Instability in the region’s geopolitical situation and a sudden drop in oil prices could pose a threat to Kuwait’s real estate sector. “Slow reforms of existing laws and halfhearted attempts by the government are restricting the private sector participation in development projects.
The country’s real estate and construction sectors are currently experiencing an unprecedented boom, led by strong economic growth triggered by high oil prices. The growth in Kuwait’s real estate sector can be attributed to the fact that currently demand outstrips supply in all segments of real estate, except for the hospitality and tourism segments, it said.
“We expect construction and real estate sectors to sustain strong growth going forward. This would be driven by expected robust economic conditions in the light of high oil prices.
In the residential segment, Markaz expects private housing sub-segment to continue witnessing undersupply in the medium term. This is primarily due to the pile up of unmet demand over the last few years. It estimates demand for private housing units to reach approximately 100,000 in 2010.
In the Istithmari (investment properties) segment, properties in the outer city areas of Kuwait (such as Fahaheel, Jahra, Salmiya, Mahboola, and Mangaf) are expected to offer greater potential for returns. This is due to the higher potential for rental growth and attractive land valuations compared to inner city areas. This, in turn, would drive cap rates downwards in the coming years to levels close to those of inner city areas.
In the commercial segment, the majority of office space under construction and development will be ready for renting in 2009. “Consequently, we expect the office market in Kuwait to witness an oversupply situation in the long term.
According to Colliers International, office rents in Kuwait have risen by close to 100 per cent since 2003. In 2006, Kuwait registered the second highest year-on-year growth in office rentals among GCC countries after Abu Dhabi.
In the hospitality segment, an increase in room supply is likely to create an over-capacity situation in the market. Consequently, Markaz believes Kuwait may see lower occupancy rates, restricting new investments in the hospitality sector.
“Kuwait’s real estate sector has experienced significant growth in the last five years, triggered by several structural factors such as economic expansion driven by high oil prices, favourable demographics and abundant liquidity.
The report expects Kuwait’s real estate and construction sectors to benefit from $8bn worth of private investments and $3bn in government investments over the next five years. The growth in the real estate sector has registered a compounded annual growth rate of 34 per cent for the period from 2002 until 2006.
Currently, demand outstrips supply in all segments of the real estate sector – residential, commercial, industrial and retail. In the private housing sub-segment, a total of 79,894, applications were outstanding and 30,414 individuals were on the waiting list with the Public Authority for Housing and Welfare (PAHW) as of the second half of 2007. On the supply side, according to the Ministry of Housing figures, between 1994 and 2005 only 19,000 state private housing units were built.
“The residential real estate segment will likely face a shortage in supply in the medium term. We expect unmet demand for private housing units to reach approximately 100,000 by 2010,” it said.
Similarly, the Istithmari (investment properties) sub-segment also has been witnessing a shortage of units due to the growing influx of expatriates after 2003, which witnessed the Iraqi war. The growth in demand for private housing units and scarce availability of land in major governorates have been reflected in the prices.
“We expect growth in Istithmari rentals at moderate levels in the medium term. Going forward, we believe outer city Istithmari properties will provide higher returns compared to inner city areas, as the real estate sector in Kuwait as well as high rental growth and lower land value appreciation in outer city areas will lead to compression in cap rates at higher rates when compared to inner city areas,” the Markaz report said.
Demand for retail space is expected to continue in the short term with entry of major foreign and regional brands in the light of Kuwait’s positive economic outlook. “We expect retail rentals to witness an upward trend in the short term. However, for conventional retail properties, our assessment tends to stay bullish even in the long term,” the Markaz report said.
Kuwait is one of the most established retail markets in the Gulf region. After a relatively stagnant performance up to 2001, retail real estate has seen increased activity. The rising number of expatriates and growing purchasing power are fuelling retail consumption, thereby transforming the retail real estate market in Kuwait.
Although the proportion of street-facing retail stores remains high, a number of comparatively small malls with 5,000 to 8,000 square metres gross leasable area (GLA) have been constructed during 1993-1998.
The trend has now shifted towards development of large malls. Tamdeen, which has a firm grip on Kuwait’s retail market, also opened the AlKout mall in 2005 as part of its Waterfront Project in Fahaheel.
The development encompasses in excess of 17,000 square metres of retail and rentable area. However, construction of Souk Sharq mall by National Real Estate Company in 1998 actually marked the switch towards construction of large malls. Souk Sharq is one of the most popular malls in Kuwait.
41%: The average annual office rentals in Kuwait year on year
$13: Per square metre is the gap between Dubai and Kuwait City office rentals
100%: Is the rise of office rents in Kuwait since 2003
Kuwait will need 100,000 housing units in three years