Global Investment House – Kuwait Real Estate Sector - The benefits of high oil prices have been omnipotent in Kuwait, helped by the adequate reserves and the relative small size of the country. It is one of richer countries in the world with a per capita GDP of US$27,273 in 2005. While nominal GDP reached a new landmark of KD23.59bn during 2005, witnessed a robust Y-o-Y growth of 35%. Similarly real GDP is estimated to have grown by 9.1% to KD11.3bn. Abundance of oil reserves as well as the various steps to increase oil production and export capacity has set the economy for high growth at least in the short to medium term. Growth would further be aided by the petro-dollar generated liquidity and the resultant investments in construction projects.
As Kuwait’s economy has continued to gain strength, the real estate sector has continued to move forward. As activity in GDP, real estate & construction segments continues to rapidly expand and additional funds are pumped into these sectors, they become pivotal to the health of the local economy. In growth terms, both construction and real estate were able to improve their value added to GDP. Construction sector’s contribution to GDP grew by 13.2% during 2005 to KD455mn while real estate contribution grew at 3.8% to KD1.14bn. Separately, real estate accounted for 4.8% of GDP during 2005, slightly below its 6-year average of 6.7%. Similarly, construction sector accounted for 1.9% of GDP, as compared with its 6-year average of 2.5%. However, this does not indicate either real estate or construction activities have been diminishing; instead, this is due to brisk growth in oil & gas sector contribution to Kuwait’s economy.
Going forward, we believe that there would be robust economic conditions and increased private spending as well as a strong pick up in gross fixed capital formation. All these would be driven by several capital projects which are likely to commence and that should help the economy to achieve double-digit growth rates in 2006. Looking forward, we expect both construction and real estate sectors to continue to augment growth in the non-oil & gas sector. In fact, we feel that growth of those key sectors will especially be quicker in the coming years as the government begins to put into practice its diversification programs and facilitating the role of private sector in the economy. Moreover, the new budget for 2006/07 seems to be a very positive and a forward looking statement made by the government. The new budget is described as the largest budget in the country’s history. The Finance Minister clearly outlined that the new budget has tried to focus its attention on the capital expenditures and on maintaining a significant rate of investment based public spending because of its important role in activating the economy. The new budget is a marked difference in the capital expenditure, namely transport and equipment as well as projects and maintenance. These two items add up to 12.82% of total expenditures, standing at KD132mn, and KD1.26bn respectively.
Factors pushing the sector activity forward are sternly intact including among others; record overall economic activity, growing population, increased credit facilities and other financing options, increased private sector participation especially through BOT schemes and finally amendments in government regulations in favor of private sector support.
On the financing side, the balance of utilized cash credit facilities extended by local banks to the different economic sectors hiked to a new landmark of KD11.83bn by the end of 2005, or 19.87% growth over 2004. Thus, aided by the increased economic activity and ample liquidity, the real estate and construction sectors have been within the forerunners of those receiving additional facilities in 2005. Credit to the real estate sector accounted for 21.5% of the total credit extended by banks during 2005, which is the second largest portion after personal facilities. Similarly, loans to construction sector reached a new landmark of KD769.8mn by the end of the year, or 30.1% growth over 2004. Furthermore, new loan products and a steady flow of lending are continuing to encourage record activity. Where, Islamic leasing (ijara) has emerged as a popular mode of financing pumping considerable funds into the real estate market. This new tool is becoming more popular as the number of Investment companies operating in accordance with the provisions of Islamic Sharia in Kuwait had reached 26 this far in 2006, managing assets that have exceeded KD3bn as compared to KD655mn in 2001. Real estate funds have also recently flooded the Kuwaiti market, pumping additional liquidity into the already buoyant market. Those funds managed around KD85mn of investments in the real estate market by the end of 2005.
Private sector participation as well is on the increasing trend for the last couple of years especially through B.O.T (Build-Operate-Transfer) mechanism. It has become a favored method for financing infrastructure projects especially in the power, wastewater, real estate development and transport sectors. Some major projects like Failaka and Boubyan islands, Arefijan and Kheiran residential projects are already in the pipeline being offered to the private sector as BOT projects. Thus, out of the government keenness to give more importance for BOT projects to cooperate with private sector, and as a response to the private sector needs the minister of Finance stated that a new BOT law is to be proposed to the cabinet soon. The law is the first one that calls for cooperation between the two sectors.
Regarding the industry performance, despite a stellar performance in the market in the past period, the sector still hold potential, as the record levels of liquidity and the uneasy world economic recovery should continue to keep funds flowing into the sector, which is deemed by many as a safe haven. Looking forward, the construction industry is expected to benefit from US$8bn worth of private investment and US$3bn worth of government investment over the next five years. The combined cost of US$11bn could rise to US$40bn if future Build Operate Transfer (BOT) projects are taken into consideration, including planned residential and tourist resort developments in Failaka and Boubyan islands. Building permits as a proxy for construction activity in the economy has shown signs of picking up in 2005 after a drop in 2004. There has been a 7.6% growth in the number of permits issued during 2005, reaching 4,116 permits as compared to 3,824 permits last year. As for sales, the highlight of the real estate activity in 2005 was a drastic increase in prices across the segments and a weakening of activity in terms of volume in both residential and investment property segments. Residential property segment, which represents the highest market share in real estate sector estimated at 56.2%, is estimated to have grown by 52.84% in terms of value to a new landmark of KD2.61bn. Similarly, the value of investment property sales is estimated to have increased by 92.24% to a new landmark of KD1.87bn while commercial sales’ value estimated to more than doubled, growing more rapidly by 113% to KD162mn.
Supply/demand analysis of each of the market segments points to the increasing supply in almost all segments. In residential terms, new residential areas are sprouting up across Kuwait as already developed areas are reaching high price levels. Similarly, the investment segment is seeing the addition of lots of new buildings every month, catering for an increasing demand within the expatriate population. The commercial segment is also seeing its share of activity. In Kuwait City, developers are sculpting a new skyline, filled with modern office towers, while commercial and entertainment complexes are dotting the country’s landscape. Even the tourism industry is undergoing a quiet boom, with about 90 hotel licenses granted since 2003.
The residential sector supply/demand dynamics are deeply biased towards an under supply as housing supply is still growing slower than housing demand. Therefore prices will continue to rise, although not in every individual market, but at the national level. Average price per square meter of residential land in Kuwait stood at KD230 by the end of 2004, which was 15% over 2003’s average price. Following the increase in land prices, average price per residential unit increased to KD162,000 by the end of 2004 with 6.18% growth. Entering 2005, land prices are estimated to have grown by another 10% over 2004. Consequently, average price per residential unit hiked again by 7.58% to reach KD174,200 by the end of the year. This increase in average price per unit was a common phenomenon in investment and commercial property as well. Average investment and commercial unit price stood at KD651,700 by the end of 2005, up from KD446,500 the year before. Rental rates as well are estimated to have grown by 5% to mirror 2004 growth rates. Going forward, we expect residential rental rates to start a period of stagnation or marginal growth especially in the medium term until extra supply is delivered to the market to start a declining trend afterwards.
Investment segment witnessed some correction during 2005 after reaching its peak in both rentals and prices during the last couple of years. Where, Kuwait’s economic boom in the last period has led to a shortage of quality apartment space especially with the influx of expatriates, instigating soaring rental prices during 2003 & 2004. The strong demand coupled with shortage in supply has propped most investment property owners to raise average apartment rents by 19.4% during 2004. As for 2005, rental rates are estimated to have stagnated at the same levels as 2004 mainly due to newly delivered supply in apartment buildings. Looking forward vacancies are expected to climb because developers are still erecting new complexes at a breakneck pace. Unless there is further economic activation, there runs the risk that supply may exceed demand in the medium term. Simultaneously, real estate appraisers are stressing that property valuations have reached their peak and although there may be room for a minute rise in the short term, prices are inevitably going to remain range bound, if not declining in the medium term. Moreover, some players are pointing to the fact that the only chance of rents or prices going up from the current level is to change regulations, allowing non-Kuwaitis to own property, which is not a possible scenario.
Commercial land rates across Kuwait staged a recovery since 2002 and continued to do so in 2004 where average land rates rose by 33.6%. Supporting this increase were low vacancy rates because of huge demand and scarcity of supply and yields were estimated to be high in the range of 9% - 12%. Similarly, rents for retail space across the state of Kuwait increased by 16.9% to average KD13.24 per square meter. At the same time, the tides have also turned in Kuwait’s office market as demand for premium office space increased. Supporting this was the formation of a plethora of new companies since mid-2003 in all sectors of the economy. Adding to this is the entry of foreign banks after CBK opened the sector. However, on the supply side Kuwait City has an extremely tight office market, with quality office space for purchase or rent relatively scarce. Thus, companies are employing the booming economy to construct additional towers up to 100-storeys to cater to increasing demand for office space. This was supported by the relaxation of plot height restrictions during early 2005, especially after Kuwait Municipality has decided to allow the construction of buildings with 100 floors in Kuwait City. As a result, it is no doubt that within few years, Kuwait City’s skyline will be completely transformed. Looking forward, Commercial properties sector is not expected to face a decline until 2007-08 when the new supply is delivered to the market. It is estimated that total supply of commercial property coming into the market by 2007-09 would reach 750,000sq.m, which would need more demand generation.
As for the upcoming hospitality sector, the government has shown its intent on fully supporting tourism in Kuwait, launching a number of tourist projects that could place Kuwait on the regional tourism radar. One of such tourism projects is the Failaka Island Development Project that is expected to add more than 4000 rooms and chalets to the sector in the most beautiful island off the coast of Kuwait. Moreover, the government is also working on developing a 20-years strategic tourism development plan. Such plan aims to attract a portion of the outbound Gulf tourism, as well as business tourism and representatives of international companies. This newfound interest in hotels will push the activity in the sector much further constructing new hotels. While, the Ministry of Commerce and Industry received 128 applications for new hotels with more than 15,000 rooms. Out of those applications, 90 were approved and only about 10 are expected to see light of the day. It is important to notice that new developments in the sector are concentrated in the five and four-star categories and prime areas such as Salmiya, Sharq and Hawally would most likely be the targets of the incoming hotel developers. Such activities in the tourism sector would further drive the real estate market.
