Kuwait construction industry is expected to benefit from US$8bn worth of private investment and US$3bn worth of government investment over the next f

Global Investment House – Kuwait Economic & Strategic Outlook VIII- Real Estate, Construction & Housing - Four years of tumbling interest rates have kindled a boom in real estate markets, both locally and internationally. Kuwait’s real estate market is a pillar of strength for the local economy, as its health is being tied to a greater number of individuals. Despite a stellar performance in the market in the past period, the sector still holds 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. All regions of the country have experienced healthy activity and price appreciation. 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 investment of US$11bn could rise to US$40bn, if the future Build Operate Transfer (BOT) projects are taken into consideration, including planned residential and tourist resort developments in Failaka and Bubiyan islands. Moreover, much current investment is going into construction of shopping malls, which include entertainment and retail facilities. However, Kuwait is also urgently in need of additional housing, as demonstrated by recent price rises in residential real estate.

Negative growth in real estate activity in 2004….

Despite the buoyancy in the sector, total property sales value shifted to negative trend, declining by 2.42% in 2004 after growing by 62.7% and 23.7% in 2002 and 2003 respectively. Total sales declined to KD2.76bn in 2004, as a result of total units sold declining by 17.2%. Out of the total sales, residential property segment encountered the highest decline in the number of units sold falling off by 17.4% to 11,064 units in 2004. The investment property segment had a decline of 15.9% while commercial property was the only segment encountering growth in number of units sold. The overall decline in terms of sales value was marginal though, with the 4.26% degrowth in the residential segment sales offsetting the growth of investment and commercial property sales by 0.33% and 5.87% respectively.

Volume of property sales continued to decline in 2005….

In 2005 the sector continued its downward trend with the number of units sold declining by 42.19% in the first nine months over the similar period in the previous year. However, by virtue of the increase in prices, total sales during 9M’05 increased to KD3.48bn, which was 56.51% above its level during same period last year. The increase in sales was also the result of an abnormally high activity in January. Total sales increased to KD1.94bn during January, which was 55.73% of total sales for the first nine months. It was mainly due to the increase in proxies to KD1.8bn contributing for 92.82% of total sales while contracts contributed only 7.18% or KD139mn.

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 (56.2% during 9M05), saw activity in terms of value growing by 43.83% to KD1.96bn in the first nine months of 2005. The level of activity in the residential segment is above that in the whole year of 2004 and is well above annual sales for the period 1998-2002. On the other hand, residential units sold declined by 39.16% compared to the similar period in the previous year, to 5,612 units in 9M05. Investment property sales’ value increased by 74.9% to KD1.403bn, while units sold declined sharply by 60% to 753. Unlike the other segments, commercial property units sold saw an increasing trend, elucidating the relative attractiveness and unsaturated state of this segment. Number of units sold in this segment increased by 45%, while the sales’ value grew more rapidly by 96% to KD122mn. In 2005, real estate sales are estimated to record KD4.6bn, which is the highest level since 1998. This would imply a growth of 68.42% over 2004 sales. However, on the other hand, total unit sales are estimated to decline by 35.58% to 8,603.

Shift in activity from residential to investment segment….

Historically, residential sector represented the bulk of activity within the Kuwaiti real estate market, accounting for an average of 73.7% of total sales value during 1998 – 2004. However, activity in investment property and commercial property segments has been steadily on an uptrend at the expense of that of residential segment whose share of the total market activity declined over the last few years from 85.5% in 2000. The influx of expatriates into the country has prompted increased activity within the investment sector, increasing its relative importance in the market. During 9M05, the value of residential sales stood at 56.17% of the total, while rigorous activities in areas such as Hawally, Mobarak Al Kabeer and Ahmady have lifted the activity in investment property to contribute 40.33% of total value of sales.

Table 1: Property Sales by Segment

Source: Ministry of Justice

Decline in property sales recently after a buoyant start to 2005….

Looking at the monthly trends in 2005, real estate activity showed fluctuating trends. Sales were on a steady growing trend for the first five months with the exception of February that witnessed 92.09% decline due to a number of holidays and the high base in January. Post February blip, the market was on its steady growth path till May. However, the market started to stagnate after May as June witnessed almost zero growth rate, followed by a declining trend till September with the third quarter witnessing 10.53% decline in total sales over same quarter last year.

Farwaniya and Hawalli dominates activity….

The same trend of real estate activity improving in terms of value and declining in terms of volume was seen across the governorates. By governorate, Farwaniya and Hawally together constitute more than 50% of total unit sales nationwide. Unit sales in these two governorates formed 27.7% and 26.6% of the total market respectively. These were followed by Al Ahmadi and Mubarak Al Kabeer governorates, which contributed 18.5% and 12.8% of total sales respectively. As for residential units sold, Farwaniya governorate accounted for 29.1% of market sales or 1,631 units. On the other hand, activity in Mubarak Al Kabeer saw a weakening with residential units sold declining by 54.74% during the period.

Table 2: Unit Sales by Governorate (9M2005)

Source: Ministry of Justice

In the case of the investment property segment, Hawally governorate accounted for almost half of all activity. Medan Hawally and Salmiya, which are within this governorate, attracted a lot of activity as old buildings are being demolished, and replaced by bigger buildings. Farwaniya ranked second in terms of units sold followed by Ahmadi, the latter being helped by heavy activity in coastal areas such as Fahaheel, Mangaf and Mahbula. A number of commercial and entertainment venues have sprouted in the governorate, along with schools, clinics and other facilities, catering to the needs of a growing population of expatriates residing in this area.

Investment property segment drives growth in building permits….

Both increasing demand for real estate and expanding activity could be made out from the upturn in construction so far in 2005 after a major drop in 2004. We have used the number of building permits issued as a proxy for construction activity in the economy. There has been a 43.2% growth in the number of building permits issued during the first half of 2005 as compared to the similar period in the previous year. New construction permits were issued for all the segments except ‘Commercial’ that declined slightly by 3.57%. Maximum growth is seen in investment category, climbing 50.6% followed by the residential category, improving by 42.79%. Activity in the industrial category increased as well by 22.86% with 43 new permits in 1H’05 as compared to 35 new permits during 1H04. As for renovation permits it increased by 38.3% to 112 or in 1H2005 over the similar period in the previous year. Though there has been an increase over 2004, the issual of permits had a major drop compared to the corresponding period in 2003. Commercial permits declined the most by 69.7% followed by industrial permits by 56.6%. It could be seen from table 26 that over the years, the growth in issual of new building permits came from the investment property segment, while the residential segment declined from the high levels of ’02 and ’03.

Table 3: Building Permits