While Kuwait’s economy showed a high degree of resilience in the face of the global economic crisis, its real estate sector – particularly the more vulnerable commercial segment – did not escape unscathed. However, the market by 2012 proved itself to be in the early stages of a sustained recovery, while legislation has helped the sector regain much of its lost momentum. The high purchasing power enjoyed by a young and expanding population, combined with Kuwait’s anticipated economic growth, suggest that the sector is at the beginning of another period of expansion.

RECOVERY: Kuwait’s real estate sector, like others in the region, displayed strong growth in the years before the global financial crisis, thanks largely to buoyant oil revenues, favourable demographics and political stability. Between 2000 and 2007 the sector had a compound annual growth rate (CAGR) of 5.6%, and at the end of that period accounted for 3.9% of GDP. The year 2007 also saw an all-time high in terms of real estate transactions, which totalled KD2.81bn ($10.04bn) – a figure that was to decline by more than 25% as the credit crunch began to take effect. According to the Capital Standards ratings agency, industry profits declined by 135% from 2008 to 2009, while the market capitalisation of the real estate firms listed on the Kuwait Stock Exchange (KSE) dropped by 40%. In the wake of the downturn some of the more leveraged firms found themselves in financial difficulty, and a number of them underwent a period of debt restructuring or left the market altogether. However, signs of an incipient recovery in 2010 proved to be the beginnings of a sustained trend that has seen Kuwait’s real estate sector regain much of the ground lost over three years, and the sector’s recent performance provides grounds for optimism. According to Kuwait Financial House, real estate market transactions increased significantly in 2012, expanding 15.6% on the previous year to reach KD3.36bn ($12bn). A number of factors account for the more favourable data, most notably an increase in domestic demand in the residential and investment segments, accompanied by an increase in prices. Moreover, while the commercial segment that had been most affected by the global crisis continued to show falling occupancy rates, higher demand for quality stock in desirable areas resulted in a favourable trend overall. Other contributing factors to the sector’s robust performance are the relatively low interest rates being offered by banks and the relatively weak performance of the KSE, both of which have made the returns from investment in real estate – of around 6.25-8.25% – an attractive prospect.

SECTOR STRUCTURE: Activity within Kuwait’s real estate sector is generally defined according to three categories: private residential real estate, which for the most part represents the housing demands of Kuwait’s expanding population; investment properties, largely made up of apartment complexes that cater to an expatriate population prohibited from owning property; and commercial properties, such as office space and retail shop floors. Residential real estate represents the largest segment in the market, accounting for 55% of sales in 2012, followed by the investment segment (37%) and commercial activity (8%), according to the National Bank of Kuwait (NBK).

A notable feature of the real estate market is the expansive role played by the government. Most of Kuwait’s land is government-owned and its development for real estate purposes is limited by the state’s desire to maximise the hydrocarbons resources beneath it. The residential segment is also subject to a high degree of government intervention in the form of the Public Authority of Housing Welfare (PAHW), which is a significant provider of housing to Kuwaiti nationals. Finally, government regulations concerning ownership and lending limits play a sizeable role in shaping the supply-demand dynamics of the sector (see below).

RESIDENTIAL: NBK data show that real estate sales in the residential segment reached KD1.7bn ($6.07bn) in 2012, a 20% year-on-year (y-o-y) rise, and averaged 657 transactions per month as compared to an average of 494 in 2011. Government subsidies play a part in the resilience of this part of the market. All Kuwaiti nationals are legally entitled to government-subsidised housing in the form of soft loans from the Savings and Credit Bank, which are granted upon marriage in order to finance the construction or purchase of new homes. In 2013 the amount of financing per residence available under this scheme was raised from KD70,000 ($250,012) to KD100,000 ($357,160), although market participants point out that this figure is still considerably below the average price of a villa.

The problem of financing the residential sector is compounded by the fact that under current legislation only sharia-compliant institutions are permitted to provide mortgages, while personal loans have been limited by the Central Bank so as not to exceed 40 times the borrower’s monthly salary, with an upper limit of KD70,000 ($250,012; see analysis). Nevertheless, demand for residential stock has exceeded supply for the past two decades, resulting in backlog of more than 100,000 units at the PAHW as of 2012, according to a study carried out by the London School of Economics.

DEVELOPMENT PLAN: Given that some predictions of Kuwait’s population growth anticipate that it will reach 3.5m by 2010, a 40% rise from the figure discovered by the 2010 census, the provision of residential housing has become a government priority. The National Development Plan (NDP), therefore, contains a number of major housing projects aimed at alleviating the prevailing housing shortage, including six new residential cities which between them will provide more than 70,000 residential units to Kuwaiti citizens. These include Al Khairan Residential City (35,844 units), Al Mutlaa Residential District (18,000), Al Sabah Al Ahmad Future City (11,000), Jaber Al Ahmed Residential City (5020), the North South Sulaibikhat Residential City (1736) and the Saad Al Abdullah Residential City (3576).

In the longer term, Kuwait has plans to develop its most ambitious real estate project to date in the northern Subiya area; provisionally slated for completion in 2013, Madinat Al Hareer (or “Silk City”) will cover an area of 250 sq km and include some 175,000 residential units able to accommodate up to 750,000 people. Real estate sales, 2011-12 INVESTMENT: Real estate transactions in the investment segment totalled KD1.2bn ($4.29bn) in 2012, a 16% y-o-y rise, according to the NBK. The performance of the investment segment is tied to the growth of the nation’s foreign labour force, the principal clients of the rental market: according to government data, there were 2.47m expatriates residing in Kuwait as of June 2011. Over the past decade the expansion of the expatriate population has averaged 6% per annum and the potential of many more travelling to Kuwait to work on the large number of projects outlined by the NDP bodes well for this part of the market.

However, in 2013 the government announced plans to reduce the number of expatriates in the country by more than 1m by the end of 2013. Explaining the government’s decision to the local press, minister of social affairs and labour Thekra Al Rasheedi stated that the initiative is “part of the ministry’s efforts to regulate the labour market, curb the phenomenon of marginal labour and restore the demographic equilibrium of the country”. The principal means by which the government hopes to reach this target is by limiting companies to hiring only Kuwaiti nationals, of which there are fewer than 1m of working age.

The feasibility of this strategy remains uncertain, however, given the nation’s ambitious expansion plans. “Kuwaitisation continues to be a challenge for private sector companies and we must continue dialogue with the government to ensure qualified and motivated individuals are being hired, while still satisfying requirements,” Ezzat Jaafar, general manager of the Arabian Construction Company, told OBG.

COMMERCIAL: The commercial real estate segment saw sales of KD252m ($900.04m) in 2012, which represented a 2% gain on 2011. Commercial transactions were particularly hard hit by the global economic crisis, as companies froze expansion plans, cut discretionary spending, and prioritised debt repayment and capital accumulation. Commercial property owners in the leasing market were compelled to revise rent agreements at lower prices and shorten lease terms in a bid to retain tenants, both of which strategies are still being deployed in some areas of the market today.

The oversupply in the commercial segment has led to an increase in vacancies, which stood at 70% in the first quarter of 2012, according independent ratings agency Capital Standards. Even the many new A-grade high rises that have recently begun to transform the skyline of Kuwait City have faced difficulty in attracting tenants. Office space activity is particularly sensitive to the changing political environment, and the turbulent parliamentary sessions of 2012 have been adduced by some as a reason for the subdued market. The effects of the July 2013 elections, which resulted in a parliament seen by some as more broadly based and possibly less likely to form a consensus on the government’s political and economic vision, remain unclear.

RETAIL: Given these circumstances, the modest rise in commercial retail sales seen in 2012 has been interpreted as indicative of a long-awaited recovery, and the fact that the last two months of the year were the strongest in terms of transactions has led to renewed optimism regarding the segment’s performance in 2013. Retail space in particular is seen as promising, thanks to an expanding population and an estimated GDP per capita of $43,800 in 2012, according to Forbes.

In 2011 the Global Retail Development Index published by UK-based consultancy A.T. Kearney ranked Kuwait’s retail market fifth among developing nations and first among those surveyed in the MENA region. According to the study, which appraised market characteristics such as saturation and business risk, retail sales in Kuwait are expected to grow from $8.4bn in 2011 to reach $11.8bn by 2015.

High-end mall space, in particular, has displayed a significant amount of growth in the past several years. According to DTZ Global, the UK-based global property services group, Kuwait has more than 50 covered malls with a gross leasable area (GLA) of around 675,000 sq metres. This represents one of the highest levels of shopping space per capita in the world, and yet, while the question of an approaching saturation point has become a hot industry topic, new mall space continues to be added to the market. In 2012 the nation’s largest and most popular mall, The Avenues, opened its third phase to add some 110,000 sq metres of retail space for a total area of 370,000 sq metres.

REAL ESTATE FIRMS: As of the second quarter of 2013 there were 38 real estate companies listed on the KSE, engaging in an array of market activities ranging from property services and management, consultancy and construction. Real estate firms underwent a period of rationalisation in the wake of the global financial crisis, and aggregate assets of listed firms, standing at KD5.87bn ($20.97bn) as of the first half of 2012, have yet to recover to the 2008 level of KD6.65bn ($23.75bn). Gross revenues of listed firms have displayed a similar contraction, falling from the aggregate KD594.4m ($2.12bn) of 2008 to KD163.1m ($582.53m) for the first half of 2012.

Despite signs of recovery, the capacity of real estate firms to act is limited by the fact that they remain highly leveraged, showing a debt-to-equity ratio of 94.1% in the first half of 2011, and have little room to take on more debt, with an interest coverage ratio of 0.42% in the same period. Nevertheless, those firms that remain in the market continue to post profits, with the five largest real estate companies (Salhia Real Estate Company, Mabanee Company, Al Mazaya Holding Company, United Real Estate Company and Al Argan International Real Estate Company) posting gross profits of KD9.12m-22.23m ($32.57m-$79.4m) in 2013.

LEGISLATION & REGULATION: The extensive legislative and regulatory framework of Kuwait’s real estate market is frequently cited as a significant influence on sector performance, and therefore any alteration to it is usually a matter of much debate. Property ownership in Kuwait is governed by Law 74/1979, which confines free simple ownership of real estate to Kuwaiti citizens. There are, however, some exceptions. Foreign nations are permitted to own real estate allocated for use as diplomatic missions, and ambassadors and mission members may own property on the granting of a decree from the Council of Ministers. The council may also issue a decree to allow any national of an Arab state to hold ownership of one estate in any of the residential areas under certain conditions. Commercial companies with non-Kuwaiti partners are prohibited from the acquisition of real estate, except in the case of joint stock companies not involved in real estate investment, which are allowed to acquire real estate necessary for the pursuit of their business.

In 2010 proposed amendments to the law sparked a debate regarding the liberalisation of the sector. Under the proposals, all expatriates that have been resident in the country for a minimum of 10 years will be allowed to purchase real estate for personal use, providing these units do not exceed 350 sq metres. Supporters of the proposed amendments argue that their adoption would improve Kuwait’s appeal as a regional business centre, while opponents hold that opening the housing sector to foreign nationals would only exacerbate the problem of limited supply.

ADVANTAGES: While the limitations on ownership might be considered onerous, in other respects the legislative framework surrounding the real estate sector is relatively light. No taxes or charges are levied upon the buyer or seller upon the transfer of properties. For example, there is no general real estate tax as seen in other jurisdictions, and registration fees imposed by the Real Estate Registration Department range from 0.5% for a standard property sale to as low as 0.25% for a sale of property without the usufruct rights.

Since the global financial crisis, the government has adopted a more interventionist legislative stance that has had a direct effect on real estate prices. In late 2008 the Kuwaiti parliament passed a bill that aimed to temper the sizeable fluctuations in real estate prices and grant the government more control over speculation activities. Perhaps the most salient provision of the new laws was the prohibition of shareholding companies from transacting in residential properties. Home loans, 2011-12 Critics of the legislation pointed out that it fails to distinguish between companies which traded in property purely for speculative purposes and legitimate sharia-compliant banks and investment companies that are prominent in the real estate market as a result of their asset-based financial models. While Islamic banks have since been exempted from the law, some industry participants maintain that the legislation makes it difficult for real estate firms and investors to raise capital, which has had a negative effect on the sector.

The effects of the 2008 legislation were somewhat mitigated in 2011 with the promulgation of the Women’s Housing Care Law, which allowed for granting low-interest housing loans of KD70,000 ($250,012) to widows of Kuwaiti citizens, Kuwaiti women married to non-Kuwaitis and irrevocably divorced women over the age of 30. According to a 2011 report by Coldwell Banker, the government’s decision resulted in a surge in demand for condominium apartments, which in turn prompted developers to purchase tracts of land on which to build new apartment complexes.

KEY CHALLENGES: For many in the sector, restrictive legislation is the most prominent obstacle to the market’s future growth. This concern extends to the acquisition of land, which in Kuwait can be a challenging process, as its sale is limited by statute. According to Law 8, only 3-4% of Kuwait’s total area is zoned for private housing, while Kuwait Finance House estimates that less than 2.5% of the nation’s land mass has been developed for real estate. The principal reason for this phenomenon is that much of Kuwait’s relatively small area of 17,800 sq km holds the potential for hydrocarbons extraction, and is therefore set aside for exploration and production activity. As a result, licences are withheld and building is curtailed in areas where long-term infrastructure projects are pending.

OUTLOOK: Despite the challenges faced by the sector, the outlook for Kuwait’s real estate market remains positive. In the residential segment, the increased home finance lending limit and the legislative changes that allow women to access credit in order to purchase property will provide a modest stimulus in the short term, while the sizeable pipeline of housing projects will help to mitigate the issue of undersupply. Despite the Ministry of Social Affairs and Labour’s ambition to reduce the number of expatriates in the country, the large amount of foreign expertise and labour required to implement the NDP is likely to maintain a healthy level of transactions in the investment segment. It is likely that the current oversupply of office space will continue to exert downward pressure on the commercial segment into the medium term, which will be mitigated by the more robust demand for retail space.

Overall, Kuwait’s real estate sector has recovered well from the difficulties it faced in 2008 and 2009, and the supply-demand imbalance that characterised those years has largely been overcome. Future growth, meanwhile, will be underwritten by the continued expansion of the economy and, given the level of government intervention in the sector, by potential legislative changes in areas such as expatriate ownership.