Real estate has long been a mainstay of Kuwait’s non-oil economy. In 2014 real estate and construction services together accounted for 10.6% of non-oil GDP, according to the IMF. Although a range of factors, including lower oil prices, have affected growth projections across the GCC, Kuwait’s real estate sector is particularly well-poised to face lower prices.
The country’s strong macroeconomic fundamentals, including a high per capita GDP, stable inflation and recent budget surpluses worth tens of billions of dollars, have helped shore up its economic position. Although Kuwait’s GDP decreased by 1.6% in 2014, the country regained most of the ground lost a year later by posting growth of 1.6%. Projections from National Bank of Kuwait (NBK) in 2015 suggest that this trend is set to continue, with 2.4% growth forecast for in 2016 and 2.5% the following year.
Although the number of transactions in some segments has decreased – likely the effect of uncertainty in global financial markets and reduced liquidity – a combination of high demand and state support have kept the sector moving forward at a steady pace.
State Roles
Cognizant that a healthy real estate market can help to further diversify the economy, Kuwait’s government works through several agencies to support the sector’s expansion. The Kuwait Investment Authority (KIA), the Kuwait Credit Bank (KCB) and the Public Authority for Housing Welfare (PAHW) all play critical roles in this regard.
KIA, the manager of the country’s sovereign wealth resources, typically focuses on projects abroad, but also invests in real estate projects at home, thus providing extra liquidity for the sector.
KCB, meanwhile, also generates liquidity, particularly for individual citizens. Established in 1950, it offers credit to Kuwaiti nationals to support real estate, industrial and agricultural transactions. It also lends to state employees against their salaries and bonuses. In 2015 the bank approved an average of 379.5 loans worth KD20.1m ($66.5m) each month, according to data compiled by NBK, down from 423.3 loans worth KD25.4m ($84m) per month in 2014.
As for the PAHW, it provides both housing units and loans to married Kuwaiti nationals. Established in 1993, the authority rose out of state and ministerial efforts in the 1950s to provide Kuwaiti nationals and their families with housing and credit. Until July 2010, the PAHW and its predecessors had provided nationals with 48,587 units, 27,965 vouchers and 1088 apartments, according to its own figures.
Lay Of The Land
The relatively short supply of land in Kuwait drives the dynamics of the real estate markets. Given the country’s small size and ongoing oil drilling operations across large swathes its territory, the government tightly regulates land use, which it divides into three categories: residential, investment and commercial. The state also maintains responsibility for deciding if and how land can be reclassified, and whether land can be developed on at all. At the time of publication 6-7% of Kuwait’s total land area was open for development.
Combined with high demand and a steadily growing population, this top-down supply restriction has given the country one of the tightest real estate markets in the region. Kuwait City possesses just 63 sq metres of urbanised land per capita, far lower than in other GCC metropolitan areas like Riyadh (171), Bahrain (194) or Dubai (468), according to data gathered by the Kuwait Real Estate Company (KREC) in November 2015. Demand for available plots far outstrips supply, with over 100,000 government housing applications pending and 44,038 vacant land parcels available in 2015, according to KREC.
Despite the supply squeeze, recent indicators for the sector are largely positive. The residential market has maintained its position as the largest segment by both sales and number of transactions, according to NBK, with 2015 sales reaching KD1.4bn ($4.6bn). In recent years, however, the investment segment has gained ground, posting growing sales figures for investment apartments and other non-residential units, which reached KD1.2bn ($4bn) in 2015. Commercial sales, meanwhile, came in at just under KD455m ($1.5bn) that year.
Residential Segment
Residential sales declined by some 28% year-on-year (y-o-y) in 2015, from a monthly average of KD158.3m ($523.6m) to KD113.4m ($375m), according to data published by NBK in March 2016. The number of transactions also decreased from 484 to 323 on average per month, while the average transaction size grew slightly, from KD334,000 ($1.1m) to KD351,600 ($1.2m). NBK’s residential home price index, based on 2010 prices, faced a downward trend in late 2015, bottoming out in November, when it posted a y-o-y fall of 6.7% to reach around 170 points. It showed signs of improvement in February 2016, rising to 180.2 points, just 2% lower than the same month a year previously. By June 2016 it had slid to 165.2 points, according to NBK, a drop of 10.9% y-o-y, which NBK attributed to summer slowdown of activity in the real estate sector.
The residential segment posted increased loans for renovations and additions, and higher land prices. Renovations and additions have represented a relatively small segment compared to new construction and purchase of existing homes (around 8% of loans distributed by KCB in 2015); however, growth has been impressive. KCB approved 1210 loans worth KD21.6m ($71.4m) for additions and renovations in 2015, a 48% increase on 2014. Indicators from early 2016 have also been positive, with 207 loans worth KD3.1m ($10.3m) approved in February alone, more than double the monthly average from 2015, and more than triple that of 2014.
Residential land prices have seen some growth despite slowing residential transactions. After easing slightly in early 2015, NBK’s residential land price index rose to 185.1 points in February 2016, a y-o-y increase of 3.7%. In June 2016 the index stood at 182.2 points, a drop of 3.9% y-o-y.
Investment Segment
Most of the investment segment is made up of apartments, demand for which is largely driven by expatriate workers. Since Kuwaitis tend to opt for home ownership, and in many cases have access to state financial assistance that makes this possible, foreign workers account for the bulk of apartment tenants. Although growth in expatriate employment may slow in the coming years, the employment base is expected to hold steady and continue to buoy prices in the segment, as highlighted by KREC in a November 2015 real estate presentation. In addition to rental apartments, investment properties can also include clinics, offices and other facilities offering professional services. “The professional services segment is set for higher growth in light of the Kuwait Development Plan coming online,” Ahmad Al Kandari, CEO of United Facilities Management, told OBG. By the numbers, average monthly sales decreased from KD151m ($499.4m) to KD102.2m ($338m) between 2014 and 2015, while average transactions per month also dipped over the same period, from 484 to 323. Conversely, property prices began to recover from declines in previous years. Indeed, the investment segment has performed well despite fears of a possible slowdown, with NBK’s investment building price index rising from 215.8 points in February 2015 to 220.8 points in February 2016, a 2.3% y-o-y increase. The average occupancy ratio also held steady at about 95% between the fourth quarter of 2010 and the second quarter of 2015, according to survey data assembled by KREC. Average monthly rent, meanwhile, grew steadily, from KD235 ($777) to KD313 ($1040) in the same period.
Right To Housing
Kuwait’s government offers substantial housing support to its nationals. State housing provisions are based on family status and nationality. Many married couples are guaranteed state aid in securing housing in the form of a housing unit, a voucher for a land plot or an interest-free government loan. Since demand far exceeds capacity, there are long waiting lists, placing the issue front and centre of the country’s political agenda. In 2013 Marzouq Al Ghanim, speaker of the Kuwait National Assembly, found that housing was the primary issue concerning the voting population.
The number of housing applications pending as of November 2015 was 108,288 and through to September 2015 the PAHW had received about 6400 new housing applications, Kuwait Financial House (KFH) said in its 2015 third-quarter housing report. As a result, there is a large backlog of housing units, with some applications dating from as far back as 1985, according to a statement by the PAHW. In April 2016, the number of applications declined to 106,000 according to KFH, with 1783 new applications recorded during the month.
Historical trends, however, indicate applications are likely to continue growing, particularly as demographic growth over the past decade has been substantial. Between 2000 and 2013, the number of Kuwaiti families grew from 153,587 to 250,406, an average compound annual growth rate of 7.7%, according to data compiled by KREC. That growth rate seems likely to persist, if not expand, given the country’s predominantly young demographic make-up: nearly 48% of the population is under the age of 19.
The government is therefore working to reduce the backlog. Following the release of Al Ghanim’s survey findings in 2013, the authorities announced their goal to complete and distribute over 12,000 units each year. So far progress has been promising, with 12,753 units laid out in the authority’s 2014/15 distribution plan, while the PAHW has confirmed it had completed the distribution of 12,177 residential units as planned in its 2015/16 financial plan, according to KFH. As of January 2016, the PAHW was in the process of executing 29 major contracts for the construction of housing units, public buildings and associated infrastructure work worth KD874.4m ($2.9bn).
In 2016 unit delivery has also moved forward. The government began to distribute housing units in newly completed residential cities, including South Al Mutlaa and South Saad Al Abdullah, the minister for housing affairs, Yasser Abul, told local media in March 2016. The authorities also expect forthcoming projects to deliver 174,000 new housing units by 2020. To work towards this target, private contractors will also be allowed to bid on several important projects, including Mutlah Residential Project, Al Subiyah Residential City and Sabah Al Ahmad Township.
Smarter Cities
Part of the challenge of providing Kuwaiti nationals with public housing arises from the prevailing preference for large single-family homes. The state guarantees an area of at least 400 sq metres per family, about double the median home size in the US, according to 2010 US census data. With a mounting application backlog, however, the authorities are continuing to explore alternatives. Some within the government advocate shifting more resources toward higher-density, multi-floor housing complexes, rather than standalone, single-family homes. In addition to accommodating more dwellings per unit of land – which is in short supply – the development of high-density housing could be a more efficient use of infrastructure and public services. To this end, the government aims to deliver 270,000 units in the coming years through large residential projects like Sabah Al Ahmad Sea City and Nawaz Al Ahmad City, Abul said in February 2016 on the sidelines of the 19th Gulf Engineering forum in Kuwait City. A month later, Abul travelled to South Korea to sign a memorandum of understanding with his counterparts regarding the construction of more high-density residential developments in Kuwait.
Commercial Segment
The commercial market recorded an unusually strong start to the year in 2016, with 14 transactions worth KD90m ($297.7m) in February, a 17% y-o-y increase. The month also marked the first time in eight years that commercial sales outperformed residential sales, according to NBK. Important growth drivers included sales in Sabah Al Ahmed Sea City worth KD69.7m ($230.5m), as well as the sale of a KD4m ($13.2m) building in Fahaheel, a shopping and leisure area in the country’s southernmost district, Al Ahmadi.
The office segment has also improved significantly in recent years. Between the third quarter of 2011 and second quarter of 2015, office occupancy ratios rose from 59.4% to 86.7%, according to a survey of 110,313 units in 4527 buildings by KREC. Leasing rates posted growth, too, increasing from KD6.4 ($19.85) to KD7.2 ($23.15) per sq metre during the same period. Occupancy in the retail market has expanded as well, growing from 77% to 94.6% between the third quarter of 2011 and second quarter of 2015.
Major Players
While the government has traditionally taken the lead in the residential segment and helped guide the development of the real estate market, Kuwait is also home to some of the largest listed real estate companies in the GCC. In 2013 the country’s real estate firms made up more than half of the region’s top 50 players by market capitalisation, according to local media. Financial results in 2015 have been strong, with the top-five players reporting steady or increasing net incomes for the year.
United Real Estate Company (United) ranks fifth by market capitalisation at KD109m ($360.5m), according to data from the Kuwait Stock Exchange (KSE). United was established in 1973, with the majority of its shares held by state-owned Kuwait Projects Holding Company (KIPCO), and the company has grown to operate across the MENA region, with key assets in Kuwait, including the KIPCO Tower, Marina Hotel and Marina Mall. The company also has projects in Oman, Jordan, Lebanon, Egypt and Morocco. As for forthcoming developments, United, along with other entities, will be responsible for implementing a real estate project on the outskirts of Kuwait City worth $5bn, Faisal Al Ayyar, KIPCO’s vice-chairman, told local media in September 2015. The project, which will cover 380,000 sq metres in the Al Daiya area, is set to include both residential and commercial properties.
Established in 1968, the Commercial Real Estate Company, typically known as Al Tijaria, is the oldest of Kuwait’s real estate majors and ranked fourth by market capitalisation at KD147m ($486.2m), as per KSE data from the first quarter of 2016. The year 2015 was a strong one for Al Tijaria, whose total assets rose 18% y-o-y to KD486m ($1.6bn), according to its financial statements. Net income also clocked 8.8% growth y-o-y, from KD18.9m to KD20.6m ($62.5m to $68.1m). In May 2015 Al Tijaria’s hospitality developer affiliate, Kuwait Resort Company, bought a KD4.8m ($15.9m) plot on Bahrain’s Dilmunia Island for mixed-use development. The company also put up KD926,600 ($3.1m) as part of a group investment in a new retail building located in the UK, it said in January 2016.
Other Key Players
With a market capitalisation of KD187m ($618.5m), putting it in third place, according to KSE data, is Salhia Real Estate Company. The firm was formed in 1974 by a group of local business interests but has since expanded its operations to elsewhere in the Middle East and Europe. Salhia held total assets worth KD270m ($893.1m) in 2015, and its net income held largely steady for the year, growing slightly from KD11.4m ($37.7m) to KD11.6m ($38.4m), according to its 2015 year-end data.
Tamdeen Real Estate ranks second among Kuwait-based firms, with a market capitalisation of KD230m ($760.8m), according to KSE data from the first quarter of 2016. The company, established in 1982, became a subsidiary of Tamdeen Group in 1996. It held KD412m ($1.4bn) in assets at year-end 2015, according to its financials. Net income, meanwhile, grew from KD7.4m to KD9.9m ($24.5m to $32.7m) between 2014 and 2015. The company’s holdings include 360 Mall, a waterfront mixed-use development, where it will partner with Hyatt Hotels Corporation to build a 261-room Grand Hyatt, the company announced in November 2015.
At KD739m ($2.4bn), Mabanee’s market capitalisation places it firmly at the front of the pack. The firm held total assets worth KD617m ($2bn) at year-end 2015, up from KD519m ($1.7bn) in 2014, as per its own figures. Net income remained stable during that period, rising from KD48.2m ($159.4m) to KD48.5m ($160.4m). Mabanee’s Avenues Mall, opened in 2007, is the largest in Kuwait with over 800 shops. The shopping centre is currently in its fourth and final phase of expansion. Mabanee has other retail projects lined up – similarly branded as “The Avenues” – in neighbouring Saudi Arabia and Bahrain. In November 2015 Saudi authorities gave the firm’s subsidiary, Shumoul Holding, approval to move forward on its $1.9bn mixed-use development, The Avenues Riyadh.
Outlook
Despite economic headwinds, Kuwait’s real estate sector has performed relatively well in the past year. Looking ahead, changes in regulations governing the banking sector could have important implications for Kuwait’s real estate market. In 2014 the Central Bank of Kuwait began implementing the Basel III financial regulations introduced in the wake of the 2008 global financial crisis. The new rules have raised capital requirements and amended the list of assets that can count towards them. Importantly, real estate collateral will be phased out as such an asset, a move that restructures incentives for banks considering real estate loans (see analysis). Although prices for the time being have held steady, some parts of the market could be affected, according to KREC.
As for each of the three real estate segments, the outlook is generally positive. Within commercial and investment real estate, leasing rates in the office, retail and apartment markets all rely on increasing economic activity to create demand for business properties and apartments for expatriate workers. Although these areas of business could face a slowdown as budgets are reduced in the public and private sectors, consistently strong consumer spending should still provide a significant source of growth.
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