Real Estate Sector - Kuwait

Real Estate Sector - Kuwait June 2013 Industry Research Report Contents Summary 1 GCC Real Estate Sector 2 Kuwait Real Estate Sector 3 Factors impacting the industry 6 Financial Performance of the Industry 8 Conclusion and Outlook 9 Summary The year 2012 saw some recovery in Kuwait s real estate market with the three segments i.e. residential, investment and commercial real estate, performing better than the previous year. The residential segment is currently one of the strongest performing segments in Kuwait, with a large undersupply of residential homes for Kuwaiti citizens. The investment segment is also performing well due to a relatively stable and a less risky nature of the business. The commercial segment is, however, a dampener for the overall real estate market, with occupancy rates at depressed levels. Overall Kuwait s real estate sector performance is expected to improve in the near term as the economic developmental plans are implemented in the country. The real estate market in Kuwait saw spectacular boom during the pre-crisis period and this was majorly due to the commercial real estate segment. The market saw a number of new construction activities, fuelled by the hope of significant improvement in the economy. However, this optimism was severely affected due to the crisis. Although, the sector saw recovery in the aftermath of the crisis, the overall confidence in the market is yet to reach pre-crisis levels. Analyst Ms. Ankita Agrawal a.agrawal@capstandards.com +965 22443523 ext.112 Capital Standards (CSR) Gravity Tower, 8th Floor, Ahmad Al-Jaber Street P.O. Box 26620, Safat - 13127 Kuwait Office: +965 2244-3523 Email: services@capstandards.com Website: www.capstandards.com Elsewhere in the GCC, the prospects for the Qatari real estate and construction sectors are optimistic on account of higher GDP growth and developmental plans fuelled by the successful bid to host the FIFA world cup 2022. UAE has started showing recovery in the real estate sector with the slight increase in property prices and rental income. Market sentiments in Dubai are improved from Dubai's safe haven status, rising population, improved property prices and a number of real estate projects announced in the past six months. Saudi Arabia is on the verge of implementing housing projects (with affordable prices) and this will be one of the key drivers for the growth of real estate sector. The recently announced mortgage regulations by the Saudi Arabian government will also help to ease the housing shortage in the country. Our view of the real estate sector remains positive, specifically for the residential and investment segments. The improvement in the commercial segment depends more on the revival of the overall economy of Kuwait. The Kuwait Development Plan will be instrumental in fuelling future growth. Kuwait Real Estate Sector P a g e 1

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 growth averaging 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 upgrade critical infrastructure like airports, roads, railways and ports. This helped in attracting the huge inflow of working expats and in some cases helped the tourism sector. These measures helped GCC countries to diversify its revenue stream and lowered its dependency on the oil sector to some extent. Increasing tourism and expat population also helped 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 (stated by various local news agencies). Per capita income of the GCC citizens stood at USD 30 thousand in 2011, nearly triple the global average per capita of USD 10 thousand. Among all the GCC countries, Saudi Arabia had the highest GDP with USD 657 bn in 2012, followed by the UAE at USD 362 bn and Qatar with USD 185 bn (Source: IMF). High growth of 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 its dependency on the oil sector and promoting non-oil sector. Real estate sector plays an important role in the overall objective of diversification and increasing non-oil sector revenue. GCC's total population more than tripled from around 14 mn when GCC was formed in 1981 to 45 mn at the end of 2011. Real estate highlights of major GCC economies are given below: Saudi Arabia Saudi Arabia is witnessing an increased number of projects in the commercial and residential sector, primarily in Riyadh, Jeddah and Makkah. One of the major projects include the expansion of Riyadh s King Khalid International Airport, 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 Development Fund approved USD 1.40 bn financing to build around 12,500 homes across the country. In addition, real estate investments by investment funds increased by 4% in 2012. Unlike most of the other GCC countries, the real estate market in Saudi Arabia is fuelled primarily by the rapidly growing local population. Qatar Qatar s 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 the past 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 increasing business activity. The Qatar National Vision 2030, announced by Qatar in the year 2008 as a step to diversify the economy from oil and gas sector, also contributed towards the developing real estate sector. Developments are also fuelled by infrastructure requirements for the 2022 FIFA World Cup. In April 2013, Qatar Financial Centre announced that the country is planning to invest USD 200 bn over the next 10 years as part of its preparation for the FIFA World Cup, 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%) in 2013 on account of the increase in real estate loans. The increase in loans is directly attributed to the increased activity in the real estate sector as part of the preparation for the FIFA World Cup. (Source: GCC economic overview May 2013) Kuwait Real Estate Sector P a g e 2

UAE UAE has managed to come out of the 2008 global financial crisis despite being one of the most severely affected real estate markets. UAE s economy is different from the rest of the GCC economies, where two third of the GDP is contributed by non-oil sector led by the diversification drive initiated by the government. Real estate and construction contributes around 22% to the economy. The real estate market in Dubai is well known for its lavish properties, rapid growth 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 progress on restructuring and refinancing debt to attain instability, which has ultimately strengthened Dubai's safe-haven status. According to the UAE's Ministry of Finance, Dubai's government allocated USD 8.80 bn for infrastructure projects in 2012, marking a return to big spending. Some of these projects were stalled at the time of the crisis due to lack of funding. In November 2012, the Prime Minister of UAE announced fifteen new projects worth more than USD 187 mn. These projects are a part of the municipality s 2013-2015 strategic plan of Dubai. Bahrain Bahrain s real estate market has experienced substantial growth over the last ten years. In 2012 the number of real estate transactions in Bahrain increased by 46 percent. Data from the Survey and Land Registration Bureau showed that the total value of transactions in 2012 was BD 663.9 mn (USD 1.74 bn) (Source: Bahrain Economic Development Board). This growth has been predominantly driven by strong population growth, increased domestic disposable income and greater demand from Saudi Arabia and other GCC countries. In September 2012 the government announced 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 housing programmes in partnership with the private sector. Kuwait Real Estate Sector As the fourth largest exporter of oil in the world, Kuwait s oil industry is the backbone of the economy. Kuwait has set forth the ambitious Kuwait Development Plan (KDP) that entails big public sector spending on infrastructure and social needs. Kuwait has seen significant increase in its population in last one decade. Its overall population has grown by 72% from 2000 to 2012, a CAGR of 4.6%. The contribution of expats in the total population has continuously shown an upward trend and accounted for 68.3% of total population in 2012. Around 45.50% of the population falls under the age bracket 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 real estate sector. Moreover, Kuwaiti nationals mostly prefer to stay in private owned houses (villas) located in low density area, whereas expats reside in rented apartments constructed for investment purposes. Demand for rented apartment is significantly high which can be seen from the vacancy rate, which was only 5% in last five years. Rental yields from these apartments are in the range of 7-9%. Kuwait Real Estate Sector P a g e 3

KWD million Thousands Industry Research Graph 1: Demographic details (Age wise population break-up) 1,600 1,400 1,370 1,200 1,000 800 600 400 200 0 581 444 368 Source: The Public Authority for Civil Information Real estate activity significantly increased before the global crisis, however post crisis, the overall pace of developments 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. 220 766 0-19 20-39 40-64 >64 Kuwaiti Non Kuwaiti Graph 2: Real Estate contribution to GDP 42 31 1500 1200 900 871.9 873.7 969.8 1062 1095 1208 1240 1277 1268 1210 1156 1166 10.0% 8.0% 6.0% 600 4.0% 300 2.0% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0.0% Real Estate GDP at Purchaser Price Value (LHS) Contribution to overall GDP (RHS) 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% as compared 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 terms of lending by banks, growing population as well as higher average income. Kuwait Real Estate Sector P a g e 4

KD Million Industry Research Graph 3: Trading Activity in the Kuwait Real Estate Sector Quarterly Transaction Value Analysis 1,200 1,000 800 600 400 200 0 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 Total Real Estate Transaction Values (KWD mn) Source: Kuwait Finance House and CSR Analysis Segmental analysis Graph 4: Transaction Values (Segment wise) 600 500 400 300 200 100-1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 Residential Investment Commercial Source: Kuwait Finance House and CSR Analysis Kuwait Real Estate Sector P a g e 5

KD,000 Industry Research Number of sales transaction Average Transaction Size 3,500 3,000 2,500 2,809 3,110 8,000 7,000 6,000 5,924 7,883 2,000 1,500 1,000 719 686 500 251 224 - Residential Investment Commercial 2011 2012 5,000 4,000 3,000 1,596 2,000 1,492 1,000 82 76 - Residential Investment Commercial 2011 2012 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 around 56% in 2012. Total transaction values for the residential segment increased by 18.78% in 2012 to KWD 1.85 bn primarily due to 33% increase in total number of transactions to 7,883. The average transaction size was KWD 224,000 for the segment as of 2012. There has been a huge demand in the residential segment owing to the increasing population. The reduction in the interest 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 for construction of 20,000 affordable houses). New PPPs and improved credit access given by government will help to improve Kuwait s housing supply demand gap. Under Kuwaiti law, the country s 1.2 mn nationals are entitled to apply for government housing after marriage, receiving loans that are paid off in small installments over 30 years. According to local news agency, despite the state s USD 400 bn oil surplus, applications for housing now surpass supply by more than 100,000 and will increase by an estimated 8000 applications each year. In March 2013 the government announced plans to build 174,000 new houses and three separate cities by 2020, with the total estimated cost of around 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 in 2011. Total number of deals for the segment was 1,596, an increase of 6.97% over the previous year, resulting in the average transaction size of KWD 719,000. The increased number of deals in this segment reflects the recurring nature of the earnings as well as the high occupancy rates. This segment was the most viable alternative for commercial real estate developers especially after the slow recovery post the crisis. This segment of the market is primarily driven by the 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 Kuwait Real Estate Sector P a g e 6

in the segment was 76 in 2012 as compared to 82 in 2011. Although the number of deals declined in 2012, average transaction size increased to KWD 3.1 mn in 2012 as compared to KWD 2.81 mn in 2011 primarily due to higher realized prices in 4Q2012. The average transaction size is highest for commercial segment on account of higher values as 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 in demand for commercial real estate properties. The occupancy rates in some of the busiest and most well known commercial office space in Kuwait still remains well below 50%. A revival in business conditions in Kuwait is the only catalyst 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 revenue base. In this regard, the government has developed KDP, which lays major emphasis on infrastructure and real estate development. However a majority of the projects under the KDP are either delayed or stalled due to delays in getting the necessary approvals from the parliament. This has affected the overall real estate market and has led to increased demand/supply gap for residential housing units. Although the government has started taking faster decisions on projects 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 may also 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 to IMF, GCC s combined fiscal surplus may turn into a deficit in 2017 as oil prices slip below USD 100 and government spending rises. Kuwait stands better compared to other GCC countries in terms of break-even oil prices, however break 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 term vision 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 has cut the discount rate by 50 bps from 2.5% to 2.0%. Lowering interest rate increases liquidity in the market and increases the access to more loans to corporates and individuals at much cheaper rates from bank and thus increases the trading and demand for commercial real estate sector as well. Rate cut is expected to have positive impact on the earnings 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, government has increased the minimum wages for the Kuwaiti nationals and expats working on public sectors. Higher wages will give additional capacity for the borrower to take loans from the bank for the residential purposes. In 2012, Kuwait Real Estate Sector P a g e 7

government announced a 25 % wage increase for public sector workers and later hike in wages for Kuwaiti nationals working in private sector also. According to local news agency, few MPs have proposed further hike in wages for the public 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 to the 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 last decade was more than 10%. With higher income, the local population demand for bigger and better properties. This leads 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 the real estate sector accounted for 26.30% of the total loan portfolio of banks in Kuwait. Higher proportion of credit to the real estate sector shows that confidence in the industry is rebuilding. Growth in lending also indicates that real estate 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 the global crisis, Kuwaiti government has imposed many restrictions on real estate companies in order to restrict speculation in this industry. The two new laws, Law No. 8 and 9, prohibit companies to own land in residential areas as hoarding of land by companies resulted into higher prices. However, an exemption is provided to Islamic banks from this law. Another law, which prohibits the holding of large property (5000 square meters) for more than 3 years, was also exempted for Islamic banks, due to their nature of business, as they held the property for long term for other than trading purposes. Moreover, the government has recently increased the maximum amount of home loans available to Kuwaiti women to KWD 70,000 from KWD 45,000, while the renovation amount that can be financed, has been increased to KWD 35,000 from KWD 30,000. The Cabinet also instructed the Credit and Savings Bank to amend its legislation, allowing maximum home loan amounts to jump to KWD 500,000 from KWD 300,000. The increase in the borrowing limit has resulted into higher 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 is illustrated 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 Kuwait Real Estate Sector P a g e 8

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 70.33 100.40 Source: Zawya and CSR analysis Total assets of real estate companies saw a severe decline of 12.28% in 2012 compared to the previous year. In addition, 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 of substantial improvement in income from available for sale investments. Profits also indicate the substantial recovery of real estate companies from the global crisis. Despite low level of activity compared to previous years, real estate companies 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 first time since the crisis, revenue and total assets are not showing any direction yet. Total assets of the industry in FY2012 were recorded at USD 19.0 bn compared to USD 21.66 bn in FY2011. Net profit for the industry was KWD 289.97 mn in 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, improved consumer sentiments and other supportive policy measures. Increased transaction in terms of value and volume also contributed in the recovery of the sector in 2012. Conclusion and outlook 2012 was certainly a turnaround year for the real estate sector. The sector reported positive profits after three consecutive years of losses, thanks to the improving global economic scenario and favorable policies from the government. The sector faces over supply on the commercial real estate side and contrastingly, the residential and investment properties are facing an undersupply situation. Successful implementation of the KDP will help in resolving the above issues. The sector is expected to take off after the parliament approves supportive policies and necessary amendments to the existing legal framework. The IMF has also urged the Kuwait government to streamline the project approval process. The government claims that approximately USD 1.88 bn (94 % of the USD 2 bn allocated for construction projects in the 2011/12 budget) has been invested according to plan. Further, sector will get the support from 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). CSR believes that, KIA investments will result into improvements in the performance of the commercial real estate segment of the sector. CSR also believes that the positive trend would continue in the coming years and residential segment will remain the largest contributor to real estate transaction value due to supply shortage coupled with huge demand. The recently increased credits limits are also expected to support the sector. 1 June 2012 Kuwait Real Estate Sector P a g e 9

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