NBK Real Estate Brief
Transactions levels ease back in June, but remain high
The latest NBK Real Estate Brief stated: Real estate activity fell back somewhat in June after a very strong May, but overall sales levels remain buoyant. The total number of property transactions (residential, commercial and investment) registered at the Ministry of Justice stood at 708, 17% lower than in May but still 74% higher than a year ago. Admittedly, activity through most of 2009 was unusually weak. But at their current levels, sales volumes are well above the average of 608 per month seen during the pre-crisis era between 2003 and 2008.
The sector’s strong sales performance continues to be driven by the residential and apartment segments, while activity in the commercial sector remains comparatively weak. (See below.)
The overall sales picture is similar when looked at in KD value terms. Sales dropped by 30% between May and June, to KD 175 million. But May’s sales activity was exceptionally strong. At current levels, sales values are still nearly twice as high as in the first half of 2009. The growing availability of financing options and relatively weak returns in other asset classes may be boosting sales activity.
i) Sales – residential (mostly villas and land)
There were 510 residential sales in June, down 19% from 632 in May but up 82% on a year ago. We estimate that nearly half of these transactions involved land, rather than buildings. Private land sales have been of growing importance to the residential property scene over the past 18 months, perhaps linked to government plans to develop infrastructure in nearby areas. Nevertheless, residential sales excluding land also remain strong at nearly double the levels of a year ago and well above the average levels of earlier years. Average sales prices in the residential segment are also up (7%) over the past year.
ii) Sales – investment (mostly apartments)
Sales in the investment segment fell by 9% in June to 196, but remain close to the all-time record high of 215 set a month earlier. In KD value terms, the improvement has been slightly less marked, with sales levels – at KD 70 million - remaining below their 2007 peaks. These two things may be linked. Anecdotal evidence suggests that relatively attractive prices and yields have made apartments a preferred asset class for some local investors.
iii) Sales - commercial
Disappointingly, commercial property enjoyed a weaker month, seeing just 2 sales. This comes after double-digit sales in the previous two months. This is the most volatile and least predictable of all the main property segments and we are reluctant to draw too many conclusions from one month’s data; on average, the first half of the year has seen 7 transactions per month, which is comparable to previous years. But in general, uncertain demand, a potential overhang of supply in the office sector and cautious lending policies by banks are likely to continue to weigh down on the commercial segment’s prospects.
Savings and Credit Bank loans
The NBK report concluded: There were 271 loans approved by the Savings and Credit Bank (SCB) in June, a drop of 19% from May. In value terms, loan approvals dropped 20% to KD 7.5 million, close to its recent low of KD 7.1 million. Unlike the sales side of the property market described above, SCB loan approvals seems to have trended flat-to-lower in the first half of 2010.
The weak numbers are largely the result of low approvals for outright purchases of homes. At 134 in June, these have failed to recover after falling sharply from a peak of 447 in late 2008. And within these loans for purchases, loans for constructing new homes fell to just 45, the second lowest on record. It should be noted, however, that loan activity does sometimes drop off during the summer months.
Loan approvals for maintenance and additions purposes - the other main SCB loan segment – also fell in June, down 24% to 137. In general, however, approvals for this loan type have been trending higher for the past three years. We continue to suspect that this reflects the high price of home purchases, encouraging loan recipients to upgrade or expand their existing properties instead.