwait turned a corner in 2012, posting cumulative profits of KD397m ($1.37bn) from 2012 through the first nine months of 2014, compared to total losses of KD361m ($1.24bn) in 2009-11. These results are a good indication of the resurgence of Kuwait’s real estate market in recent years.

Residential

The total value of residential sector transactions increased by 6.2% y-o-y in 2014 to KD2.06bn ($7.1bn), according to figures from KFH, with residential real estate accounting for roughly 42.5% of all deals by value. The segment’s share has declined slightly from around 50% in 2013. While the number of residential transactions decreased by about 6% y-o-y, from 6687 in 2013 to 6299 in 2014, the average value per transaction rose by 24.3% over the period, to KD331,250 ($1.14m). Despite short-term fluctuations in house value and transaction volumes, the overall trend of the past three years has been positive, and thanks to the supply and demand dynamics of residential properties in Kuwait, housing stock tends to retain its value over the long term. More recently, stronger growth has been witnessed in the investment and commercial real estate segments.

Investment

Investment real estate saw a rapid rise in 2014, with the total value of transactions increasing by nearly 40% to KD2.11bn ($7.27bn), compared to KD1.52bn ($5.24bn) in 2013. Although the number of transactions in the segment fell from 1815 to 1711 over the period, the average value per transaction was up 30% to KD1.19m ($4.1m), which helped to boost the segment’s share of yearly transactions by value from 38% to 44%. Segment growth has been buoyed by unattractive returns on the KSE in 2014, stemming from lower oil prices and weak investor confidence. According to a report from the National Bank of Kuwait (NBK), the investment segment “has long been viewed as a strong alternative to the stock market for investing”. Specific projects under development include the $77bn Silk City project, which will create a 25,091-ha metropolis close to Kuwait City.

The project, which is expected to be completed by 2023, also includes plans for the world’s tallest tower at 1001 metres. Moreover, the Silk City project is set to offer over 700,000 housing units, as well as planned ports, shopping centres, entertainment complexes and commercial offices. The project is expected to be constructed in phases over the next 25 years. The Sheikh Jaber Causeway, which will link Kuwait to Silk City, is on track for completion in 2018, according to SSH Design which is managing the project.

Commercial

While the value of commercial real estate property transactions has been relatively small in Kuwait, the segment is rapidly growing in importance. KFH figures show that commercial real estate transactions’ share of the sector total had nearly doubled by the end of 2014, from around 10% of total sales in the fourth quarter of 2013 to 22% for 2014.

Considerable activity in the first and second quarters of 2014 saw total quarterly sales values reach KD102m ($351.4m) and KD193.4m ($666.3m), respectively. However, this was followed by a sluggish third quarter, with just 12 transactions worth KD34m ($117.1m), compared to 39 transactions valued at KD252m ($868.2m) in the fourth quarter. This brought the year’s total to KD581.4m ($2bn), up 32% over 2013. As was the case with both residential and investment real estate, the segment’s transaction volume had gone down, albeit by a more significant 31.6%, while the average value per transaction increased by nearly 30% to KD4.85m ($16.7m).

Supply-Side

Public sector investments aimed at expanding the country’s housing stock have helped to boost growth in Kuwait’s real estate market. Developing housing for an estimated 2.6m people through 2030 has been a key priority of the country’s development strategies. The most recent five-year plan, passed in February 2015, will run through 2020 and plans for KD34.15bn ($117.65bn) in spending. This is a slight increase over targeted spending of KD31bn ($106.8bn) under the 2010-15 plan, despite the marked drop in global oil prices. Some 45,000 housing units are expected to be built, as well as a metro system and railway network that could help create greater connectivity for those living outside the urban areas of the country. While similar initiatives saw little to no progress in the past, the government remains hopeful that these goals will be reached.

The PAHW, originally established as the National Housing Authority in 1974, is mandated with leading the implementation of this plan in coordination with the Ministry of Public Works (MPW), which is in charge of developing the required infrastructure in Kuwait, and the Partnerships Technical Bureau (PTB), which oversees the country’s PPP programme. The KCB, meanwhile, provides long-term interest-free loans to Kuwaitis to finance state housing.

Housing for All

Among the social benefits made available to Kuwaiti nationals is the promise of state-subsidised housing after marriage. However, bureaucratic inefficiencies have inhibited the implementation of this policy. By 1980, just six years after the PAWH was created, there was already a backlog of 19,000 housing applications. As of January 2014, this number had risen to nearly 110,000, with Kuwaitis expected to wait up to 20 years to receive housing.

With over half of the country’s 1.2m nationals under the age of 25, the housing shortage is a pressing national concern. To address this imbalance, Kuwait has worked to build residential cities across the country, aiming to construct some 120,000 residential units in the coming years – more than the total number of houses distributed in the 60 years to 2012.

Projects under consideration include Silk City, which will have capacity for 750,000 inhabitants; Al Khairan Residential City, which is expected to accommodate an estimated 600,000 residents upon completion; Al Sabah Al Ahmad Future City, also known as Pearl City, with up to 100,000 inhabitants; Jaber Al Ahmad Residential City, with 70,000; Al Mutlaa Residential District, with 18,000; and Saad Al Abdullah Residential City, with 3576. Further capacity may also be on the horizon, with state-run Kuwait Oil Company turning over some 70m sq metres of land for housing development in May 2014. An estimated 43,000 units will be built on the site, which the government hopes will cut the waiting list nearly in half.

However, thus far progress on many of these developments has been limited. Urban sprawl means new settlements are located farther from the city centre, complicating the accompanying infrastructure and facilities requirements, and the cultural preference for large, single-family units precludes the widespread development of more efficient, apartment-style housing. Indeed, government units are a minimum of 400 sq metres, roughly two-thirds larger than the average new house built in the US.

Work It

In addition to catering to middle- and highincome Kuwaiti families, the state is also developing lower-income housing units as part of its Labour Cities Project to support the large expatriate population, which accounts for some 75% of the country’s total workforce. The South Al Jahra Labour City, which will provide affordable housing for up to 20,000 male labourers, is currently being constructed, with the 1m-sq-metre urban development being carried out under a build-operate-transfer scheme. According to the terms of the PPP, the investor will rent the land from the Kuwait municipality for an investment term of 40 years in return for the right to generate revenue by leasing out completed housing units.

According to the PAHW, the state subsidy for each ready-made unit for Kuwaiti families brings the cost down from around KD300,000 ($1.03m) to $10,000 on average. The price of land forms the majority of the cost, which also includes construction materials and labour. Buyers can take out interest-free loans of up to KD70,000 ($240,000) from the KCB, payable over several decades, as well as KD35,000 ($120,500) in loans for renovation materials. For those building their own home, the same KD70,000 ($240,000) soft loan applies, supplemented by a one-time KD30,000 ($103,356) grant. In March 2013 the government increased the maximum housing loan permitted from KD300,000 ($1.03m) to KD500,000 ($1.72m).

According to the NBK, the KCB approved more than 5000 housing loans in 2014, for a total value of over KD300m ($1.03bn). While approved loans were down 23% y-o-y, disbursed loans were up 43% to around KD200m ($689m), as a result of more housing stock coming on-line through the year. PAHW disbursed 12,000 residential units in 2014, which allowed the KCB to distribute previously approved loans to those who had been waiting for housing.

Landmarks

ift towards high-rise towers as the real estate sector and the financial markets have recovered from the financial crisis. Kuwait City now has four skyscrapers that are over 200 metres in height – all of which were built in 2009 or later. Standing at 412 metres, Al Hamra became the 15thtallest skyscraper in the world upon its completion, winning its architects and developers international accolades for design. The 80-storey structure was named as one the best inventions of 2011 by TIME magazine, as well as earning a second-place ranking in the 2011 Emporis Skyscraper Awards.

The Arraya-2 Tower and the United Tower, also known as KIPCO Tower, are the next two tallest, at 300 and 240 metres, respectively. Arraya-2 is strictly for commercial purposes, while KIPCO Tower has 60 floors of mixed-use space, including a shopping area, offices and residential units. Al Tijaria Tower, at 218 metres in height, was built in 2009 and boasts 41 floors of commercial office space. While Arraya-2 was Kuwait’s tallest building when it was built in 2009, two years later the Al Hamra Tower usurped this title.

Major Players

Several local Kuwaiti real estate companies have expanded their presence in the last decade, entering the top echelon of the GCC property market. Kuwaiti companies made up more than half of the top-50 GCC real estate players by market capitalisation as of 2013, according to Arabian Business, with four Kuwaiti firms ranking in the top 20.

In fifth place, Al Mabanee is Kuwait’s top real estate developer, with the country’s largest portfolio of real estate investments, at a book value of KD460m ($1.58bn) in 2014. The company’s growth has largely been driven by The Avenues mall, a concept it is now expanding to Bahrain and Riyadh. Al Mabanee’s market capitalisation stood at KD709.24m ($2.44bn) at the end of 2014, with net profits of around KD48m ($165.4m) in 2013 and 2014. Salhia Real Estate Company is the second-largest player in the country and was ranked 15th in the GCC. With total assets of KD266m ($916.4m) as of 2014, Salhia reported net profits of KD11.4m ($39.3m) as well as a market capitalisation of KD185.7m ($639.8m) at end-2014. The company has a global footprint, with a portfolio of developments across Europe and the GCC, including the Arraya-2 Tower in Kuwait City.

Kuwait’s third-largest real estate company and 18th in the GCC is United Real Estate Company (URC), which is part of the KIPCO group. The company had a market capitalisation of KD114.1m ($393.1m) in early 2015, with total assets of KD521m ($1.79bn) at end-2014, and reported KD7.9m ($27.2m) in net profits for 2014. URC has a large portfolio of projects in Kuwait, Egypt, Jordan and Oman, including KIPCO Tower in Kuwait City. Moreover, the last of the top four Kuwaiti firms, the Commercial Real Estate Company, commonly known as Al Tijaria, was ranked 19th in the GCC, with a market capitalisation of KD148.1m ($510.2m) as of April 2015. It is focused on investment property and commercial real estate, reporting KD18.9m ($65.1m) in net profits and KD411.8m ($1.42bn) in total assets in 2014. Among its portfolio is the eponymous Al Tijaria Tower in Kuwait City.

Retail

Rising per capita income in Kuwait has spurred on growth in the retail real estate segment, mirroring the broader trend in the GCC. According to a report by Alpen Capital, the value of retail markets in the region is set to grow by a compound annual growth rate of 7.3% from 2013 to 2018, to reach $284.5bn. While the neighbouring UAE takes the top spot in the retail sector, A.T. Kearney’s 2014 Global Retail Development Index ranked Kuwait eighth on its list of the top-20 destinations for global retailers.

Indeed, only the UAE ranked higher amongst the Gulf states on the list, with Saudi Arabia and Oman placing 16th and 17th, respectively. Kuwait’s retail market expanded by 11.9% in 2013, spurred on by urbanisation, the influx of expatriates, rising incomes and the growing tourism sector, Alpen Capital noted.

A Mall World 

To cater to growing retail demand, several high-end malls have been developed in Kuwait. The Avenues Mall, which first opened its doors in 2007, has been expanded into Kuwait’s largest retail shopping space. The mall is spread out across seven districts, with more than 800 shops and a 10,000-vehicle, multi-level parking lot. The mall is currently undergoing a fourth phase of expansion, which is being carried out by Al Mabanee for an estimated KD265m ($913m). The upgrades, expected to be completed by the end of 2017, will bring the total gross leasable area (GLA) of the mall to 357,000 sq metres.

The Avenues has helped attract one of the highest concentrations of international retailers in the GCC, according to A.T. Kearney. Kuwait’s luxury segment is particularly attractive, with major brands like Chanel, Burberry, Louis Vuitton, Prada and Christian Dior establishing exclusive retail spaces at the mall. 360 Mall, The Gate Mall and Marina Mall round out Kuwait’s other premium retail developments. Both 360 Mall and The Gate Mall are smaller than The Avenues, at 82,000 and 37,000 sq metres, respectively.

As the anchor of Marina World, a mixed-use property developed by URC, Marina Mall – with a GLA of 35,379 sq metres – houses more than 150 shops and connects to the rest of the Marina complex via a glass-enclosed walkway. Restaurants, a yacht club and a five-star hotel are all on-site.

Outlook

Concerns remain that insufficient regulation could dampen growth in the sector. To that end, encouraging private investment in the real estate market is a focus for the government and is beginning to yield positive changes. Laws governing the implementation of PPPs are being reformed to attract investment, and the record number of major infrastructure projects launched in 2014 is contributing to market momentum. Despite some fluctuations in the oil economy, the country’s high per capita income appears to be on steady footing, helping to support growth in the local real estate market going forward.