New housing developments help tackle high demand in Kuwait

 

The impressive scale of Kuwait’s real estate sector can be seen from outer space in a time lapse video made from satellite images. These images show a new city in the country’s south being gradually reclaimed from the sea over the course of 15 years. Sabah Al Ahmad Sea City represents KD1.5bn ($5.1bn) worth of private investment by the La’ala Al Kuwait Investment Company to create an entirely new resort with residential units, shops, marinas and beaches for 90,000 people.

However, as this new coastal community takes shape, many real estate developers in Kuwait find themselves confronted with more down-to-earth challenges and issues. Strict regulations preventing foreign ownership of homes, and the distribution and development of homes for citizens have created a closed shop in property development and financing.

Although Kuwaiti citizens and businesses are astute and powerful players in international property markets, the traditional framework governing the domestic real estate sector offers distinct challenges for those seeking to deliver more innovative solutions in design, development and delivery of new concepts in contemporary urban living, and poses challenges for other, connected sectors, such as facilities management, which have a lot of potential but require development. “It is a challenge finding the proper education and experience in facilities management in Kuwait due to the lack of degrees or certifications; however over the last several years online training facilities and exams have begun to fill this gap,” Ahmad Yousef Al Kandari, vice-chairman and CEO of United Facilities Management, told OBG.

However, with several new communities being built by the government to provide homes for more than 100,000 Kuwaiti married couples, there are new opportunities to develop residential, retail and commercial property in the years ahead.

ECONOMIC IMPORTANCE: The real estate sector is a significant contributor to GDP in Kuwait. In 2015 real estate and rental accounted for KD3.45bn ($11.4bn) of GDP at current prices – an increase of 3% on KD3.34bn ($11.1bn) in 2014 – and accounted for 9% of non-oil GDP and 5.6% of overall GDP. On the country’s stock exchange, Boursa Kuwait, a total of 36 of the 190 companies listed are in the real estate sector, making it the second most significant group of equities after financial services. In 2016 real estate accounted for 26.2% of all share trades by volume and 20.75% of share trades by value.

CITY PLANNING: With the discovery of oil came the desire to present each citizen with a share of the country’s wealth by granting each young man a plot of land or a house when he married. British architects were given the challenge of designing the new city and did so according to the prevailing ideas of the day. In 1952 they assumed that cars would be the main mode of transport for the wealthy residents of the new city, so low-density neighbourhoods were built around a radial ring road. Eight neighbourhoods were developed, as were the two coastal communities of Hawalli and Dimna. Along the coastal road towards Jahra zones for industry, health and medicine were developed by the town planners. The old city was to be redeveloped and to help persuade people to leave their family homes, generous grants were handed out.

PUBLIC HOUSING: From 1967 to 1984 land grants were means tested, and from 1974 the National Housing Authority, which subsequently became the Public Authority for Housing Welfare (PAHW), was responsible for the provision and distribution of land and homes to citizens. The principle that the state would provide a generous plot or house for every young newly married couple was established as one of the main conduits through which citizens would receive the benefits of the country’s oil wealth.

From 1954 until 2012, 93,040 homes were provided for citizens. During that time a template was created, so that citizens who married came to understand that they were entitled to a detached two-storey house on a plot of land no smaller than 400 sq metres, and that while they were waiting for their request to be granted they would receive a total of KD150 ($496) a month to go towards their rent.

Long-term interest-free loans of KD70,000 ($232,000) were offered to those who preferred a plot of land to a finished property, or wished to buy a house or apartment other than one supplied by the government. Housing loans could only be given by the state-owned lender Kuwait Credit Bank.

The formula was intended to ensure each citizen was treated equally, but in practice there were serious flaws with the pace of delivery and the value of different properties. By 2012, although over 90,000 couples had received homes, more than 100,000 were on the waiting list and they soon worked out that they could expect to remain on it for up to 15 years before being given their own home. Also, as plots nearer to popular parts of the city were filled the PAHW had to build further afield on sites that could not command the same market prices as those in neighbourhoods closer to the heart of the city.

PUBLIC PRESSURE: As more young people in Kuwait found themselves on the waiting list and paying increasingly expensive rent, pressure grew for the government to act. From 2014 to 2016 the PAHW distributed a total of 45,746 units, almost half as many as had been allocated in the previous 57 years. National Bank of Kuwait (NBK) noted that the PAHW had distributed more than 12,000 plots in 2016 and 15,240 in 2015. In the National Development Plan for 2015-20 the authority has pledged to deliver another 60,000 homes for citizens.

In 2016, when there were around 103,000 couples and families on the list, the PAHW signed a number of infrastructure projects to support the development of new suburbs and townships. South Al Mutlaa City will have a capacity of 30,000 land plots to be distributed and in June 2016 a KD296m ($979.2m) contract (for major infrastructure works was awarded so that homes, amenities and public buildings could be developed. In May 2016 the PAHW also signed a memorandum of understanding with South Korea’s Land and Housing Corporation, creating a joint venture to build a further 30,000 homes at Saad Al Abdullah. Work is scheduled to start in 2018.

PRIVATE CAPITAL: In a break with tradition that is in keeping with the National Development Plan’s objective to attract more private capital and foreign investment in government schemes, the housing minister, Yasser Hassan Abul, announced in an interview with local press that he wants the PAHW to work with commercial companies to build new master-planned communities, and to provide technical and strategic support for existing developments. The minister said that since May 2016 the PAHW has had the authority to tender for public-private partnership (PPP) projects without involving the Kuwait Authority for Partnership Projects. The PPP approach could be employed for three projects at Al Khairan, South Saad Al Abdullah and North Al Mutlaa, which will collectively provide a total of 102,000 homes.

In the same interview, Abul added that in light of recent changes to the law in Kuwait, the country is looking to attract more investors to the construction and real estate sectors, with new resolutions allowing for joint ventures and partnerships, as well as investments in private schools and universities, private health care facilities, malls, logistics parks, among other areas. He added that the government is seeking to encourage “suitably qualified local, regional and international companies to invest”.

KUWAITI HOMES: The backlog of government-provided homes has had a significant impact on the broader real estate market in Kuwait. The Real Estate Association (REA) notes that private housing is the single most important segment of the sector in Kuwait, accounting for 78% of all designated land parcels in the country. In its report on 2014 the association calculated that of 185,456 private land parcels, 141,418 are already developed as houses, with 44,038 lots remaining vacant. Its report notes that 61% of all vacant lots are in four new areas under development, including Sabah Al Ahmad Sea City, North West Sulibikhat and Jaber Al Ahmad City.

HOUSE PRICES: According to the REA, average house prices grew from KD219,000 ($724,000) in 2007 to KD414,443 ($1.4m) at the end of 2014, when the combined value of existing housing stock inhabited by Kuwaiti citizens reached KD55.1bn ($182.3bn) – or KD70.6bn ($234bn) if vacant lots are included. That also means the average home owned by a Kuwaiti citizen is worth $1.36m. However, house prices in Kuwait when compared to average family income are considerably higher than in many other countries and their values have outstripped incomes. According to REA research, the ratio of average home value to family income in 2014 was 3.20 in the US, 3.27 in Switzerland, 4.69 in Australia, 5.07 in the UK and 9.82 in Kuwait. However, Kuwait’s ratio is still more modest than some European cities, with Paris and London having ratios of 15.15 and 18.94, respectively, in 2014.

RENTS: Kuwaiti families on the housing waiting list tend to rent two kinds of properties: subdivided housing with a small number of apartments rented to families, where the landlord often occupies one of the properties; and larger apartment blocks with multiple flats where the landlord lives elsewhere. The REA’s report for 2014 suggests there were 50,000 apartments in the first category plus 4371 apartment blocks containing 51,058 flats. Surveys by the REA suggest that in 2014 the occupancy rate for apartments rented by Kuwaitis was 97.4%, pointing to high demand at a time of limited supply of alternative housing for citizens. The report suggests the average rent being paid by a Kuwaiti for an apartment was KD371 ($1227) per month. In the Kuwaiti real estate market, where expatriate workers are not permitted to own property, the buildings that foreign employees occupy are referred to as investment properties. The average monthly rent for a flat in a property of this sort in 2014 was around KD313 ($1035), according the REA.

HOUSING SHORTAGE: In a report at the end of 2014 the REA used government data to estimate that there were more than 118,000 Kuwaitis on the housing waiting list at that point, and it used population forecasts to estimate that the government would receive 234,672 applications for housing in the 20-year period from 2014 to 2033, which would mean that if the government wished to eliminate the housing shortage by 2033 it would need to supply more than 350,000 houses, equivalent to 17,507 new houses every year.

The report coincided with a surge in the real estate market in Kuwait. According to NBK, 2014 was a record year, with total real estate sales across all sectors of the market equalling KD4.3bn ($14.2bn), and it was the fourth consecutive year of growth. In the residential sector alone sales were up 5% compared to 2013, at KD1.9bn ($6.3bn). The Sabah Al Ahmed Sea City development accounted for 40% of all residential transactions in 2014. In 2015 the market began to cool, with total residential sales of KD1.4bn ($4.6bn) and in 2016 the decline continued with the value of all residential sales dipping to KD944m ($3.1bn). A combination of weakened investor sentiment in the wake of volatility in oil prices and significant steps by the PAHW to provide more new homes for citizens saw a significant correction in the market over the two-year period from the market’s peak.

HOMES FOR EXPATRIATES: The investment real estate market in Kuwait revolves around the development of rental properties for expatriate workers. In 2017 data from the Public Authority for Civil Information shows there are 3.07m foreigners living in Kuwait, making up 70% of the country’s 4.4m population. Expatriates are not allowed to own investment property, but there is a significant market in the buying and selling of apartment buildings among the Kuwaiti population. In 2014 sales were up 30% compared to 2013, with property worth KD1.8bn ($5.95bn) sold in 1718 transactions. Since then the market has shrunk, with sales of KD1.27bn ($4.2bn) from 1448 transactions in 2015, and 1300 transactions in 2016 resulting in sales of KD817m ($2.7bn).

Demand for expatriate accommodation is sensitive to the overall strength of the economy, with strong growth typically associated with an influx of more workers. Following the 2008 financial crisis, vacancy rates in expatriate apartments grew and the prices of investment buildings declined. A scarcity of property in 2013 and 2014 resulted in an occupancy rate of 95% in investment property apartments, according to the REA. In 2017 NBK cautioned that an rise of 7-10% in utility bills for expatriate workers – a price rise that citizens are exempt from under subsidy reforms – could further dampen rental prices in the investment sector when the increases are introduced in the second half of the year. However, the bank pointed out that tenants might also respond to the rules by being more economical with their use of electricity and water.

COMMERCIAL PROPERTY: The commercial real estate sector, which includes office, retail and industrial space, has proved somewhat more resilient than residential or investment property. In 2014, KD557m ($1.8bn) in commercial transactions took place, a 40% increase on 2013, which had, in turn, seen growth of 57%. The total value of sales dipped in 2015 to KD455m ($1.5bn), but picked up again by 26% in 2016 with a record year, in which KD575m ($1.9bn) in commercial property deals were struck.

Commercial aspects of the Sabah Al Ahmad Sea City project played a significant role in driving up the value of deals during the period. In 2014 two commercial property deals with a combined value of KD133m ($440m) were struck there, while in 2016 three plots there were sold with a combined value of KD104m ($344m). In January 2016 a smaller commercial plot at Sea City was sold for KD6.4m ($21.2m). The Salmiyah area also witnessed some significant commercial deals, with a building sold there for KD10.5m ($34.7m) in 2015 and two complexes with a combined value of KD105m ($347.3m) sold in 2016.

The government’s decision to reduce subsidies on electricity and water may also have an impact on the commercial sector, where electricity bills were due to increase from 2 fils per kWh to 25 fils in the second half of 2017. The REA’s data shows occupancy rates for office accommodation increasing from 59.4% in 2011 to approximately 67.4% in 2013 and 86.7% in 2015, with average lease rates per sq metre increasing in those three years from KD6.4 to KD6.8 and KD7.2, respectively. In 2015 there was 1.17 sq kilometres of office space under construction.

RETAIL: The REA published a study in early 2016 examining pricing and occupancy at 13 major shopping malls in Kuwait, covering a combined gross leasable area (GLA) of 546,208 sq metres. It found there were 2235 retail units with an average lease rate of KD25.16 ($83.23) per sq metre per month and an occupancy rate of 99.1%. Across the malls in the survey, 40% of shops sold fashion and shoes, 15.1% were devoted to entertainment and fitness, food and beverage outlets accounted for 13.4% of space, and hypermarkets had 10.1%. What was striking about the REA report’s findings was that the proportion of retail floor space per person in Kuwait is just 0.26 sq metres, compared to 0.78 sq metres in Bahrain, 1.63 sq metres in Canada, 2.14 sq metres in the US and 3.41 sq metres in Dubai. This indicates that there is considerable room for retail expansion in the Kuwaiti market.

The report also acknowledges that between 350,000 sq metres and 400,000 sq metres in GLA is being added to the mix with Salhiya Mall, Tamdeen Development in Al Khairan, the renovation of Al Manshar and the addition of a second mall by Gate Mall Company. The project pipeline for retail space also includes the fourth phase of expansion of The Avenues Mall, which is expected to be completed in the first quarter of 2018. The KD265m ($876.7m) expansion is being built out over 117,000 sq metres with a GLA of 95,000 sq metres, and it will include a five-star and a four-star hotel, as well as new shopping districts, bringing the total cost of The Avenues to KD600m ($1.98bn). Also under construction is Argan Square, which is a new retail development from Alargan International Real Estate Company in Salmiya with a leasable area of 5640 sq metres.

HESSAH AL MUBARAK: Although much of Kuwait’s urban development has historically been in low-density neighbourhoods, in October 2016 work began on a master-planned community overlooking the sea in the capital city. The development, Hessah Al Mubarak, is being built by Kuwait Projects Company. It will be the country’s first mixed-use development with apartments, low-rise duplex buildings, serviced apartments, offices, clinics, commercial spaces, boutiques and eateries. With a total built up area of 381,968 sq metres, including 227,066 sq metres in plots, 50% of the space will be devoted to public services and amenities, including health care clinics.

MARKET REFORMS: Developments like Hessah Al Mubarak and Sabah Al Ahmad Sea City are concrete evidence that investors are exploring opportunities in Kuwait rather than in offshore locations like Dubai or London. These exclusive developments offer buyers a chance to invest in a new kind of living space, whether it is for their first home, a city centre apartment or a weekend retreat at the coast.

However, developers know that regulations mean their market is limited to Kuwaiti citizens, and some believe a partial lifting of restrictions on expatriate property ownership and on home lending by commercial banks could help diversify the economy by tapping a rich seam of revenue for developers and lenders. “We could allow the government to permit expatriates some form of ownership of the apartments they live in here so that they are encouraged to invest more of their money here rather than elsewhere in the world,” Tawfiq Aljarrah, executive director at the REA, told OBG. “We must think of all the jobs that could be developed in the private sector if we had a mortgage market and a more vibrant real estate sector with estate agents, insurance brokers and legal advisers.”

OUTLOOK: Liberalisation of the real estate market could be perceived as politically sensitive if citizens felt they were competing with foreign buyers in the domestic property market. However, if the PAHW succeeds in reducing housing waiting lists through innovative partnerships with private sector businesses and foreign investors, the stage could be set for more profound reform that would underpin national efforts to diversify the economy. If the ambition of previous developments is anything to judge by, the country is on its way to significant changes. As the creation of Sabah Al Ahmad Sea City shows, Kuwait is prepared to re-shape traditional models of development to build a modern country for future generations.

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The Report: Kuwait 2017

Construction & Real Estate chapter from The Report: Kuwait 2017

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