The sector turns to new greenfield developments

Although growth in real estate slowed during the global financial crisis, the sector has rallied to become one of the best-performing non-oil industries in Kuwait. Following early recovery in 2011 and 2012, real estate growth increased considerably in 2013, driven by investment and the commercial sector’s performance, with expanding housing demand supporting growth in the residential sector. While the commercial segment had faced problems with excess supply, government investment and movement on new mega-projects should see the sector grow steadily in 2014. Land allocation poses a challenge to future expansion, with the government’s housing backlog nearing 110,000 applications, although its efforts to increase the longstanding mortgage cap in late 2013 should see lending activities increase in 2014, which will drive growth in the residential market over the medium term. At the same time, record population growth has led the investment sector to reach new highs in 2013, a trend that is expected to continue throughout 2014.

Overview

Real estate activity in Kuwait encompasses three broad categories, including residential real estate, investment and commercial properties. Foreigners are prohibited from owning property in Kuwait, meaning residential real estate activities are constrained to the growing population of Kuwaiti nationals, while investment properties largely comprise apartment complexes serving expatriates and Kuwaitis that are currently awaiting delivery of government housing. The commercial segment includes office and retail space, and has seen a dramatic improvement over the past year, becoming one of the fastest-growing segments of the market.

Kuwait’s real estate market is unique, in the sense that it is highly centralised, with the Public Authority for Housing and Welfare (PAHW) tasked with providing affordable housing for Kuwait’s citizens, while most of Kuwait’s land is government-owned and limited in terms of development opportunities, as the state has reserved the majority for hydrocarbon extraction and military purposes.

Players & Sectors

The top five real estate companies in Kuwait, with respect to total assets, are the National Real Estate Company (NREC), with $1.77bn, United Real Estate Company (URC, $1.6bn), Mabanee Company ($1.38bn), IFA Hotels and Resorts Company ($1.35bn), and the Commercial Real Estate Company (CREC, $1.31bn). Other notable companies include Alargan Real Estate and Action Real Estate Company. The residential segment dominates real estate activities in Kuwait, comprising 49.8% of total sales in 2013, followed by the investment segment, at 38.3%, and the commercial segment, with 11.9%, according to the National Bank of Kuwait (NBK.) In 2010, the real estate sector comprised 15% of the total trading activities in Kuwait, with 39 private companies operating in the country, according to ratings agency Capital Standards, although the number of real estate companies has since increased to 49, with assets totalling $19.54bn as of June 2013.

According to a recent NBK report, property sales reached KD315m ($1.1bn) in January 2014, marginally lower than the previous month, but up by 24% year-on-year (y-o-y). Growth was driven primarily by activity in the investment segment, with monthly sales rising to KD141m ($495m), equivalent to an 88% increase y-o-y. The number of transactions hit 197, up 76% over the same month in 2013. The majority of transactions were accounted for by individual apartments, followed by whole buildings, at 38%, and plots of land, with 6%. Investment properties are considered an alternative to the stock market and are largely made up of apartment complexes that cater to the expatriate population.

Meanwhile, in the residential sector, which reflects the housing demand of the Kuwaiti population, sales dropped 2% y-o-y in March 2014, to hit KD142m ($503m). While the average sales value climbed by 46% in annual terms, the number of transactions fell 32% to 368, the lowest level since February 2013. The jump in average value was driven at least in part by several large transactions, with three properties selling for KD2m ($7m) each. Sales in the residential sector are largely made up of land plots, which accounted for 60% of January 2014 transactions in this segment. The balance of real estate sales were in the commercial segment, where nine properties where sold for a combined KD32.1m ($112.8m).

Growth

Following several years of decline following the global financial crisis, Kuwait’s real estate sector showed strong recovery in 2012 and 2013, and should continue its upwards trajectory in 2014. The market underwent a spectacular expansion during the pre-crisis period, driven by investments in the commercial real estate segment, but subsequently deflated in the wake of the global financial downturn, with market capitalisation losses reaching 40% in 2009 and profits dropping 135% in the same year. Post-2010, the sector began showing some improvement, although its contribution to GDP remains low. The sector’s GDP at purchase price value grew by 2.78% in 2012 to reach KD1.3bn ($4.6bn), compared to KD1.26bn ($4.43bn) in 2011; however, real estate’s contribution to total GDP dropped from 2.9% in 2011 to 2.5% in 2012, according to Capital Standards.

Growth in 2013 reached – and even surpassed – pre-crisis levels in some segments, driven by high demand for residential property, impressive expansion in the investment segment and a substantial increase in commercial sales. The NBK reported average monthly sales of KD308.8m ($1.09bn) in 2013, representing 18% growth over 2012, while in April 2014, the bank also said that the real estate sector accounted for 9% of total profits in Kuwait, with the sector’s profits increasing by a dramatic 106.9% in 2013 to reach KD148m ($520.3m.) Lending has also shown impressive growth. According to the Central Bank of Kuwait, utilised credit facilities extended by local banks during the 2012/13 fiscal year increased by KD1.34bn ($4.7bn), or 5.2%, to reach KD27.4bn ($96.2bn), compared to KD26bn ($91.4bn) at the end of the previous year. Surging personal and real estate loans drove the rise in lending, with real estate loans increasing by KD454m ($1.6bn), or 6.7%, to reach KD7.2bn ($25.3bn.) Capital Standards reported that bank credit facilities extended to the real estate sector stood at KD7.5bn ($26.4bn) as of December 2013, compared to KD7.07bn ($24.8bn) in 2012, representing 6.08% growth, with outstanding real estate loans accounting for 25.97% of the total loan portfolio of banks.

In February 2014, Capital Standards reported that out of 44 companies with financials available to the public, 33 reported net profits in the first half of 2013, including the big five: Mabanee led the pack, reporting $98.4m in net profits, followed by CREC with $23.81m, NREC with $23.47m, URC, with $20.94m, and IFA, with $630,000. Mabanee’s revenues reached $160.65m in the first nine months of 2013, followed by IFA Hotels, at $98m, URC, at $73.32m, CREC at $50.63m, and NREC, at $19.52m. Capital Standards also reported that nine of the 11 loss-suffering companies reported smaller losses during the first half of 2013 compared to 2012, leading the agency to report that the sector has at least partially recovered from the crisis, and is poised to show a strong performance in 2014.

Legislation & Mortgages

The sector’s overarching legal framework is largely encapsulated in Law 74/1979, which confines ownership of real estate to Kuwaiti nationals, although foreign nations are permitted to own real estate used as diplomatic missions, while ambassadors and mission members, as well as Arab state nationals, may also own property on issuance of a decree from the Council of Ministers. In late 2008 the Kuwaiti National Assembly issued in Law No. 8/2008, concerning the private housing sector, whereby private companies were prohibited from investing in private housing projects. Critics noted that the law failed to distinguish between legitimate sharia-compliant banks and speculative property traders, and although Islamic banks have since been exempted from the law, stakeholders maintain the legislation poses significant challenges for real estate firms hoping to raise capital, negatively impacting the sector.

More recent developments have shed a promising light on future growth, however. In 2011 the state promulgated its Women’s Housing Care Law, which established new low-interest loans with a maximum limit of KD70,000 ($246,120) for Kuwaiti women married to non-Kuwaitis, divorced women over the age of 30 and widows of Kuwaiti citizens. The decision was thought to have led to a surge in demand for condominium apartments, which contributed to the residential market’s expansion in 2012 and 2013. In December 2013, the government moved to increase a long-standing mortgage allowance, which had previously been set to a maximum of KD70,000 ($246,1230.) Under the new rules, Kuwaitis are allowed to borrow up to KD100,000 ($351,600) to finance a property, and a maximum of KD30,000 ($105,480) for renovations, which should help those facing a decades-long wait for government housing find private funding to purchase a property or upgrade existing villas.

Nonetheless, mortgage activities are restricted to Kuwait’s sharia-compliant Islamic banks, which have led to complaints from standard private banks that current legislation is restricting growth in lending. Seven lenders in the segment are able to offer home financing, including Kuwait Finance House (KFH), Ahli United Bank, Kuwait International Bank, Boubyan Bank, Warba Bank and Al Rahji Bank.

The state’s Savings and Credit Bank was renamed the Kuwait Credit Bank (KCB) in January 2014, and has seen its strategy shift towards provision of mortgages for Kuwaiti families. Property and land are financed under murabaha (cost-plus financing) and ijara (leasing) models, while construction and renovation loans operate under the of deferred delivery. Financing is generally limited to 15 years and the market remains burdened by mortgage caps, with most residential properties priced far beyond the government’s KD100,000 ($351,600) cap, and all lenders insisting salary transfers be made directly to mortgage payments. These restrictions have led conventional banks to lobby for mortgage reforms, hoping to capitalise on anticipated future growth in the residential market. Nonetheless, the KCB’s 2014 rebrand and strategy shift could be emulated by private banks that choose to undergo structural changes; in April 2014, for example, the Commercial Bank of Kuwait, the state’s fifth-largest lender, announced it plans to convert into a full-fledged Islamic bank offering mortgages, which could set a precedent for traditional banks to expand their portfolios to include home finance.

Land Licenses

Land allocation also remains a challenge. KFH estimates that less than 5% of Kuwaiti land has been developed for real estate. At just 17,800 sq km, Kuwait’s relatively limited supply of land is made more inaccessible due to its high reserves of oil and gas, with many areas thus being set aside for exploration and drilling activities, as well as military use. This has resulted in a dearth of licences, with building also curtailed in areas where large, long-term mega-projects are being developed.

Despite these ongoing challenges, the legislative framework governing real estate activities is relatively conducive to growth. Buyers and sellers do not pay taxes or charges when transferring properties, and the state lacks a general real estate tax, though fees charged by the Real Estate Registration Department range from 0.25% to 0.5% of the sale’s total value.

Investment

Kuwait’s population has grown considerably in the past decade, jumping from 2.2m in 2004 to 3.97m in 2013, with expatriates comprising about 69%, or 2.7m, according to the Public Authority for Civil Information. This considerable population growth has put intense pressure on the PAHW, with its housing backlog growing to 109,122 as of January 2014. The investment segment has shown strong growth in the wake of a shortage of affordable housing; expatriates and Kuwaitis on the housing wait list typically reside in rented apartments constructed for investment purposes, with a shortage of these properties driving rents to new highs in 2013. Indeed, real estate growth in 2013 was driven by record-breaking sales in the investment segment, which grew 23.6% in 2013 to reach KD1.4bn ($4.9bn), with the number of transactions growing by 10% over 2012. The investment segment increased to a record KD207m ($727.8m) in December 2013, representing 79% y-o-y growth, and easily surpassing the previous sales record of KD184m ($646.9m) in April 2007, indicating the sector has shown strong recovery from the 2007-08 global crisis.

Demand for rented apartments can be seen in vacancy rates, which have hovered around 5% in the last five years, according to Capital Standards, while rental yields from these apartments range between 7% and 9%. Rental rates in Kuwait City jumped by 27% over the past three years, according to economist Hajaj Bu Khadour, who told Al Bawaba in August 2013 that the normal growth rate in the GCC is 8%. According to economists at NBK, the appetite for real estate investment is expected to continue into 2014, especially if more expatriate workers are hired to work on a number of new construction projects currently in the pipeline. Real estate investment could see a dramatic decline in the medium term, however. The government has announced plans to reduce its expatriate workforce by up to 1.4m in the next six years, which will have a considerable knock-on effect on real estate investment, and could lead to a substantial oversupply within the investment segment.

Residential

Foreigners are prohibited from owning property in Kuwait, so the residential segment is dominated by government-supplied affordable housing. The PAHW is currently working on delivery of a number of new residential cities: Al Khairan Residential City, with 35,844 units; Al Mutlaa Residential District, with 18,000 units; and Al Sabah Al Ahmad Future City, with 11,000 units, as well as South Al Jahra Labour City, which will deliver 20,000 affordable units to low-income expatriate labourers.

In March 2013, the state announced new plans to build an additional 174,000 units by 2020, an investment expected to reach $5bn. The PAHW has indicated that it plans to start work as soon as possible, given inflation rates, and that, while most projects will be government run due their size, some private sector participation may be possible. Yasser Abul, minister of state for housing affairs, told OBG, “In regards to increasing the housing supply, there is plenty of room for the private sector, but they must work hand-in-hand with the public sector due to the large scale of the planned projects.”

This demand provides some security to investors. Khaled Al Meshaan, chairman and managing director of Alargan Real Estate, told OBG, “With the large youth population and rapidly growing middle class, there is great potential for further growth throughout the real estate sector.” In the longer term, Kuwait has plans to develop one of the most ambitious real estate projects in the GCC, Madinat Al Hareer, or Silk City, in the northern Subiya area. Silk City will feature numerous bridges, an expansive sports complex, convention centres, a duty-free mall, and a 1001-metre skyscraper, all spread over an area of 250 sq km. In addition to its recreational offerings, Silk City is expected to include 175,000 residential units able to accommodate up to 750,000 people, although this long-term plan has been slow to take off, with more recent estimates putting the total project cost at between KD25bn-27bn ($90bn-95bn).

Commercial

In 2011, Kuwait’s commercial real estate market was comprised of about 811,000 sq metres of retail and office space, 55% of which was occupied, with rental rates hovering around KD6.75 ($23.70) per sq metre. Indeed, the sector has long faced serious challenges of oversupply, with Capital Standards reporting that the slow pace of economic growth in Kuwait, coupled with delays in the implementation of the National Development Plan, has led to a fall in demand for commercial real estate properties. According to the agency, occupancy rates in some of the busiest and most well-known commercial offices in Kuwait remained well below 50% as of June 2013. “A revival in business conditions in Kuwait is the only catalyst that could lead to better prospects for the commercial real estate business,” read Capital Standard’s June 2013 real estate report.

Compared to previous years of slow growth or declines, however, 2013 was an exceptional year for the commercial sector, with total sales reaching KD440m ($1.55bn), up 75% compared to 2012. Growth was driven by a large number of transactions, which doubled 2012 levels to reach 178 in 2013, while transaction sizes increased by 12%.

Economists at NBK have suggested that the growth in the commercial segment has been driven by largely two factors. The first is a potential spillover from the investment segment, with boundaries between the two markets not clearly defined, while the second involves government stimulus. According to the NBK, the state’s major real estate investment firms, including the Kuwait Finance Investment Company, Kuwait Investment Authority (KIA), and KFH, have become more active in buying commercial property in the last several years.

Indeed, rapid recovery and dramatic new growth can be partially attributed to the KIA’s recent decision to inject nearly $3.6bn into the local commercial property market, in an attempt to bolster the struggling sector and benefit from plunging prices. KIA, one of the largest sovereign wealth funds in the Gulf, launched a real estate investment portfolio worth KD1bn ($3.5bn) in March 2011, which is managed by KFH, Kuwait’s largest lender.

Local experts applauded the move, anticipating that increased market liquidity will bolster local investment and real estate activities, as well as the Kuwait Stock Exchange. While the commercial office segment has traditionally underperformed compared to the residential and investment segments, 2014 could see sustained growth in the commercial space, as the government appears poised to move forward on several of its most-ambitious mega-projects, including the Clean Fuels Project, the Al Zour North Independent Water and Power Project, and a host of new residential builds. Improvements to the overall business environment will see the office sector continue its growth trajectory, although it is unlikely to hit the same highs in 2014 as it did in 2013.

Shopping Spree

Kuwait ranked ninth overall on A.T. Kearney’s Global Retail Development Index 2013 survey, rising three places from 2012, and holding the number two spot within the MENA region, behind the UAE. The retail segment has largely grown on the back of international brands’ expansion. Most recently in March 2014, when Marks & Spencer opened a new 6700-sq-metre store in Kuwait City. Operated by Al Futtaim Group, Marks & Spencer’s long-term franchise partner, the store is the 26th to open in the region and the largest international store in Marks & Spencer’s portfolio. Rising consumer demand has also led to a wave of new shopping centres. 360 Kuwait, which has 82,000 sq metres of retail space, opened in 2009, while the state’s showpiece shopping centre The Avenues opened its $533m, 100,000-sq-metre phase-three extension in 2012, which included 545 retail units and 52 food and beverage outlets. The Avenues will move forward on a planned phase four expansion, which is slated to include two five-star hotels, additional shopping space, and a multi-purpose ballroom when finished.

Meanwhile, The Gate Mall, a six-floor, 37,000-sq-metre shopping centre located near the American University of Kuwait and slated to include over 275 shops, is expected to open by the end of 2014. The KD12m ($42.2m) project, built by Al Kuthban Construction, will be Kuwait’s third-largest shopping centre when it opens. Meanwhile, developers of Al Salam Mall, a $71m project with 26,680 sq metres of gross leasable area, announced it would open in September 2014 with 70% of retail space leased.

Outlook

Although it was perhaps one of the hardest-hit sectors during the 2007-08 financial crisis, region-wide real estate showed promising gains in 2013, after years of slow recovery. Although residential activities lead the market, rapidly expanding commercial and investment segments should continue to offer opportunities to investors in 2014. Kuwait’s expanding population, shortage of affordable housing, and ongoing mortgage reforms will concurrently drive growth in the residential segment, although land allocation and a relatively limited mortgage allowance will continue to pose problems. The forecast for the sector is positive, especially given the government’s moves to roll out mega-projects, which will improve the business environment, driving growth in all three sectors. However, should the government make good on its plan to reduce its expatriate population by over 1m people, the sector will face enormous challenges in expanding and maintaining both occupancy and rental rates.