Global Investment House – Kuwait – Real Estate Sector –August 2007 - The best of times are here to remain as portended by the global oil demand forecasts. Oil price anywhere above US$50 is bound to ensure adequate liquidity in Kuwait. Besides the buoyant oil scenario, what enhance our expectations for the medium term are the multiplier effects of projects, which attract huge investments.
While transport and utility related projects are set to ensure steady investments for years, other construction and tourism related projects would abet the optimum utilization of liquidity in the shorter term. Kuwait’s real estate market is a pillar of strength for the local economy, as its health is tied to the Kuwaiti population as a whole. Aside from Oil sector, Kuwait has two major markets that are stock exchange and real estate. 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.
Real estate and construction segments continued to expand rapidly and additional funds were pumped into these sectors and they become pivotal to the health of the local economy. In growth terms, both construction and real estate were able to improve their value addition to GDP. Construction sector’s contribution to GDP grew by 9.7% during 2006 while real estate contribution grew at 7.2%. Combined, the sectors accounted for 6% of Kuwait’s economy during 2006, as compared to 8.5% and 6.7% in 2004 and 2005 respectively. However, this does not indicate either real estate or construction activities have been diminishing; instead, this is due to brisk growth in oil & gas sectors in Kuwait’s economy.
Aided by the increased economic activity and ample liquidity, the real estate and construction sectors have been among the forerunners of those sectors receiving credit facilities over the period 2000-2006. Credit to the real estate sector accounted for 22% of the total credit extended by banks during 2006, which is the second largest portion after personal facilities. Further, the sector has consistently expanded, with banks increasing facilities to the sector at a CAGR of 25.2% over the same period. During 2006, facilities extended to real estate sector reported 29.5% of annual growth, standing at KD3.3bn. Similarly, banks increased facilities to the construction sector by 25.9% on average over the period 2002-2006 to breach the KD1bn landmark by the end of 2006. On annual basis, loans to the sector grew rapidly by 39% for 2006 to stand at KD1.1bn.
Building permits as a proxy for construction activity in the economy has shown signs of picking up in 2005 after a drop in 2004. As for the year 2006, issued permits reported 12.5% decline reaching 3,601 permits. The decline could be reported mainly to residential permits due to its sheer size (more than 80% of permits by the end of 2006). Residential permits declined by 10.5% reaching 2,738 permits. On the other hand, commercial permits grew significantly by 67.3% to 87 permits.
Total property sales value was helped by the buoyancy in real estate sector to grow at a CAGR of 14.2% for the period 2001-2006 reaching KD2.7bn. However, total number of units sold during the same period had declined at a CAGR of 1.8%. This implied a higher average price per unit especially for residential segment. Investment segment reported increasing CAGR rates for both number and value of units sold at 7.8% and 27.1% respectively. Similarly, mirroring the real estate boom especially in commercial segment both number and value of units sold reported the highest CAGR rates of 25.8% and 69% respectively.
Residential property remains the backbone of the local property market, despite a growing interest in investment properties in the recent period. Much of the activity in the real estate market is concentrated in this vital segment and we hold the view that supply / demand dynamics are deeply biased towards an under supply of residential property. Confirming the undersupply scenario is Public Authority for Housing Welfare (PAHW) data on total applications and waiting list. According to PAHW, waiting rate has been increasing over years. Waiting rate stood at 16.8% during the late eighties then jumped to 24.6% on average for the whole nineties. However, there was a dramatic increase in waiting rate for the last three years reaching more than 50% over the period 2004-2006.
By the end of 2006, residential land average price hiked to a new landmark of KD277/m2 as compared with KD253/m2 reported for 2005. Land prices in Hawally and the Capital governorate led the rise as areas closer to Kuwait City, such as Yarmouk, Surra, and Salwa led in interest. Residential land prices in the Capital governorate hiked by an average of around 12.2% by the end of 2006. Following the increase in land prices during the last four years, average price per residential unit followed an increasing trend reporting a CAGR of 4.3% over the period 2003-2006. Average price per unit increased from KD152, 470 during 2003 to KD172, 980 in 2006. Generally, this increase in average price per unit over the last four years was a common phenomenon in investment and commercial segments as well as industrial segment. On CAGR basis, both segments grew at 18.6 and 19.6% respectively over the period. Average investment and commercial unit price stood at a new landmark of KD703, 900 in 2006. More important was industrial segment that witnessed the highest annual growth rate of 87.4% standing at KD707, 500 by the end of 2006.
The investment properties sector continued its exceptional performance during the period 2000-2006. The influx of expatriates, increased building space, and rising rents were the main reasons backing the performance. Entering 2006, investment property prices in hotspots such as Salmiya and Hawally grew by 9.7% and 13% to stand at KD620 and KD538 per square meter respectively. As a result, the strong demand coupled with shortage in supply has propped most investment property owners to raise rents. Entering 2006, rental rates continued its growth at 9% reaching a new landmark of KD2.95 per meter square. Bneed Al- Gaar and Al- Fahaheel lead the growth during 2006 reporting annual growth rates of 12.8% and 12%. Areas such as Salmya and Hawally reported the lowest growth rates of 6.5% and 5.9% reaching KD3.26 and KD3.06 per square meter respectively.
After a relatively stagnant performance on the part of the retail market up until 2001, commercial real estate property in Kuwait has seen increased activity. Commercial segment average land rates grew rapidly at a CAGR of 18.8% over the period 2000-2006. Currently, vacancy rates are still low because of huge demand and scarcity of supply and thus rental prices are rising. By the end of 2006, average commercial land rates picked up by 11.8% to a new landmark of KD3, 490 per meter square. Commercial land rates in Hawally and Salmiya went up by 25.8% and 10% respectively in 2006. Similarly, Retail space rental across the state of Kuwait increased by 16.6% to a new landmark of KD16.7 per square meter by the end of 2006. Rentals in Hawally, Farwaniya and Khaitan increased the most by 27.9%, 26.5% and 21.2% respectively.
Concurrently, the tides have also turned in Kuwait’s office market. This has translated into precipitous increases in commercial land value. During the period 2001-2006 commercial land which is licensed for 620% built up area in downtown Kuwait grew at a high CAGR of 17.1%. Prices increased to unseen level of KD7, 750 per meter square by the end of 2006. Similarly, neighboring Sharq area plots, which are licensed for 520% built up area, have also hiked up in value at a CAGR of 21.2% during the same period. Prices sky rocketed to a new landmark of KD6, 950 per meter square by the end of 2006.
Finally, regarding real estate sector performance in the stock market, Kuwaiti market rebounded during the first half of 2007 backed by investors’ confidence that remained high on the back of positive news flow from the macro perspective and healthy corporate earnings. Global General index reported overall YTD gain of 30% at the end of the 1H07, while Global Real Estate Index reported 10.4% YTD growth. On the capitalization front, total market capitalization reported YTD growth of 32.5% during 1H07, mirroring the positive market sentiment. Market capitalization stood at KD55.5bn by the end of 1H07 while Real estate capitalization reported a growth of 12.5% standing at KD3.5bn.
On the profitability front, the year 2007 witnessed major changes as total earnings more than doubled during 1Q07. Total earnings grew by 158.3% to stand at KD1.5bn as compared with KD577.3mn during 1Q2006. Backed by the positive market sentiment, almost all sectors reported double digits growth rates during 1Q07. Within all sectors, real estate sector reported the best performance. After reporting KD10.3mn of losses during 1Q06, real estate earnings rebounded during 1Q07 to reach KD75.4mn of profits.
