Kuwait Real Estate Sector- June 2013

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Kuwait Real Estate Sector P a g e | 1

Industry Research

Real Estate Sector - Kuwait

Summary

The year 2012 saw some recovery in Kuwait s real estate marketwith the three segments i.e. residential, investment andcommercial real estate, performing better than the previous year.The residential segment is currently one of the strongestperforming segments in Kuwait, with a large undersupply ofresidential homes for Kuwaiti citizens. The investment segment isalso performing well due to a relatively stable and a less riskynature of the business. The commercial segment is, however, adampener for the overall real estate market, with occupancy rates

at depressed levels. Overall Kuwait s real estate sectorperformance is expected to improve in the near term as theeconomic developmental plans are implemented in the country.

The real estate market in Kuwait saw spectacular boom during thepre-crisis period and this was majorly due to the commercial realestate segment. The market saw a number of new constructionactivities, fuelled by the hope of significant improvement in theeconomy. However, this optimism was severely affected due to thecrisis. Although, the sector saw recovery in the aftermath of thecrisis, the overall confidence in the market is yet to reach pre-crisis

levels.

Elsewhere in the GCC, the prospects for the Qatari real estate andconstruction sectors are optimistic on account of higher GDPgrowth and developmental plans fuelled by the successful bid tohost the FIFA world cup 2022. UAE has started showing recovery inthe real estate sector with the slight increase in property prices andrental income. Market sentiments in Dubai are improved fromDubai's safe haven status, rising population, improved propertyprices and a number of real estate projects announced in the pastsix months. Saudi Arabia is on the verge of implementing housing

projects (with affordable prices) and this will be one of the keydrivers for the growth of real estate sector. The recentlyannounced mortgage regulations by the Saudi Arabian governmentwill also help to ease the housing shortage in the country.

Our view of the real estate sector remains positive, specifically forthe residential and investment segments. The improvement in thecommercial segment depends more on the revival of the overalleconomy of Kuwait. The Kuwait Development Plan will beinstrumental in fuelling future growth.

Report Contents

Summary 1GCC Real Estate Sector 2Kuwait Real Estate Sector 3

Factors impacting the industry 6Financial Performance of the Industry 8Conclusion and Outlook 9

Analyst Ms. Ankita [email protected]+965 22443523 ext.112

Capital Standards (CSR)Gravity Tower, 8th Floor, Ahmad Al-JaberStreet P.O. Box 26620,Safat - 13127 KuwaitOffice: +965 2244-3523Email: [email protected] Website : www.capstandards.com

June 2013
mailto:[email protected]:[email protected]:[email protected]://www.capstandards.com/http://www.capstandards.com/http://www.capstandards.com/http://www.capstandards.com/mailto:[email protected]


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GCC Real Estate Sector

Post the global crisis, the GCC region has been one of the fastest growing regions of the world, with real GDP growthaveraging at more than 5% over the last three years (2010-2012). The strong performance of the oil and gas sector

had a positive impact on the non-oil sector too. The surplus from oil revenues helped the government to upgradecritical infrastructure like airports, roads, railways and ports. This helped in attracting the huge inflow of workingexpats and in some cases helped the tourism sector. These measures helped GCC countries to diversify its revenuestream and lowered its dependency on the oil sector to some extent. Increasing tourism and expat population alsohelped in increasing demand for the real estate in the form of residential complex and shopping malls.

The combined GDP of the six-nation GCC was at around USD 1.40 trillion in 2011, the 13th largest in the world (statedby various local news agencies). Per capita income of the GCC citizens stood at USD 30 thousand in 2011, nearly triplethe global average per capita of USD 10 thousand. Among all the GCC countries, Saudi Arabia had the highest GDPwith USD 657 bn in 2012, followed by the UAE at USD 362 bn and Qatar with USD 185 bn (Source: IMF). High growthof GCC economies was due to its oil production and reserves; however the year 2009 witnessed a fall in the growth in

all GCC economies on the onset of the financial crisis. GCC countries have taken various steps to reduce itsdependency on the oil sector and promoting non-oil sector. Real estate sector plays an important role in the overallobjective of diversification and increasing non-oil sector revenue. GCC's total population more than tripled fromaround 14 mn when GCC was formed in 1981 to 45 mn at the end of 2011. Real estate highlights of major GCCeconomies are given below:

Saudi Arabia

Saudi Arabia is witnessing an increased number of projects in the commercial and residential sector, primarily inRiyadh, Jeddah and Makkah. One of the major projects include the expansion of Riyadhs King Khalid InternationalAirport, with a contract value of USD 800 mn, is expected to be completed by 2015. There are various other projects,

including the construction of hospitals, sport city as well as residential units. In 4Q2012, the Real Estate DevelopmentFund approved USD 1.40 bn financing to build around 12,500 homes across the country. In addition, real estateinvestments by investment funds increased by 4% in 2012. Unlike most of the other GCC countries, the real estatemarket in Saudi Arabia is fuelled primarily by the rapidly growing local population.

Qatar

Qatars economic outlook remains very affirmative due to the stable operating environment as well as high GDP

growth on account of the export of the vast hydrocarbon resources. The GDP grew by an average of 14.13% over thepast five years as of 2012, as per the IMF.

The Qatari real estate sector is flourishing due to its young population, rising number of households and the increasingbusiness activity. The Qatar National Vision 2030, announced by Qatar in the year 2008 as a step to diversify theeconomy from oil and gas sector, also contributed towards the developing real estate sector. Developments are alsofuelled by infrastructure requirements for the 2022 FIFA World Cup. In April 2013, Qatar Financial Centre announcedthat the country is planning to invest USD 200 bn over the next 10 years as part of its preparation for the FIFA WorldCup, and a significant part (USD 140 bn) would be spent in the first five years in projects such as new airport, seaport,and a rail and metro system.

Private sector lending grew by 13.60% during 2012 and it is expected to register an even higher growth (17.50%) in2013 on account of the increase in real estate loans. The increase in loans is directly attributed to the increasedactivity in the real estate sector as part of the preparation for the FIFA World Cup. (Source: GCC economic overviewMay 2013)


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UAE

UAE has managed to come out of the 2008 global financial crisis despite being one of the most severely affected realestate markets. UAE s economy is different from the rest of the GCC economies, where two third of the GDP iscontributed by non-oil sector led by the diversification drive initiated by the government. Real estate and constructioncontributes around 22% to the economy. The real estate market in Dubai is well known for its lavish properties, rapidgrowth and quick returns. Property prices and rental incomes have recently started showing signs of improvement;however it is far from the 2008 peak levels. A number of factors have contributed to the recovery including progresson restructuring and refinancing debt to attain instability, which has ultimately strengthened Dubai's safe-havenstatus. According to the UAE's Ministry of Finance, Dubai's government allocated USD 8.80 bn for infrastructureprojects in 2012, marking a return to big spending. Some of these projects were stalled at the time of the crisis due tolack of funding. In November 2012, the Prime Minister of UAE announced fifteen new projects worth more than USD187 mn. These projec ts are a part of the municipalitys 2013 - 2015 strategic plan of Dubai.

Bahrain

Bahrains real estate market has experienced substantial growth over the last ten years. In 2012 the number of realestate transactions in Bahrain increased by 46 percent. Data from the Survey and Land Registration Bureau showedthat the total value of transactions in 2012 was BD 663.9 mn (USD 1.74 bn) (Source: Bahrain Economic DevelopmentBoard). This growth has been predominantly driven by strong population growth, increased domestic disposableincome and greater demand from Saudi Arabia and other GCC countries. In September 2012 the governmentannounced plans to spend USD 5.59 bn (BHD 2.1 bn) on the construction of over 50,000 houses in the next five years.The five-year housing strategy will see 47,000 units built, along with 10,000 others through alternative housingprogrammes in partnership with the private sector.

Kuwait Real Estate Sector

As the fourth largest exporter of oil in the world, Kuwaits oil industry is t he backbone of the economy. Kuwait has setforth the ambitious Kuwait Development Plan (KDP) that entails big public sector spending on infrastructure and socialneeds.

Kuwait has seen significant increase in its population in last one decade. Its overall population has grown by 72% from2000 to 2012, a CAGR of 4.6%. The contribution of expats in the total population has continuously shown an upwardtrend and accounted for 68.3% of total population in 2012. Around 45.50% of the population falls under the agebracket of 20-39 years. Higher proportion of younger population has led to higher demand for the housing sector. Per

capita income of the Kuwait has also grown significantly, which will further support the growth in the residential realestate sector. Moreover, Kuwaiti nationals mostly prefer to stay in private owned houses (villas) located in low densityarea, whereas expats reside in rented apartments constructed for investment purposes. Demand for rentedapartment is significantly high which can be seen from the vacancy rate, which was only 5% in last five years. Rentalyields from these apartments are in the range of 7-9%.


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Graph 1: Demographic details (Age wise population break-up)

Source: The Public Authority for Civil Information

Real estate activity significantly increased before the global crisis, however post crisis, the overall pace ofdevelopments slowed down significantly. The contribution of real estate in the overall GDP in 2011 was a mere 2.5%,which was the lowest in the last decade.

Graph 2: Real Estate contribution to GDP

Source: Central Bank of Kuwait

The total transaction activity in the real estate market for 2012 stood at KWD 3.36 bn, an increase of 15.61% ascompared to previous year. The improvement was an outcome of increased activity in residential segment by 18.78%.The increased residential demand can be attributed to supportive government policies for its citizens, favorable termsof lending by banks, growing population as well as higher average income.

581

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Real Estate GDP at Purchaser Price Value (LHS) Contribution to overall GDP (RHS)


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Graph 3: Trading Activity in the Kuwait Real Estate Sector Quarterly Transaction Value Analysis

Source: Kuwait Finance House and CSR Analysis

Segmental analysis

Graph 4: Transaction Values (Segment wise)

Source: Kuwait Finance House and CSR Analysis

0

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1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012

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1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012

K D M i l l i o n

Residential Investment Commercial


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Number of sales transaction Average Transaction Size

Source: NBK and CSR Analysis

Great potential for residential sector

The residential segment accounts for the largest pie of the total real estate sector in Kuwait by contributing around56% in 2012. Total transaction values for the residential segment increased by 18.78% in 2012 to KWD 1.85 bnprimarily due to 33% increase in total number of transactions to 7,883. The average transaction size was KWD 224,000for the segment as of 2012.

There has been a huge demand in the residential segment owing to the increasing population. The reduction in theinterest rate for housing loans also spurred demand. To cater to this demand, the government has initiated PPP(Public Private Partnership) programs, which includes various projects like the South Al Jahra Labor City (a project forconstruction of 20,000 affordable houses). New PPPs and improved credit access given by government will help toimprove Kuwaits housing supply demand gap. Under Kuwaiti law, the countrys 1.2 mn nationals are entitled to applyfor government housing after marriage, receiving loans that are paid off in small installments over 30 years. Accordingto local news agency, despite the states USD 400 bn oil surplus, applications for housing now surpass supply by morethan 100,000 and will increase by an estimated 8000 applications each year. In March 2013 the governmentannounced plans to build 174,000 new houses and three separate cities by 2020, with the total estimated cost ofaround USD 5 bn.

Investment segment a positive alternative for developers

Investment segment accounted for a total transaction value of KWD 1.19 bn in 2012 as compared to KWD 1.07 bn in2011. Total number of deals for the segment was 1,596, an increase of 6.97% over the previous year, resulting in theaverage transaction size of KWD 719,000. The increased number of deals in this segment reflects the recurring natureof the earnings as well as the high occupancy rates. This segment was the most viable alternative for commercial realestate developers especially after the slow recovery post the crisis. This segment of the market is primarily driven bythe increasing number of the expat population in Kuwait.

Lower demand for commercial segment

The contribution of commercial segment is the lowest as compared to other segments. In 2012, commercial segment

transaction values stood at KWD 267 mn as compared to KWD 238 mn in a year earlier. Total number of transactions

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Residential Investment Commercial2011 2012


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in the segment was 76 in 2012 as compared to 82 in 2011. Although the number of deals declined in 2012, averagetransaction size increased to KWD 3.1 mn in 2012 as compared to KWD 2.81 mn in 2011 primarily due to higherrealized prices in 4Q2012. The average transaction size is highest for commercial segment on account of higher valuesas per a single transaction.

The slow pace of economic growth in Kuwait, coupled with delays in the implementation of the KDP has led to a fall indemand for commercial real estate properties. The occupancy rates in some of the busiest and most well knowncommercial office space in Kuwait still remains well below 50%. A revival in business conditions in Kuwait is the onlycatalyst that could lead to better prospects for the commercial real estate business.

Factors impacting performance of the Real Estate Sector

Economic activity and progress on KDP

Kuwait government is keen to reduce its dependency on the oil sector and is making efforts to diversify its revenuebase. In this regard, the government has developed KDP, which lays major emphasis on infrastructure and real estatedevelopment. However a majority of the projects under the KDP are either delayed or stalled due to delays in gettingthe necessary approvals from the parliament. This has affected the overall real estate market and has led to increaseddemand/supply gap for residential housing units. Although the government has started taking faster decisions onprojects approval, big ticket projects are still taking time to get government nod.

Oil price fluctuations

Being an oil dependent country, any significant movement in oil prices impacts the overall financial market. It mayalso limit the government s ability to spend on infrastructure and other development activities. Any major oil price

fluctuation will have an influence on the economy which will ultimately impact the purchasing power of an individual.In such a scenario demand for housing and other real estate activities will also be a great concern. In the last one year,oil prices have been relatively stable and were hovering around USD 100-110 per barrel for OPEC Basket. According toIMF, GCCs combined fiscal surplus may turn into a deficit in 2017 as oil prices slip below USD 100 and governmentspending rises. Kuwait stands better compared to other GCC countries in terms of break-even oil prices, howeverbreak even prices is increasing over the years for Kuwait also.

Political instability

The political situation in Kuwait has been unstable since the last few years. Instability results into lack of long termvision and implementation issues. The current government is only six months old; any instability may impact the

overall development plan.

Interest rate

Any change in interest rate affects the real estate companies as well as individuals. Last year in October 2012, CBK hascut the discount rate by 50 bps from 2.5% to 2.0%. Lowering interest rate increases liquidity in the market andincreases the access to more loans to corporates and individuals at much cheaper rates from bank and thus increasesthe trading and demand for commercial real estate sector as well. Rate cut is expected to have positive impact on theearnings of the real estate companies and boost residential segment also.

Increase in public sector wages also has positive Impact on the real estate market. In the last few years, governmenthas increased the minimum wages for the Kuwaiti nationals and expats working on public sectors. Higher wages willgive additional capacity for the borrower to take loans from the bank for the residential purposes. In 2012,


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government announced a 25 % wage increase for public sector workers and later hike in wages for Kuwaiti nationalsworking in private sector also. According to local news agency, few MPs have proposed further hike in wages for thepublic sector employees. These factors will have positive impact on the real estate residential segment as well.

Demographic mix

Kuwait has registered significant growth in the population over the last few decades. Higher population is also due tothe significant influx of expats. Higher expat population increases the demand for the investment real estate segment.This led to impressive growth in demand for rental apartment in Kuwait.

Per capita income

Kuwait has seen significant increase in per capita income. The rate of growth of per capita income over the lastdecade was more than 10%. With higher income, the local population demand for bigger and better properties. Thisleads to higher demand and higher prices for the residential real estate.

Bank lending to Real estate

According to the CBK, bank credit facilities extended to the real estate sector stood at KWD 7.21 bn as of March 31,2013 as compared to KWD 6.82 bn as of March 31, 2012, implying a growth rate of 5.60%. Loans outstanding with thereal estate sector accounted for 26.30% of the total loan portfolio of banks in Kuwait. Higher proportion of credit tothe real estate sector shows that confidence in the industry is rebuilding. Growth in lending also indicates that realestate companies have recovered substantially from the crisis and have a number of projects to execute.

Government regulations

Government regulations have serious impact on the overall performance of the real estate operations. Since theglobal crisis, Kuwaiti government has imposed many restrictions on real estate companies in order to restrictspeculation in this industry. The two new laws, Law No. 8 and 9, prohibit companies to own land in residential areas ashoarding of land by companies resulted into higher prices. However, an exemption is provided to Islamic banks fromthis law. Another law, which prohibits the holding of large property (5000 square meters) for more than 3 years, wasalso exempted for Islamic banks, due to their nature of business, as they held the property for long term for other thantrading purposes.

Moreover, the government has recently increased the maximum amount of home loans available to Kuwaiti women toKWD 70,000 from KWD 45,000, while the renovation amount that can be financed, has been increased to KWD 35,000from KWD 30,000. The Cabinet also instructed the Credit and Savings Bank to amend its legislation, allowing maximumhome loan amounts to jump to KWD 500,000 from KWD 300,000. The increase in the borrowing limit has resulted intohigher purchasing power in the hands of the citizens leading to higher demand.

Financial Performance of the Real Estate Sector

There are 49 real estate companies listed on the KSE (according to Zawya). Financial performance of the industry isillustrated in the below table:

Table1: Industry Statistics

(Figures in USD mn) 2012 2011 2010 2009

Total Assets 18,999.46 21,660.37 20,241.39 21,171.38


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Total Equity 7,780.89 9,001.33 9,237.43 9,558.91

Total debt 7825.05 1 7,733.24 7,422.17 7,655.67

Gross Revenues 1,284.17 1,672.49 942.60 1,171.05

Net Operating Income 354.40 454.14 124.98 334.36

Net Profit 289.97 -466.47 -483.76 -336.91

Return on Average Assets (%) 1.90 -3.64 -2.61 -2.31

Net Debt/Equity (%) 98.26 99.96 74.98 77.48

Payout Ratio (%) 78.76 54.12 70.33 100.40Source: Zawya and CSR analysis

Total assets of real estate companies saw a severe decline of 12.28% in 2012 compared to the previous year. Inaddition, higher vacancy rate and declining rentals have impacted the earnings of the real estate companies. However,the sector reported positive net profit after suffering losses for the past three years. This was mainly on account ofsubstantial improvement in income from available for sale investments. Profits also indicate the substantial recoveryof real estate companies from the global crisis. Despite low level of activity compared to previous years, real estatecompanies debt levels have increased in the last two years, indicating higher leverage.

Kuwait real estate market is yet to move into full growth trajectory. On one hand, industry witnessed net profit firsttime since the crisis, revenue and total assets are not showing any direction yet. Total assets of the industry in FY2012were recorded at USD 19.0 bn compared to USD 21.66 bn in FY2011. Net profit for the industry was KWD 289.97 mnin FY2012 as compared to net losses of KWD 466.47 million in FY2011. Improving scenario is mainly on account of

various government measures including increased spending plans, positive interest rate environment, improvedconsumer sentiments and other supportive policy measures. Increased transaction in terms of value and volume alsocontributed in the recovery of the sector in 2012.

Conclusion and outlook2012 was certainly a turnaround year for the real estate sector. The sector reported positive profits after threeconsecutive years of losses, thanks to the improving global economic scenario and favorable policies from thegovernment. The sector faces over supply on the commercial real estate side and contrastingly, the residential andinvestment properties are facing an undersupply situation. Successful implementation of the KDP will help in resolvingthe above issues. The sector is expected to take off after the parliament approves supportive policies and necessaryamendments to the existing legal framework. The IMF has also urged the Kuwait government to streamline theproject approval process. The government claims that approximately USD 1.88 bn (94 % of the USD 2 bn allocated forconstruction projects in the 2011/12 budget) has been invested according to plan. Further, sector will get the supportfrom the KIA s (Kuwait investment Authority-sovereign wealth fund of the country) announcement of investing KWD

one billion in local commercial property sector. This fund will be managed by Kuwait Finance House (KFH). CSRbelieves that, KIA investments will result into improvements in the performance of the commercial real estate segmentof the sector.

CSR also believes that the positive trend would continue in the coming years and residential segment will remain thelargest contributor to real estate transaction value due to supply shortage coupled with huge demand. The recentlyincreased credits limits are also expected to support the sector.

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Kuwait Real Estate Sector- June 2013