Kuwait's drive towards building new communities to meet growing real estate demand

 

Property development, sales and rentals play a significant role in Kuwait’s economy, and home ownership is set to grow as new cities are built to accommodate a growing population. Landlords in the office, retail and industrial sectors enjoy high occupancy levels and there has been extensive development of rented residential properties for the expatriate workers, who constitute almost 70% of the country’s 4.6m population. Private sector developers have opened new flagship hotels and shopping malls in 2017 and 2018, with others under construction. The government itself is driving the construction of new communities to meet the sizeable backlog in homes for citizens.

Economic Impact

The Central Statistical Bureau data on national accounts shows the real estate sector’s contribution at current prices grew from KD2.9bn ($9.5bn) in 2015 to KD3bn ($10bn) in 2016 and KD3.1bn ($10.3bn) in 2017. In 2016 the sector generated 9.1% of total GDP and 12.2% of non-oil GDP. The provisional data for 2017 showed that the real estate sector contributed 8.6% of total GDP, and like 2016, 12.2% of non-oil GDP. As of September 2018 there were 38 real estate companies listed on Boursa Kuwait. Mabanee, with a market capitalisation of KD623.4m ($2.1bn), was the only real estate business listed on the premier market, but the main market also included Salhia Real Estate Company, Ream Real Estate Company, Commercial Real Estate Company and Tamdeen Group. Mabanee owns The Avenues Malls in Kuwait and Bahrain, and is building two new destination malls with the same brand in Al Khobar and Riyadh in Saudi Arabia. Salhia owns landmark upmarket retail and leisure complexes in Kuwait City as well as the JW Marriott and Courtyard by Marriott hotels and office towers, and is building the new mixed-use Al Assima development in the Sharq area of Kuwait City, with a business tower, mall and leisure facilities. Tamdeen is working to complete a number of major projects in 2018, including the Tamdeen Square development, which features four 40-storey residential towers with more than 400 apartments that can be acquired as homes or investment properties; two hotel-apartment buildings; a hotel; and a shopping centre in Sabah Al Salem. Its KD123m ($407.8m) mixed-use waterfront Al Kout development in Al Ahmadi includes a mall with gross leasable area (GLA) of 100,000 sq metres, which opened in April 2018 and had 84% of its outlets leased by December 2017. Upon completion, the mall will have 360 shops, 12 cinema screens as well as restaurants and cafes. The Al Kout Rotana Hotel will be adjacent to the mall, with both facilities serving the headquarters of Kuwait’s state-owned oil and gas companies. Ream owns and manages 402 buildings in Kuwait and the UAE.

Demographic Drivers

While the commercial activities of some of the country’s larger real estate developers illustrate the breadth of activity taking place in the sector, the government plays a pivotal role in driving forward the development of residential properties for the country’s growing national population. According to the Public Authority for Civil Information (PACI), there were 1.39m Kuwaitis living in the country in June 2018, accounting for 30.4% of the entire population. Of those national citizens, 62.6% are under the age of 30, a total of around 867,000 people. A cornerstone of the social contract between citizens and the government is the provision of free homes or plots of land. The Public Authority for Housing Welfare (PAHW), which is the body tasked with delivering on this promise, faces two significant challenges. The first obstacle is the issue of pent up demand for housing. However, by the end of 2017, the numbers of citizens on the housing waiting list had fallen to 100,000, which was a significant improvement on 2014, when there were more than 111,000 outstanding applications, according to data published by Kuwait Finance House (KFH).

In 2017 PAHW pledged to deliver 36,000 residential units. To put this in historical context, this is equivalent to almost 40% of the 93,040 homes built and handed over to citizens by PAHW from 1954 to 2012. The second challenge for PAHW is to increase this level of delivery over the longer term to cope with future demand, as almost two-thirds of Kuwaitis are under 30. The backlog in housing distribution means that some Kuwaitis are moving into rented private properties, while in other cases multiple generations of the same extended family remain under one roof. PACI data from June 2018 shows that 2.05m people, including servants, were living in homes of a Kuwaiti citizen. Of that total, 1.08m people, or 52.5%, were living in households with 10 or more people, while 400,492, or 19.5%, were in homes with 14 or more people living together.

Legal Foundations

In addition to PAHW’s activities in the residential housing market, the country’s laws restrict land and property ownership to GCC citizens. Laws passed in 1959, 1960 and 1978 established regulations for the registration of real estate, the operation of commercial companies and the leasing of property. Law No. 74 of 1979 regulated foreign ownership of property and effectively prohibited foreign residents or companies from owning property. A subsequent law in 2004 did permit citizens of GCC countries residing in Kuwait to buy real estate, and the same rights have been extended to citizens of other Arab countries. The Ministry of Justice (MoJ) operates a land registry and can also consider applications for property ownership from Arab nationals. In 2015 local media reported that six foreign residents from Lebanon, Jordan, Yemen and Egypt had been granted permission by the MoJ to purchase plots of land under Law No. 74. In 2018 the Cabinet’s economic affairs committee prepared a report suggesting foreign residents be allowed to own their own homes in certain areas. It claimed the move could stimulate the real estate market without having an impact on housing options or prices for Kuwaitis.

In the wake of the global financial crisis of 2008, Kuwait passed Law No. 8 and Law No. 9 which restricted commercial ownership of land in residential areas. The laws were designed to prevent monopolisation of land ownership and reduce speculation. The new laws stipulated that any party owning more than 5000 sq metres of land for more than three years for trading purposes would have to pay a KD10 ($33.15) fee for every additional square metre of land they owned. KFH, an Islamic lender, subsequently challenged the law in 2009, successfully arguing that banks should be excluded from the fees, as the land was being held in collateral rather than for trading purposes. However, the impact of the legislation has effectively hampered the growth of commercial residential property development in Kuwait. “The impact is that homes are either being built as part of government-funded schemes or by individuals using government loans, but without medium-sized property developers in the market,” Bashar Al Salem, CEO of architectural practice Kayan, told OBG.

Property Loans

In its “Financial Stability Report 2017”, the Central Bank of Kuwait (CBK) notes that the combination of property loans to individuals, real estate companies and construction firms meant that half of Kuwaiti banks’ credit portfolios were exposed to the real estate sector. The CBK reported that lending to households grew by 7.6% in 2017, with 86% of that credit accounted for by instalment loans for the repair and purchase of private homes. In the same year direct lending to the real estate sector increased by 4.4%, reversing the 3.4% loss the sector had experienced in 2016. The CBK attributed the real estate market’s partial recovery in 2017 to renewed activity in the residential segment. In 2017 bank credit to households increased by 7.6% to KD11.5bn ($38.1bn), making it the top recipient of bank credit, followed by the real estate sector, which was loaned KD9.5bn ($31.5bn).

Property Prices

The government’s commitment to providing homes for citizens, combined with laws largely prohibiting foreign ownership of property, has resulted in a two-tier home market in Kuwait. Villas and apartments built for Kuwaitis are classified as residential, while buildings designed for occupancy by foreign residents are regarded as investment properties. MoJ data on transactions across the real estate sector is analysed by both KFH and NBK, while the Real Estate Association (REA) makes its own surveys of activity in residential, investment, office and industrial property transactions. NBK noted that in 2017 overall activity in all property segments saw a 6.5% increase in the number of transactions to 4524, but a 6.9% decline in the value of sales to KD2.2bn ($7.3bn). It reported that residential sales increased by 22%, but that the investment and commercial sectors declined by 19% and 37%, respectively. The market picked up in the second quarter of 2018, with sales totalling KD774m ($2.6bn), a 31% year-on-year increase. Residential sales for the quarter were KD306m ($1bn); investment sales nearly doubled year-on-year to KD347m ($1.2bn); and commercial sales increased by 40% to KD120m ($397.8m). According to KFH’s report, in the first quarter of 2018 the average prices per sq metre for residential, investment and commercial land were KD610 ($2022), KD1500 ($4970) and KD3386 ($11,200), respectively. Land in Capital Governorate was the most expensive with average prices of KD838 ($2780), KD2380 ($7890) and KD6011 ($19,900) per sq metre for residential, investment and commercial plots, respectively.

Investment Properties

The REA’s analysis of the market found the occupancy levels of properties leased to foreign residents had fallen from 95% during 2011-16 to 86.8% in 2017. The REA attributed this to a slowdown in the growth rate of the expatriate population, thereby reducing demand for some of the new properties that are being built. The association found the average annual growth rate in foreign citizens living in Kuwait had been between 3% and 4% during 2011-15, peaking at 4.8% in 2016. In 2017 the overall number of foreign residents living in Kuwait increased, but by just 2%. Data from PACI shows there are 13,353 investment properties in Kuwait, which the REA estimates contain 371,006 residential apartments. The association’s detailed analysis covers a 42.6% sample of these, or 5695 properties containing 162,576 apartments. The 2017 survey noted 21,529 vacant apartments and based on its sample, estimated that 48,973 apartments were standing empty across the country. It also counted 875 new investment properties under construction, with 26,466 apartments, which it forecast would swell supply by 6.6% in 2018-19. Investors have also seen average monthly rental receipts decline from KD313.2 ($1040) in the second quarter of 2015 to KD278.9 ($927) at the end of 2017. The REA predicted it would take until 2022 for market demand to absorb the 75,000 apartments that are already empty or under construction if the growth rate of the expatriate population over that period were to remain at 1.5-2%.

Freehold Apartments

Although many Kuwaitis prefer to live in family villas, freehold apartment buildings are an attractive alternative. Despite this being a relatively small segment of the real estate market in the country, such properties offer some of the best yields for property investors. MoJ data shows 2017 was a modest year, with 671 property transactions compared to 819 the year before, and 973 in 2015. The REA analysed 43 properties including 1590 flats in the fourth quarter of 2017, and counted 599 unsold units. The association calculated that it was taking an average of 31.3 months for a project to sell out, against a construction time of 24 months. Although the market may have stalled in 2017, over the preceding decade from 2007 the compound annual growth rate in freehold prices was 7.6%, with rents growing by an average of 6-6.5% per annum. The result is that over the 10-year period the combined return for investors was some 14.3% per annum.

By 2018 the infrastructure works had been completed on the Hessah Al Mubarak district, allowing developers to commence the design phase for apartments. “There will be two 40-storey towers on the seafront with 212 apartments and 20 buildings for low-rise homes, 300 in all,” Tawfiq Aljarrah, executive director of Kuwait Projects Company, told OBG. “The homes will be sold freehold to Kuwaitis.”

Office Properties

The office space segment in Kuwait enjoyed some of its highest occupancy rates since the global downturn of 2008, according to the REA. Their research shows the rate grew from 59.4% in 2011 to 95.6% in 2017. Alongside this, average lease rates have grown to KD7.77 ($25.76) per sq metre, not including common area charges. Some 415 office buildings generated KD127.7m ($423.4m) in annual rental income, with the REA estimating the combined value of properties was KD1.8bn ($6bn). In the fourth quarter of 2017, the REA reported there was 1.43m sq metres of existing office space, up from 1.17m sq metres in the second quarter of 2015. However, the REA report cautioned that some significant new developments could draw tenants from existing properties. In Sharq, near the central business district, new headquarters for the Kuwait Investment Authority and the CBK were nearing completion which had a combined space of 140,000 sq metres, with the possibility of additional tenants filling available added space. NBK and Mabanee are also building headquarters towers in Asma Governorate, with 50,000 sq metres between them.

Retail Space

In 2018 the fourth and final phase of The Avenues Mall by Mabanee opened, bringing the total GLA for the regional destination mall to 360,000 sq metres. According to the REA, there was 799,141 sq metres of existing retail space in Kuwait at the end of 2017, with 346,046 sq metres under construction. This is a significant increase from the second quarter of 2015, when there was 770,196 sq metres of retail space, but just 28,945 sq metres under construction.

At the end of 2017 the occupancy rate of existing retail property was 98.7%, but only half of units under construction had been leased, putting the occupancy ratio for retail mall space at 84%, according to the REA. From the second quarter of 2015 to the end of 2017, the average lease rates per sq metre fell from KD18 ($59.68) to KD17.5 ($58.02) for basement units, and from KD25.7 ($85.21) to KD23.5 ($77.91) for ground-floor spaces.

Hotels

Kuwait’s real estate developers are also working on hospitality developments. By 2020, the five-star Waldorf Astoria hotel and the four-star Hilton Garden Inn will have been completed, adjacent to The Avenues Mall with 600 rooms between them. This follows the opening in early 2017 of the 284-room Four Seasons Hotel Kuwait at Burj Alshaya, a 140,000-sq-metre development that includes the 43-storey Western Tower, which also serves as Alshaya’s corporate headquarters. Tamdeen is working on two additional hotel projects, with the 200-room Rotana Hotel as part of the Al Kout development and the planned 261-room Grand Hyatt.

Industrial Sites

Kuwait’s existing stock of industrial real estate is limited. The REA’s 2017 report focused on eight areas offering warehousing space, estimating that occupancy rates are above 95%, with strong demand for warehousing and leasing rates holding steady or even increasing marginally. Prices per sq metre range from KD2 ($6.63) in Abdullah Port, to KD9.5 ($31.50) for the most expensive cold storage facilities.

Outlook

In 2018 the Sheikh Al Jaber Al Ahmad Al Sabah Causeway is due to open, linking the existing city to Subiyah, where one of the landmark real estate projects is set to be unveiled at the proposed location of the Silk City mega-project development. Along with the development of uninhabited Boubyan Island and the redevelopment of Failaka Island, Silk City offers a wealth of opportunity for private property developers as well as for the construction firms, building tens of thousands of new homes for Kuwaitis. Failaka is to host new hotels, universities and cultural centres, while leisure facilities, solar generation and data storage facilities are planned alongside a logistics zone on Boubyan. Silk City is to have a new financial centre and an amusement park as well as homes and amenities. These large-scale developments along with the country’s markedly growing population appear set to be central drivers across all segments of Kuwait’s real estate market over the next decade. “The real estate sector in the Gulf is full of models and drawings, but when we can show the people of Kuwait something real, they will embrace it,” Aljarrah told OBG.

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The Report: Kuwait 2018

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