Signs of recovery: Good fundamentals present opportunities for future growth

Steady residential demand from a young and wealthy population and increased government spending on commercial development projects is helping the real estate market get back on track, with clear signs of recovery in the industry. Recent legislation, including new laws giving women stronger homeownership rights, and allowing Islamic banks to offer mortgage services, should also benefit the sector in the coming years.

HIGHS & LOWS: For much of the past decade, the real estate market posted strong growth numbers on the back of surging oil revenues, favourable demographics and political stability. The sector expanded at a compound annual growth rate (CAGR) of 5.6% from 2000 to 2007, and in the latter year accounted for 3.9% of GDP. According to figures from the Global Investment House, the overall value of real estate transactions totalled KD2.81bn ($10.13bn) in 2007, an all-time high. The picture changed, however, with the outbreak of the global credit crunch, which led to a sharp reduction in activity. From 2008 to 2009, the total volume of real estate transactions fell from 6166 units to 4586 units, a decline of 25.6%. Over the same period, industry profits and market capitalisation dropped by 135% and 40%, respectively, according to figures from the Capital Standards ratings agency. “The economic downturn had a broad negative impact on the property market,” Venkateshwaran Ramadoss, the assistant manager at the Kuwait Financial Centre, told OBG. “The consequences were, and remain, most severe in the commercial office segment, where there has been a steep decline in rental values and a surge in unit vacancies.” As might be expected, the downturn also hurt the profitability of real estate firms, many of which had become dependent on risky investments during the period of strong growth. Since 2009, several real estate firms with investments in domestic and overseas property markets have undergone debt restructuring to avoid defaulting on their obligations. Meanwhile, firms that have maintained healthy margins have done so by relying on rental operations and other more stable revenue streams. For example, two of the more profitable companies in 2010, the Salhia Real Estate Company and the United Real Estate Company, both have strong retail segments. Salhia and United saw 55% and 85% of gross profits come from their rental business, respectively, in 2010, according to figures from Capital Standards.

RECOVERY: Despite major setbacks following the global economic crisis signs of market recovery have appeared in 2010-11. According to Kuwait Financial House, the total value of real estate transactions was estimated to have risen by 5.3% in the first quarter of 2011 and reached KD1bn ($3.6bn) by the second quarter. This continued a trend established in 2010, when average monthly sales totalled KD166.1m ($598.79m), up 53% from KD108.7m ($391.86m) in 2009. Overall, the sector’s total value climbed to some KD2bn ($7.21bn) in 2010, a 21% increase over the figure a year earlier.

Although the market still remains weak in some areas, there are good reasons to believe that this positive trend will continue going forward. For starters, the Kuwaiti population is young and growing, with more than half of Kuwaiti nationals under the age of 25. Although home financing has become more restrictive in the wake of the global crisis, Kuwaitis continue to enjoy generous, tax-free salaries from the government, which employs the majority of resident nationals. “The real estate market will continue to benefit from the strong purchasing power of the locals,” Ramadoss said.

BUILDING PLANS: In addition, the health of the market is likely to improve with the roll-out of the National Development Plan, which will address rising house prices and surging demand by overseeing the construction of more than 70,000 new homes in several municipal areas. Furthermore, over the next five years the Kuwait Investment Authority plans to invest KD1bn ($3.6bn) in the commercial segment (see analysis), a move expected to boost market liquidity and reduce pressure on indebted sector companies. “Such huge liquidity in the real estate market will reflect positively on local investment and real estate firms, and the country’s bourse as well,” Tawfiq Al Jarrah, the chairman of Kuwait Real Estate Union, said in March 2011.

RESIDENTIAL: The local real estate market is typically divided into three segments: residential, which mainly serves Kuwaiti citizens; the investment segment, which consists of rental units for expatriate workers; and the commercial market, consisting of office and retail properties. Of these, the residential segment posted the strongest growth from 2009 to 2010, with the number of sales jumping 65%. In addition, statistics from the Ministry of Justice indicate that the value of real estate transactions rose to KD1.1bn ($3.97bn) in 2010, up 73.7% from the figure in 2009.

All Kuwaiti nationals are legally entitled to government-subsidised housing. Upon marriage, families become eligible for KD70,000 ($252,350) soft loans, which are used to finance the construction or purchase of new homes. Over the past two decades, the number of applications for guaranteed housing has far exceeded supply, resulting in a backlog of more than 90,000 units at the Public Authority for Housing Welfare. Given that the country’s population is projected to grow by 3% from 2011 to 2014, this problem, if not addressed, will become more acute.

Above all, the country’s low housing supply is a function of land shortages nationwide. Land access has been constrained by geographic limitations, and by the passage of Laws 8 and 9 in 2008, which, in order to curb speculation, have restricted private companies from buying and trading residential property. Overall, only 3-7% of the country’s territory has been developed, with the rest owned by the government and controlled by strategic industries such as the oil and gas sector.

Land deficits are compounded by social expectations. In general, Kuwaitis prefer to own large villas in central and upscale locations. Rental units, vertical projects and homes outside of well-developed areas are considered undesirable. In the view of some industry professionals, expectations will need to follow the market as apartments or 200-250-sq-metre homes, as opposed to the current norm of 400 sq metres, become the more readily available options.

SUPPLY FOR DEMAND: Although many doubt the preferences of local homebuyers will change in the near future, there is some optimism that the government will alleviate housing shortages through residential building projects. Under the National Development Plan, the authorities plan to expedite construction works on six new residential cities holding more than 70,000 units, all of which will be provided to Kuwaiti nationals free of charge. These include the Khairan Residential City (35,844 units), the Mutlaa Residential Areas (18,000), the Sabah Al Ahmad Future City (11,000), the Jaber Al Ahmad Residential City (5020), the North South Sulaibikhat Residential City (1736) and the Saad Al Abdullah Residential City (3576).

Meanwhile, the most ambitious long-term housing project in Kuwait is Madinat Al Hareer, or the “Silk City” development. Once completed in 2023, the city will cover a 250-sq-km area in the Subiya area of northern Kuwait and include 175,000 units housing up to 750,000 people. According to project officials, the projected cost for the Silk City initiative is KD25bn ($90.13bn).

HOME FINANCING: Coupled with strong demand, housing shortages have allowed home values to rebound quickly from the financial crisis. According to some estimates, in 2009 alone home prices fell 20-30% from their peaks in 2008. However, from the fourth quarter of 2009 to the fourth quarter of 2010, average residential transaction values rose 17% to KD258,000 ($930,090), according to figures from Capital Standards. This trend continued through to the third quarter of 2011, with values increasing by an average of 10-20%, due to the increase in demand and limited availability of supply.

At the same time, home financing has become more restrictive under Law 9, which forbids conventional lenders from offering mortgages. In addition, under new central bank regulations, most personal loans cannot exceed 40 times the borrower’s monthly salary, and are capped at KD70,000 ($252,350). Combined with government soft loans, this gives typical families KD140,000 ($504,700) for the purchase of a new home, a figure that falls well below average unit prices in many areas. In the Hawally Governorate, for example, figures from the Kuwait Finance House indicate that home prices in the first quarter of 2011 averaged KD231,250-261,250 ($833,656-941,806) across several areas. Meanwhile, in the Capital Governorate, average prices in various areas ranged from KD694,000-858,000 ($2.5m-3.09m) in the Abdullah Al Alsem region, KD480,000-630,000 ($1.73m-2.27m) in the Shamiya region, and KD542, 000-617,000 ($1.95m-2.22m) in Adeliya.

LEGAL DEVELOPMENTS: Nonetheless, recent regulatory developments promise to improve consumer and investor access to capital. Following an appeal from the Kuwait Finance House, Law 9 was recently amended by the Court of Cassation to allow Islamic banks to offer mortgages for single-plot homes. “Given that Islamic lenders can now offer real estate finance, I expect residential demand to rise even further,” George Agajanian, the real estate appraisal division manger at Kuwait International Bank, told OBG. “In fact, our bank has already seen a 5-10% increase in home loan applications during the first and second quarters of 2011.”

Also in 2011, parliament approved the Women’s Housing Care Law, which will grant low-interest housing loans of KD70,000 ($252,350) to widows of Kuwaiti citizens, women married to non-Kuwaitis and irrevocably divorced women over the age of 30. A second bill was endorsed to fund the law, raising the capital of the Credit and Savings Bank from KD500m ($1.8bn) to KD3bn ($10.82bn). According to a recent report from estate agent Coldwell Banker Kuwait, these measures have already generated a dramatic increase in demand for condominium apartments, in turn compelling local developers to purchase plots of land for the construction of new condominium complexes.

Other major bills are in the draft stages. In 2010 changes were proposed to Law 74/1979, which governs property ownership. Under the proposed amendments, all expatriates that have lived in the country for a minimum of 10 years will be allowed to purchase residential apartments for personal use, so long as these units do not exceed 350 sq metres. According to supporters, this measure would not only stimulate market demand, but also make the country a more attractive regional business centre. Critics, however, argue that opening the housing sector to foreigners would only exacerbate the problem of limited supply.

INVESTMENT: The fortunes of the investment segment are tied to fluctuations in the country’s foreign labour force, which drives demand for apartment rentals. According to most-recent official data, there were 2.47m expatriates living in Kuwait by June 2011, up from 2m in 2005. From 2012 to 2015, this population is projected to rise by 2.5-3.5% per year.

Given that expatriate population growth averaged around 6% annually over the past decade, some consider these estimates too conservative. Moreover, others argue that an unprecedented number of foreign workers may flock to Kuwait in the coming years to work on planned infrastructure projects. “We are bullish about the investment properties [apartments] segment because of the country’s growth outlook, and because it is not over supplied and has demand growth potential due to the foreign manpower required to complete public works under the National Development Plan when it progresses,” Venkateshwaran Ramadoss the assistant manager of the Kuwait Financial Centre told OBG. “The growth in expatriate labor force would continue to boost demand for rental accommodation.”

In addition, the sector will remain attractive to investors due to the low returns currently offered by domestic banks and the Kuwait Stock Exchange. As an example, whereas many banks are offering annual investment returns of 4%, returns on rental properties in the Hawally Governorate are estimated at 7-8%. According to local newspaper reports, other active areas for rental investors include Al Salmiya, Al Farwaniah and Mahboula. In April 2011 Mahboula led all areas in terms of apartment activity, with 31 units sold at an average of KD432 ($1557) per sq metre.

Overall, the total value of real estate transactions in the investment segment rose by almost 50% in 2010 to KD671m ($2.42bn), up from about KD450m ($1.62bn) in 2009. According to the Kuwait Finance House, in the third quarter of 2011 occupancy rates for investment properties ranged from 90-95%, with monthly apartment rental ranging between KD145 ($522) and KD220 ($793) for one-bedroom units, KD170-270 ($612-913) for two bedrooms, and approximately KD260-450 ($937-1622) for three bedrooms.

RETAIL: Like the commercial real estate market generally, the retail sub-sector experienced a marked slowdown during the height of the global economic crisis, which saw consumers slash discretionary spending and prioritise debt repayment and savings. As a result, many landlords began offering lower rental payments, shorter lease terms and other incentives to attract and retain tenants. “Retail activity suffered mightily from late 2008 to mid-2010 due to reduced lending and a plunge in consumer confidence,” Joe Weberhofer, the property operations and marketing manager at the Action Real Estate Company, told OBG. “Thus, average retail rental rates in Kuwait have fallen to KD24 ($87) per sq metre, down from a peak of KD35 ($126) per sq metre, and some developers have discounted overall fees by 50%.”

Like the residential industry, however, the retail real estate business in Kuwait can point to promising indicators. First among these is the gradual restoration of consumer confidence. In the December 2011 Consumer Confidence Index published by the Kuwaiti-based ARA Marketing Research and Consultancy, the country’s overall point total rose to 127, the highest score recorded in nine months. This was particularly impressive given the uncertain political situation at the time.

Similarly, in the 2010 Middle East Consumer Confidence Index published by the region’s leading job site Bayt.com and the research firm YouGov Siraj, Kuwait’s total score jumped to 554, up from 413 in 2009.

Finally, in the 2011 Global Retail Development Index published by UK-based management consultancy A.T. Kearney, Kuwait’s retail market ranked fifth among developing nations, and first among those surveyed in the MENA region. According to the study, which includes indices such as market saturation and business risk, total retail sales in Kuwait are expected to rise from $8.4bn in 2011 to some $11.9bn by 2015, largely due to the rising disposable income levels of local shoppers.

MALLS: All of this is good news for retail tenants and developers, especially those invested in the country’s growing roster of shopping malls. According to figures from DTZ Global, a real estate services group, Kuwait now has more than 50 covered malls with a gross leasable area of up to 675,000 sq metres, giving the country one of the highest levels of shopping space per capita in the world. As estimated by DTZ, rental rates for these properties are in the range of KD15-20 ($ 54-72) per sq metre in secondary areas, and KD20-45 ($72-162) per sq metre in prime locations.

The nation’s most popular mall is The Avenues, a development established in 2007 that has since expanded over three phases. In 2012 phase three will see the mall add some 110,000 sq metres at an investment cost of $550m, giving the property over 370,000 sq metres in total. Given the large number of other ongoing shopping centre projects, as well as the recent opening of the 24,000-sq-metre Al Hamra Mall, some have suggested that the market is nearing oversaturation. Nevertheless, developers are confident, buoyed by the public’s large and growing appetite for consumption.

OUTLOOK: The prospects for the market are largely positive. In the residential segment, major housing development works should help mitigate the problem of undersupply, while amendments allowing Islamic banks to offer mortgage financing promise to strengthen the purchasing power of local homebuyers. In addition, consumer access to credit has been enhanced by recent legislation extending government housing loans to women, a measure that has already increased demand for condominium units in several areas. Going forward, the sector’s ongoing recovery will depend on how quickly these initiatives can be fully implemented.

The investment segment is also poised for strong growth in the coming years, with many analysts predicting a rapid expansion in the expatriate population as foreign labourers come to work on infrastructure projects under the National Development Plan. Much will depend on the pace at which these works proceed through the tendering process. Meanwhile, the outlook for the commercial property business is decidedly mixed. Excess office supply will continue to exert downward pressure on rental rates, especially as new units hit the market. On the other hand, the bold liquidity injection plan launched by the Kuwait Investment Authority, which intends to buy over $3bn in distressed commercial assets over the next five years, has been hailed by many as a potential turning point for the market.