Kuwait in numbers

40 per cent: Vacancy rate in Kuwait City’s office market, the highest in the GCC

100,000: Waiting list of applicants for Kuwait’s social housing scheme

Sources: MEED; GIH; Public Authority for Housing Welfare

Kuwait’s real-estate market is beginning to recover from the impact of the global economic downturn, but only slowly.

In 2009, the total number of units sold dropped 25.8 per cent to 4,586, according to figures from the local Global Investment House (GIH). Housing was worst hit, with unit sales falling 27.5 per cent, compared to 21 per cent in the apartments and commercial sector. The average price per transaction also fell in 2009, down 15.8 per cent to KD700,000 ($2.5m), from KD832,000 the previous year. In terms of overall contribution to the economy, the real-estate sector dropped 2 per cent in 2009 to KD1.18bn, while the construction sector fell 3.3 per cent to KD585, according to GIH.

Uneven economic recovery

“There was a slowdown in 2008-09 due to restricted access to credit, people selling property to pay off debts, and a general lack of confidence in the market,” says Daniel Kaye, senior economist at National Bank of Kuwait (NBK).

There have been signs of a recovery in 2010, but it has been patchy. After a dip in real-estate sales in the first quarter of the year, there were signs of an upturn in the second quarter. The total value of residential and apartment sales in the second quarter was up 44 per cent on the first three months of the year to KD579m. The average price per transaction, though, continued to decline in the second quarter, particularly in the commercial sector, where it fell 28 per cent, compared to a 10 per cent drop in the housing sector and a 3 per cent increase in the apartments sector.

The recovery looked strong until the past few months, when transactions fell by about 50 per cent

Daniel Kaye, National Bank of Kuwait

Even the brief revival in transaction numbers in the second quarter was followed by sluggish activity in the third. According to NBK’s latest real-estate report, published at the end of October, there were only 347 property transactions registered at the Justice Ministry in September, the lowest number for a year. The September total was down 24 per cent on August and only half the monthly average in the second quarter, when the market enjoyed transaction figures in excess of 700 a month, according to NBK.

Market analysts are optimistic of a more buoyant performance in the fourth quarter of the year, putting much of the market’s third quarter listlessness down to seasonal factors such as the summer holiday period and an early Ramadan. Market activity accelerated towards the end of September, with more than a third of the month’s sales coming in the past four days of the month, according to NBK.

“The recovery looked strong until the past few months, when transactions fell by about 50 per cent,” says Kaye. “But the fall is more to do with seasonal affects. In the summer you tend to see a fall off in activity, and similarly in Ramadan. The early weeks of October look fairly good, and we will probably see a bounce back in the next few months.”

Kuwait’s strongly segmented real-estate market means the pace of recovery in the residential and commercial sectors will be strongly divergent. While the housing sector is likely to see a shortage of supply as a long list of locals seek to get on the property ladder, the commercial and retail sectors are likely to remain oversupplied in the medium term.

Residential demand is skewed by the constitutional right of Kuwaitis to receive housing – and a KD70,000 interest-free government loan – when they marry, while non-Kuwaitis are prevented from investing in residential property. Kuwait’s Public Authority for Housing Welfare has a waiting list of 100,000 housing applicants, and a further 65,000 applications are expected by 2014/15, according to DTZ, a London-based property consultancy.

Kuwait social housing

“There’s a huge waiting list of applicants, and around 10,000 new applicants each year, which is much greater than the number of approvals,” says Kaye. “It’s a fundamental issue, and over the long term will create pressure for property prices to rise.”

The government is embarking on a number of housing projects in an attempt to meet demand, but it is “questionable” whether development can catch up with demand without the involvement of the private sector, says DTZ. “About 70,000 new units are due to be built in the next few years, which will help make inroads into the waiting list, but there will still be upward pressure on prices for some time to come,” says Kaye.

Activity in the residential sector, focused largely on apartments rather than houses, has held up relatively well during the downturn. “The apartments sector has been less volatile than the villa sector,” says Kaye. “There has been a slowdown in the number of transactions in 2008-09, but it has been less marked. There has been a fall in prices, which may have helped to keep the volume of transactions up.” According to DTZ, land prices in the residential sector have now begun to recover after a 25-35 per cent drop from their 2008 peak.

Transaction volumes in the apartment sector have also been buoyed by a relative reluctance to invest in other areas of the economy. “A number of nationals have moved their money from stocks or fixed-term deposits to invest in apartment buildings,” says Kaye. “Prices have fallen, so they have become better value for money, and they also offer higher yields.”

On the whole, the outlook for investors in Kuwait’s housing and apartments sector is positive. “Rising demand will mean that the residential sector will continue to play the major role in Kuwait’s real-estate market,” says Faisal Hasan, head of research at GIH. “We expect the residential sector to witness a gradual pick-up in prices as signs of recovery start to show in 2010. In the investment sector, the pick-up will be linked to increased demand from the expatriate workforce.”

In stark contrast to the local housing market, the greatest problem in the commercial sector is not a lack of supply, but a lack of demand. According to DTZ, demand has “flattened”, while office supply has continued to come on to the market. New office buildings are being built in the Shuwaikh area of Kuwait City by both government organisations and private companies, and once they are completed, the vacated premises will add further “second-hand space” to the market, say DTZ.

The resumption of construction activity in the past year coupled with stagnant demand means that the gap between supply and demand is expected to widen. “The financial crisis slowed down the rate of construction, but a lot of supply is expected to come on in the next year or so,” says Kaye. “The question is whether there is enough demand. If the demand is not there we can expect quite a weak market in the years ahead.”

According to DTZ, an estimated 184,000 square metres of office space within 28 new buildings was due for completion in Kuwait City’s central business district by the end of the summer, while a further 439,000 sq m is set to be added in 24 projects due for delivery by 2013. At least nine further schemes are at the design or feasibility stage that once completed would provide an additional 291,000 sq m of office space.

As a result, an increasing amount of office space is lying unused, and prices are unlikely to pick up for some time to come. Kuwait City’s office market has a vacancy rate of 40 per cent, the highest among the GCC’s major cities, compared to 38 per cent in Dubai, and 20 per cent in Riyadh and Doha, according to GIH. “The commercial segment is expected to witness a slower recovery than the residential sector,” says Hasan. “We do not foresee a pick-up in the segment in the short-to-medium term. The delivery of new supply will exert more downward pressure on rentals for both retail and office space.”

Retail operators in Kuwait

The fortunes of developers in the retail sector, meanwhile, are likely to be mixed. Kuwait’s largest shopping mall, the Avenues, in the Al-Rai industrial district, will “continue to be the dominant retail destination in Kuwait for the foreseeable future”, and although new malls continue to be developed, retail operators are now being “more selective” on which locations they choose, according to DTZ.

Funding for the third phase expansion of the mall, developed by the local Mabanee Real Estate Company, was secured in the first half of  the year.

“The Avenues development is doing pretty well,” says Kaye. “All the retail spaces seem to be taken or are in the process of being taken, and the mall is full of high end brands.”

The 360 Mall on Kuwait City’s 6th ring road, which opened in mid-2009, is also proving to be a success, although retail space is being filled only gradually. “There are still a few vacant slots, but in the last few months it has filled up quite quickly,” says Kaye.

With the exception of the local housing market, the same is true across Kuwait’s real-estate sector, meaning that development in the medium term is likely to be undertaken at a measured pace.

“Projects are coming along that will hit the market in the next one or two years,” says Kaye. “There are plots of land available in Kuwait City, but given the uncertainty of the market it would be quite a risk for developers to take on a greenfield development.”